The clauses often come with complicated language and mathematical formulas that reference complex indices or benchmarks that generate disputes. Omission of relevant cost index. The inflation index included in an EPA clause must be a reasonably accurate reflection of the contract costs the seller is likely to bear so if the cost index included in a clause does not track the relevant costs to contract performance it would be considered defective.  For example, in one case an EPA clause omitted a cost index for aluminum that was the principle material for the contract and as such the cost index was determined to not have a logical relationship with the type of contract costs being measured.

Use of unauthorized index. The FAR authorizes adjustments under for four types of EPA provisions: 

(1) for standard supplies that have an established catalog or market price (2) for semi-standard supplies for which prices can be reasonably related to the prices or nearly equivalent standard supplies (3) based on actual cost of labor or material or (4) based on indices of labor or material. If these conditions are not met the rogue clause may be considered illegal.  For example, DOD established a clause that used a price index of petroleum that reflected average prices of refiners. The court ruled the price index did not represent an established catalog or market price because it did not reflect a specific vendor’s price but rather a simple average and further the index did not constitute a cost index because it consisted of average prices, not costs (BDM Mgt Svcs., ASBCA 28003). 

Failure to make adjustments to base period. To preserve the original bargain the EPA clause needs to relate back to the original base price negotiated by the parties.  In one case the EPA clause was deemed contrary to regulations because it only permitted an adjustment for the first 6 month period to tie back to the level price after which it was subject to changes every six month. The court ruled the index merely measured market trends in separate six month increments rather than comparing changes to the original price (Craft Machine Works, ASBCA Bo. 35167). 

Failure of the benchmark price or index. Sometimes a benchmark price or index may no longer be a good benchmark when (1) the methodology for calculating an index changes (2) the benchmark is split into two prices (e.g. one price subject to price controls and the other not) or (3) the benchmark price or index ceases to exist. In some cases, the EPA clause itself may address these contingencies (e.g. require parties to negotiate new terms) while if the EPA clause is silent courts have employed different legal theories to reach a common result e.g. reform the clause to produce a reasonable price consistent with the original bargain.

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