The worldwide shortage of memory chips, known as dynamic random-access memory (DRAM) and NAND flash memory, has been widely reported in the press. The shortage is largely driven by insatiable demand for artificial intelligence (AI) and data centers. The shortage is causing prices to spike on a daily basis, with DRAM prices increasing by over 500% in the commercial market. The long-term solution, increasing capacity in the United States and allied countries, will take time and require capital investment, resources and technical know-how. In the short term, federal contractors, including Original Equipment Manufacturers (OEMs) and their resellers, distributors, channel partners and system integrators, are impacted. By extension, so is the federal government.
We are in the midst of a rapid expansion of AI data centers as well as the integration of AI capabilities throughout personal computers, edge devices, cloud environments, and telecom networks. This expansion and integration has pushed memory manufacturers to shift wafer production to high bandwidth memory. This shift in production is driving a shortage in traditional computer memory that is likely to continue until late 2027, when a Federal Acquisition Regulation implementing a statutory ban on the use of Chinese semiconductors will only heighten the demand and need for chips produced in the United States and allied countries. This shift in memory chip production is affecting the entire technology ecosystem including notebook and desktop computers, workstations, general purpose and AI servers, mobile phones, and other consumer electronic applications. These trends are projected to continue with suppliers forecasting unprecedented broad-based triple digit price increases for all categories of conventional memory and storage components. According to objective industry observers, personal computer prices have already increased 10-15% and are likely to go up 20-25% more in the next six months. Core server prices have increased 35-40% and are projected to increase 60-65% in the next six months.
The rapid and continual increase in prices for computer memory requires continual economic price adjustments for firms performing under existing federal government contracts. Firms that are unable to perform based on existing prices face termination for default. While the government may recoup some damages in the short-term via a termination for default, many contractors, including small businesses, may simply go out of business, resulting in damage to the American economy (e.g., unemployment, broken leases, unpaid suppliers and creditors). And since the entire tech industry is impacted by the shortage and price increases, the government is unlikely to acquire the technology it needs from some other supplier at a lower price than it can get from its current contractor. In the long term, terminating contracts for default now will lead to decreased competition and higher prices in the future, as the remaining contractors will raise future prices to make up for the losses incurred.
For the Multiple Award Schedule (MAS), the most rational course of action would be for the General Services Administration (GSA) to issue a temporary deviation alleviating the need for pricing for impacted products at the contract level, allowing contractors to compete on price at the order level. Alternatively, GSA could issue a temporary deviation allowing contractors to request economic price adjustments on a weekly basis, with a one-week turn-around time. This is not a new concept. In the late 1990s, GSA did this very thing on a temporary basis in response to the Y2K crisis. GSA provided temporary contract price relief and established a set date where it would re-examine the market and determine whether the temporary price relief should continue. More recently, GSA worked with industry to provide price relief in response to the supply chain disruption caused by the Covid pandemic. Without GSA action, MAS contractors will stop submitting quotes and contracting agencies will have to purchase on the open market, leading to delays, the increased use of the government purchase card, and the potential for agencies to purchase non-Trade Agreements Act compliant products. Industry and government are aware of the memory chip shortages and the resulting increase in prices. Doing nothing is not an option. The government is not in the business of putting companies out of business. Industry is ready to work with government to craft a temporary, common-sense solution that protects competition by keeping businesses solvent and provides the government with the technology it needs to achieve its mission.