Wifcon.Forum Archives

Award Term - Legality

By newbie on Wednesday, February 26, 2003 - 02:42 pm:

Hi - I'm looking into how our agency can use award-term contracting. I've read several articles on it, including Vern's. What I can't find is much discussion on the legality of contracting for extended periods of time, say the 10 years for which many award term contracts are written. Does this vary by agency? Is the FAR 5-year limit only on multi-year contracting, so as not to apply to options? Or is the limit in period of performace 5 years, inclusive of options, unless your agency is authorized otherwise (I know part of our agency has congressional authority to enter into "5+5" contracts, for a total of 10 years).

Thanks!

By Linda Koone on Monday, March 03, 2003 - 07:45 am:

Newbie:

Since nobody answered your question, I'll take a stab at it.

(1) The FAR restricts multi-year contracts to 5 years unless otherwise authorized by statute [FAR 17.104(a)].

(2) FAR 17.204(e) restricts the length of multiple year contracts (contracts with options) to 5 years unless otherwise approved in accordance with agency procedures. This restriction doesn't apply to IT contracts and some classes of contracts, such as service contracts, may be otherwise restricted by statute.

The contract length, based on the restriction at FAR 17.204(e) does vary from agency to agency.

By Anonymous on Monday, March 03, 2003 - 11:14 am:

I've attended some presentations on award term. As I recall, the contract term limit is still there, but they get around the length by stating that the award term (extension) is part of an award, and therefore can go beyond the term limit.

To my thinking, this argument does not hold water as it would imply that the terms of the contract would end with the contract period, (so what are the contract terms during the award term period?)

I'll wait for the courts to solve the issue.

By Vern Edwards on Monday, March 03, 2003 - 01:23 pm:

I haven't responded sooner because newbie said he'd read my stuff. I addressed the issue of maximum length in the monograph that I wrote for NCMA, Award Term Contracting: A New Approach for Incentivizing Performance.

The use of an annually-funded award-term incentive does not make a contract a multi-year contract as defined by FAR § 17.103 (see 10 U.S.C. § 2306b and 41 U.S.C. § 254c). Contracts with award-term incentives are multiple year contracts, which are not multi-year contracts. Thus, the five-year limit referred to in FAR § 17.104(a) does not apply to annually-funded contracts with award-term incentives.

The five year limitation on the length of the total of the basic and option periods which appears at FAR § 17.294(e) does not apply to contracts with true award-term incentives, because award terms are not options. If a contract provides for award options, instead of award terms, then the five year limit does apply. However, agencies may waive that limit in accordance with their internal procedures.

The Department of Labor has interpreted the five year limit on contracts covered by the Service Contract Act, mentioned in FAR § 22.1002-1, to mean that no single term of the contract may exceed five years, but that each option or award term is a new contract for purposes of the Act. See 29 CFR § 4.135. Thus, this limitation does not prohibit the use of award-term incentives.

The five year limit in FAR § 16,505(c) on ordering periods for task order contracts for advisory and assistance services does apply to contracts with award-term incentives.

By Anonymous on Monday, March 03, 2003 - 03:12 pm:

Vern
Is there any case law to back up your argument? I don't question your interpretation of the letter of the law, but I would like to see a court decision on the intent of the law before I accept your argument.

By Vern Edwards on Monday, March 03, 2003 - 03:46 pm:

Anonymous:

To the best of my knowledge there have been no court decisions of any kind about award-term incentives.

Keep in mind that the courts and the GAO become involved when there is some kind of dispute, either between the government and a prospective or disappointed bidder or between the government and its contractor. It is unlikely that you are going to see a court decision about limits on the number of award terms an agency can include in a contract. Prospective bidders are not likely to protest the inclusion of an award-term incentive in a contract since they stand to gain if they win. A disappointed bidder is not likely to succeed in a protest about that since any such protest would probably have to have been filed before the closing date for receipt of proposals, but that is not likely for the reason that I just gave. Finally, a contractor is not likely to go to court because an agency has included too many award terms in a contract.

Although I suppose that a lawsuit from some other party is possible, I consider it highly unlikely. Who would sue? So those of you who can't accept my reasonable interpretations of the regulations until a court or the GAO affirms them are likely to be in limbo for a very long time. Meanwhile, agencies are using award-term incentives.

By FormerCO4AF on Monday, March 03, 2003 - 06:32 pm:

Anonymous of 3:12 pm.

Personally I wouldtake the lack of court rulings and protests as a sign of industry acceptance to the process.

I agree with Vern. If a contractor protests and wins he/she loses on any future opportunity with award terms.

Talk about biting the hand that feeds you.

By Vern Edwards on Monday, March 03, 2003 - 07:35 pm:

I just searched the active listings at FedBizOpps and got 11 pages of hits for "award term." I checked more closely and found 24 separate acquisitions with award term incentives in just the first four pages.

Agencies planning to use award term incentives included:

Air Force Education and Training Command;
Army, White Sands Missile Range;
DOD Missile Defense Agency;
Naval Facilities Engineering Command;
Naval Surface Warfare Center, Dahlgren Division;
Air Force, Air Force Materiel Command;
Naval Surface Warfare Center, Port Hueneme;
Army, Fort Hood Directorate of Contracting;
Army Infantry Center, Fort Benning;
U.S. Corps of Engineers, Kansas City Civil Works;
Military Traffic Management Command;
NASA Ames Research Center;
Army, Fort Riley Directorate of Contracting;
Navy, Military Sealift Command;
DOD Education Activity;
Navy, Space and Naval Warfare Systems Center;
USAINSCOM;
Department of Transportation, Coast Guard;
Army, Fort Campbell Directorate of Contracting; and Defense Threat Reduction Agency.

The acquisitions were for a variety of services, including base maintenance, IT operations and support services, advisory and assistance services, technical support services, aircraft parts, ship defense systems engineering, motor pool operations, dining facility operations and management, herbicide application, project office support, aerospace testing and facilities operations and maintenance, custodial services, school maintenance, care and training of marine mammals, grounds maintenance, and nuclear technology support.

Several of the acquisitions would permit the contractor to earn up to 15 years of renewals by providing excellent performance.

By newbie on Monday, March 03, 2003 - 10:40 pm:

Thanks for everyone's input. Vern, I did read your writings on the topic, but I guess I still am unsettled on the issue. Here's why:

"Thus, the five-year limit referred to in FAR § 17.104(a) does not apply to annually-funded contracts with award-term incentives."

What if we're not talking about annually funded contracts? I use multi-year money and incremental funding on CR contracts... what if I wanted to incrementally fund a two-year award term? Would the multi-year limit apply then?

"The five year limitation on the length of the total of the basic and option periods which appears at FAR § 17.294(e) does not apply to contracts with true award-term incentives, because award terms are not options. If a contract provides for award options, instead of award terms, then the five year limit does apply. However, agencies may waive that limit in accordance with their internal procedures."

But what's the other option? If award terms are not options, then they are either:
1. continuations of current awards; or
2. new awards.

If they are continuations of current awards, then the multiple year limit on the base plus option periods would seem to apply. The intent of this part of FAR seems to be to limit the total time -how can we say that award terms aren't part of the total time of an award? If the award terms are awarded under a contract, they are part of that contract, and I would think they would be subject to applicable time limits on that award. If award terms are new awards... well... I just don't think this holds water.

"The Department of Labor has interpreted the five year limit on contracts covered by the Service Contract Act... Thus, this limitation does not prohibit the use of award-term incentives."

Their interpretation only deals with contracts subject to the SCA. Right?

What about service contracts not subject to SCA, with one or multi-year money, in incrementally funded CPAF contract arrangements, subject to the 5-year limit and not subject to any agency exception on time limits?

Thanks, everyone.

By newbie on Monday, March 03, 2003 - 10:43 pm:

Also, thank you for the active listings of activities using award terms. I think DoD has different authority regarding time limits - and almost all of those listings were DoD. I wonder if they are using this authority to justify the award term arrangements, or if they are just ahead of the curve in implementing this relatively new incentive.

By Vern Edwards on Monday, March 03, 2003 - 11:49 pm:

newbie:

See FAR § 17.104: "Multi-year contracting is a special contracting method to acquire known requirements in quantities and total cost not over planned requirements for up to 5 years unless otherwise authorized by statute, even though the total funds ultimately to be obligated may not be available at the time of contract award."

Under an award-term contract the agency does not acquire services in advance of funding. Award-terms are conditioned upon a continuing need and availability of funds. The contractor earns entitlement to an award term, but the term does not go into effect unless the government needs the services for another year and funds are available. If there is no requirement or if funds do not become available, there is no cancellation charge.

You say that if award terms are not options, then they must be either continuations of current awards or new awards. You then conclude that if they are continuations, then the option limitation in FAR § 17.204(e) applies. That's a non sequitur. The option limitation applies to contracts with options. Award terms are not options. So, the option limitation does not apply. And why can't award terms be new awards? Why doesn't that hold water? In any event, whether award terms are non-option continuations of an existing contract, an entirely new thing, or new awards, the five year limitations in FAR Subparts 17.1 and 17.2 do not apply.

Now I have explained this to you as well as I can. A number of agencies have been using award term incentives since 1997. Their use of award term incentives has been widely discussed. There has been no outcry from Congress, the IGs, or the GAO. Why, then, are you so bound and determined to find them in violation of non-applicable five year limitations?

You remind me of the people who in 1994 swore that the evaluation of oral presentations in source selection was "illegal" and would result in an overwhelming number of sustained protests. You also bring to mind the people who in 1987 thought that fixed-price contracts with award fees were illegal because they weren't mentioned in FAR, and the ones that said the evaluation of past performance was too subjective to be permissible.

There are a lot of things wrong with award term incentives, newbie; I'm increasingly inclined to think that they are not a good idea. But I do not believe that they violate any statute or regulation.

Here's a final thought: If you're convinced that award term incentives violate FAR, then don't use them.

By Anonymous on Tuesday, March 04, 2003 - 08:32 am:

Vern:
Can we stick to the issues and not browbeating to try to win people to a point of view?

Does anyone have an idea why the FAR puts a 5-year limit on contracts? If we can ascertain the reason for the limit, then I may be more comfortable in skirting this FAR induced limit.

Anonymous of 3:12 pm

By Vern Edwards on Tuesday, March 04, 2003 - 10:12 am:

Anonymous:

Congress established a five year limit on multi-year contracts because it did not want DOD to make commitments beyond its five-year defense plan. Multi-year contracting originally was available only to DOD and for the acquisition of supplies; it has since been made available to the civilian agencies and for the acquisition of services.

I don't know why FAR (not Congress) put limits on contracts with options. It might be for similar reasons or because of the difficulty of pricing beyond five years. Keep in mind, however, that the limitation on contracts with options is neither statutory nor absolute. Agencies may waive it and several of them have.

The five year limit on contracts covered by the SCA reflects the determination that contract wage determinations should be revised at least that often in order to reflect prevailing wages and fringe benefits.

The five-year limit on the ordering period of contracts for advisory and assistance services reflects Congress's dislike of those contracts.

If you understand the history and background of multi-year contracting and read the regulations carefully, you'll see that the policy is about contractually obligating the government in advance of funding, with provision for payment of cancellation charges, which is not what a properly written award-term incentive does. The idea behind multi-year contracting is to enable contractors to obtain the benefits of long term commitments and economies of scale, which they can pass on to the government. If a contractor is going to manufacture a product for which quantities are authorized and funds appropriated annually, and the agency's long-term plan calls for five years of production, the contractor can get better prices from suppliers of parts and components by insuring them against production breaks. Multi-year contracting is designed to enable the contractor to enter into long term agreements with its subs, by contracting in advance of funding with provision for the payment of cancellation charges. If the government wants a contractor to build a facility in which to provide a service, like space launch preparation services, and the facility will take more than one year to build, the government must allow the contractor to make long term commitments to its subcontractors, notwithstanding annual authorization and appropriation. That's what multi-year contracting permits. See FAR § 17.105-2.

See: "Multiyear Procurement: The Different Faces of Congress," in The Nash & Cibinic Report, July 1995 (9 N&CR ¶ 40), in which the professors explained multiyear contracting as follows:

"The 'multiyear' contract is a special type of requirements contract that obligates the agency to buy designated quantities of supplies or services for a period up to five years and to pay cancellation costs if funds are not available to buy the entire requirement. This permits contractors to achieve efficiencies by incurring large startup costs with the knowledge that they will be reimbursed those costs without regard to changing program requirements."

This description does not apply to contracts with award-term incentives. Indeed, award-term incentives would be inconsistent with the goal of multi-year contracting.

The N&CR article usefully discusses the history of multiyear contracting and its extension to the civilian agencies and to the acquisition of services. (The statutes say "multiyear," without the hyphen; FAR hyphenates the term, "multi-year.") See, too: Postscript: Multiyear Procurement," in 10 N&CR ¶ 54 (October 1996).

In "Multiyear Cpntracts or Multiple-Year Contracts: There is a Difference," 13 N&CR ¶ 48 (September 1999), the professors discuss the on-going confusion over the distinction between multi-year and multiple-year contracts:

"In multiyear contracts, the Government obligates itself to place orders if funds are available. Thus, multiyear contracts can only be used with multiple-year appropriations or when specifically authorized by Congress. Although multiyear contracting, either specifically authorized or with multiple-year appropriations, has been in use since the early 1960s, the term "multiyear" continues to be used to describe any contractual arrangement covering a period of more than one year. As a result, considerable confusion has resulted."

The professors go on to explain the difference. And yes, Anonymous, the professors cite a considerable amount of case law in their articles.

A contract with a properly-written award-term incentive does not commit the government in advance of funds and makes no provision for payment of cancellation charges or termination costs if funds do not become available. I explained that in my NCMA monograph, page 2-14:

"The contract should state that cancellation of an award that has not commenced will not entitle the contractor to any termination settlement or any other compensation."

I discussed it again on pages 3-12 and 3-13 in my recommendations about writing an award-term clause:

"The cancellation of any award terms or the voiding of the award-term incentive for any of the reasons set forth in this clause shall not be considered either a termination for convenience or a termination for default and shall not entitle the contractor to any equitable adjustment or any other compensation."

Compare that language with the requirements of FAR § 17.106-1(c), regarding the cancellation of multi-year contracts.

I got irritated with newbie for persisting in making an argument without first doing his/her homework. I shouldn't have let my irritation show, and I apologize. I have been running into that kind of thing a lot lately and I'm getting grumpy about it. No excuse, though.

By Anonymous on Tuesday, March 04, 2003 - 12:29 pm:

Vern:
I think this is one area where we will disagree.

I agree that prolonging a contract through award term extensions can be advantageous in the instant case to the government. And for the government and the winning contractor, I don’t see a reason for bringing award term to court.

However, I can foresee award term being protested in the future for various reasons. The following are just mental exercises for now, but they are the basis for my being wary about award term contracting.

1) As you stated in your 10:12 post “Congress established a five year limit on multi-year contracts because it did not want DOD to make commitments beyond its five-year defense plan. Multi-year contracting originally was available only to DOD and for the acquisition of supplies; it has since been made available to the civilian agencies and for the acquisition of services.”

A contract may be for 5 years, but if there is an award term clause, it may be an obligation for more than 5 years (up to 15 according to an earlier post). Granted, this is only if the funds are available, the program needs to continue, and the contractor performs well enough to earn the extra time. However, in awarding the contract, the government is committing itself to this prolonged period if all 3 items exist. So in essence, DoD could be committing itself to contracts beyond the 5-year defense plan.

Personally, I think the terms “multi-year” and “multiple year”, et al, have sufficed in usage up to the award term era, but will be re-addressed in the future.

2) In the wider picture of business, from which many of our regulations arise (SB contracting being but one example), an award term contract that could last up to 15 years excludes other businesses from having a shot at those government dollars. Are we dealing fairly with the rest of the market by reverting to a sole source for the award term? (I know I’m going to get hammered for citing “sole source”, but that is the impression I have, even though the contractor has earned it.)

3) Are we raising the bar to contracting with the government, or maybe slamming the door in the face of improvement? If a company builds a better mousetrap, how long before the government will get it due to being licked in to an award term contract? (I would like to think that this is not a valid argument, but perception is enough for a legislative representative to make waves.)

For the time being, I accept award term contracting, but will keep my ear to the rail as I believe the protest train will come eventually.

Anonymous of 3:12 pm

By Vern Edwards on Tuesday, March 04, 2003 - 12:58 pm:

Anonymous:

I'm not sure that we disagree. Here is what I wrote in an article published at Wifcon in February 2002:

"The award-term incentive is an unproven idea, far too new for anyone to make any claims about its effectiveness or success, and so professionals should greet award-term 'success stories' with skepticism. Nevertheless, FY 2001 witnessed increased interest in and application of the idea. No regulations have been promulgated to govern its use and official guidance is skimpy, at best; significant issues of law, policy and practical application are unresolved. Contracting offices that have decided to use award-term incentives in their contracts are learning as they go, borrowing from each other and improvising. A review of some of their solicitations, award-term clauses, and award-term plans suggests that those offices have not been as thoughtful and as thorough as they might have been. More importantly, continued expansion in the use of award-term contracts could result in a significant restructuring of some segments of the contract services market as requirements are effectively withdrawn from the market for ten to twenty years at a time. It is not clear that such a significant restructuring would be in the best interests of the taxpayers. Thus, if interest in and use of award-term incentives continues to grow during FY 2002, the Office of Federal Procurement Policy should find out what is going on and determine what, if any, regulation is needed."

While I don't share some of your notions about multi-year contracting and multple-year contracts, I do share your concern about the continued expansion in the use of award-term incentives.

Vern

By Vern Edwards on Tuesday, March 04, 2003 - 06:39 pm:

For more background on multi-year contracting (as opposed to multiple-year contracts), see the Comptroller General's letter to the Administrator, Small Business Administration, B-152766, 43 Comp. Gen. 657 (April 3, 1964).

The Comp. Gen.'s letter shows that new and unorthodox contracting methods are often attacked as being illegal and/or anti-competitive. People in government seem to be inherently conservative, and often have a hard time accepting new ideas. In this case, the SBA claimed that multi-year contracting, which was not then authorized by statute, was illegal, anti-competitive, and hurtful to small businesses. The GAO disagreed.

Here is how the Comp. Gen. described multi-year contracting, as authorized by ASPR § 1-322 (capitalization as in the original):

"AS PRESENTLY CONSTITUTED PARAGRAPH 1-322 DEFINES MULTI-YEAR PROCUREMENTS AS A METHOD FOR COMPETITIVE CONTRACTING FOR KNOWN REQUIREMENTS FOR MILITARY SUPPLIES, IN QUANTITIES NOT IN EXCESS OF PLANNED REQUIREMENTS FOR 5 YEARS SET FORTH IN, OR IN SUPPORT OF, THE DEPARTMENT OF DEFENSE FIVE YEAR FORCE STRUCTURE AND FINANCIAL PROGRAM, EVEN THOUGH THE TOTAL FUNDS WHICH ARE EXPECTED ULTIMATELY TO BE OBLIGATED BY THE CONTRACT ARE NOT AVAILABLE TO THE CONTRACTING OFFICER AT THE TIME OF ENTERING INTO THE CONTRACT. UNDER THIS METHOD, CONTRACT QUANTITIES ARE BUDGETED AND ACCOUNTED FOR IN ACCORDANCE WITH THE PROGRAM YEAR IN WHICH EACH QUANTITY IS AUTHORIZED. IT WOULD NOT BE USED WHERE FUNDS COVERING THE PROCUREMENT ARE LIMITED BY STATUTE FOR OBLIGATION DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS EXECUTED. IT WOULD BE USED ONLY WHERE COMPETITIVE PROCEDURES ESTABLISH THAT REDUCED UNIT PRICES WOULD RESULT OVER ANNUAL BUYS BY REASON OF THE ELIMINATION OF REPETITIVE, SUBSTANTIAL, START-UP COSTS."

The letter is historically very interesing.

By newbie on Tuesday, March 04, 2003 - 11:17 pm:

without doing my homework? your reply didn't bring up any new unconsidered information, just reiterated your interpretation of information already in discussion.

My point about the option contract limits was this: if you have a contract with options, that also has an award-term incentive, then nothing tells me that the FAR limit at 17.204 would no longer apply, merely because an award term is part of the equation.

As for the comment, "If you're convinced that award term incentives violate FAR, then don't use them," I'm certainly not convinced they violate the FAR. I'm the one who wants to use award term in my agency. I'm the first person to look into it or consider it. If I decide I don't think it is adventageous for the purchases I make, I won't use it. My objective (stated from the outset) was to gather information in an effort to advise my agency of the appropriateness of this type of incentive for the work we do.

By Vern Edwards on Wednesday, March 05, 2003 - 12:43 am:

newbie:

I most certainly did bring up newly considered information and you should by now have all the info you need.

1. I have clearly distinguished multi-year from multiple year contracts and provided you with plenty of references for the proposition that the use of award-terms does not make a contract a multi-year contract and is, indeed, inconsistent with the objectives of multi-year contracting.

2. I have explained that the five-year limit on contracts with options is waivable without the need for a FAR deviation. (You don't need options with an award term contract anyway, and if you don't have options then the limitation on options will not apply. Moreover, even if you have options along with award terms, FAR says that "the total of the basic plus the option periods shall not exceed 5 years." It says nothing about award terms, which are not options. So, if you have a one-year contract with four one-year options and the potential for 15 award terms, the total of the basic and option periods does not exceed five years.)

3. I have cited authority for the proper interpretation of the Service Contract Act's five year limitation, which does not preclude the use of award terms.

4. I have opened your eyes to the possibility that an award-term is neither an option or a new award (your false dichotomy). It's not necessarily one thing or the other; it may simply be an entirely new thing -- an award term.

One thing I did not do was answer your question: " I use multi-year money and incremental funding on CR contracts... what if I wanted to incrementally fund a two-year award term? Would the multi-year limit apply then?"

If by "multi-year money" you meant "multiple-year appropriation" (see the GAO Redbook, Vol. 1, Ch. 5, page 5-3), then by all means, go ahead and incrementally fund a two-year award term. If your funds cover the extent of your contractual obligation, then you don't have a multi-year contract within the meaning of FAR Subpart 17.1 and the five-year limit will not apply.

When a contract includes a well-written award term incentive clause, it says:

"You have the chance to earn award-term contract extensions by rendering excellent service. If you earn an award term, and if when the award term is due to commence we still have a requirement, and if we get money from Congress for the requirement, then you won't have to compete to continue performing the contract. The contract extension will be yours as a matter of right. But if you earn an award term and we don't have a requirement, or if Congress doesn't give us money, then there will be no extension of the contract and we will part company amicably (or not, as the case may be) at no cost to the government -- not a penny, not a farthing, nothing, nada, zilch."

(Gee, that would make a pretty good award-term clause.)

Good luck to you.

Vern

By formerfed on Wednesday, March 05, 2003 - 10:21 am:

Newbie,

One key thing in your task to "advise my agency of the appropriateness of this type of incentive for the work we do" is determining if this is the most effective way to incentivize the contractor. You can get this started when you conduct market research. Motivating factors to provide exceptional performance vary greatly from company to company and from industry to industry. The best way to gather this information is to ask from your potential offerors.

Another factor is how much your requirement will change over time. The thing that prompted the five year FAR restriction is the discovery of many long term overpriced contracts years ago. These contracts contained excessive prices in the out years due to many negotiated changes over time that are noncompetively established. You want to avoid that and the longer the term is, the more the likelihood.

By newbie on Friday, March 07, 2003 - 12:06 am:

Thank you Vern, and formerfed.