Equitable Adjustment

An equitable adjustment is a negotiated change to a contract's price, schedule, or other terms that fairly compensates the contractor, or reduces the contract price, when government actions, directives, or conditions beyond the original contract scope materially affected performance costs.

What is an Equitable Adjustment?

An equitable adjustment (EA) is the monetary and/or schedule remedy provided when a contract must be modified to address impacts caused by the government rather than the contractor. EAs can flow in either direction: a contractor may receive an upward price adjustment when the government directs additional work or imposes additional costs; or the government may receive a downward adjustment (a credit) when work is deleted or reduced.

EAs arise most commonly from several FAR-authorized change mechanisms: the Changes clause (FAR 52.243-1 through 52.243-7) authorizing the contracting officer to direct changes within the general scope of the contract; the Differing Site Conditions clause (FAR 52.236-2) covering unexpected subsurface or latent physical conditions; the Government Delay of Work clause (FAR 52.242-14); and suspension of work orders. In each case, the affected party (usually the contractor) has a contractual right to an equitable adjustment.

The content of an equitable adjustment includes: direct costs of the changed work (labor, materials, equipment); indirect costs properly allocated to the changed work; profit on the changed work (typically allowed for additions, sometimes debated for deletions); and schedule extension if the change is on the contract's critical path. The EA does not include unabsorbed overhead for indirect costs not traceable to the government action, or anticipatory profits on future work that was not directed to be changed.

Equitable adjustment requests that are certified by the contractor and submitted as claims under the Contract Disputes Act are called requests for equitable adjustment (REAs). If the REA is certified and denied by the contracting officer, it can be appealed to the appropriate Board of Contract Appeals or the Court of Federal Claims.

Why Equitable Adjustment matters for government contractors

EA rights are one of the most significant financial protections in government contracting. When the government directs changes that increase cost or extend schedule, the contractor has a contractual right to be made whole, not to profit at the government's expense, but not to absorb legitimate additional costs either. Contractors should track potential EA entitlements in real time during performance, document government-directed changes carefully, and submit REAs promptly.

Example

A federal building construction contractor encounters rock formations 12 feet below grade, not indicated in the government's geotechnical reports, that require blasting, specialized equipment, and five additional weeks of work. The contractor submits a request for equitable adjustment under the Differing Site Conditions clause (FAR 52.236-2) for: $380,000 in blasting and excavation costs above the original bid; $45,000 in temporary work stoppage costs while the government reviewed the situation; $38,000 in overhead allocated to the five-week delay; and a five-week schedule extension. After negotiations, the contracting officer agrees to $440,000 and a four-week extension, issuing a bilateral contract modification.

Frequently Asked Questions

What is the difference between an equitable adjustment and a claim?

An equitable adjustment is a request for fair compensation for a government-caused impact, typically submitted informally as an REA. A claim under the Contract Disputes Act (CDA) is a formal, certified demand for payment that triggers the contracting officer's duty to issue a final decision within 60 days (for claims under $100,000) or within a reasonable time (for larger claims). An REA can be converted to a CDA claim if the parties cannot reach agreement.

Is profit allowed on equitable adjustments?

Profit is generally allowed on upward adjustments, the contractor is entitled to earn profit on the additional work directed by the government, just as it expected to earn profit on the original work. For downward adjustments (credits), the government may reduce the contract price to remove both direct costs and profit, though the exact treatment depends on the specific change and the contract's terms.

How long does a contractor have to submit an REA?

Time limits depend on the specific clause at issue. The Changes clause (FAR 52.243-1) requires the contractor to assert its right to an equitable adjustment within 30 days of receiving the written change order. However, courts have allowed contractors to preserve rights by providing written notice within the window even if the full pricing is submitted later. Contractors should consult the specific contract clauses and applicable case law.

Can the government force a contractor to accept an equitable adjustment it disagrees with?

No. The government cannot unilaterally impose an EA; it must be agreed upon (a bilateral modification) or formally denied (allowing the contractor to appeal). If the contracting officer issues a Final Decision on a certified claim that the contractor disagrees with, the contractor has 90 days to appeal to the Board of Contract Appeals or 12 months to file suit in the Court of Federal Claims.