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rios0311

Exercising a Future Option

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I have a task order that was awarded under an agency specific MAC. The order has a base period of performance with two one-year option periods. The base period ends in September 2013. Program will not have the funds required to fund the 1st option (Oct 13 through September 14). They've asked me if they can instead exercise the second option next year for which they anticipate they will have funds (Oct 14 through September 15).

I don't see any way of doing this unilaterally. But can I do this bilaterally? In other words, can I provide notice to the contractor that we will not exercise option 1 of the contract, but that we would like to continue performance on the following year according to the terms of option 2 (length of performance and technical requirements)? I understand this approach doesn't constitute exercising an option. I'm simply extending the contract, but for a later date. So I'm not even sure it can be called an extension. However, I'm concerned about the gap with no performance.

I think that since the original task contemplates a total of three years of performance, doing this would not require drafting a justification for an exception to fair opportunity since the total performance time under the task order would not exceed the three year period contemplated by the original order. Is this something I can do bilaterally?

If not and assuming that I simply place a new order under the MAC for the required services, would I have a good basis for sole sourcing this (exception to fair opportunity) to the current contractor? Or would I have to compete it again?

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I would just ask the contractor if he will accept a zero dollar option modification that places him on standby for a year or until the funds become available provided he does not charge any demobilization or remobilization costs. He will probably agree in order to retain the rights to the FY15 work should they get the funds. If he demands to be paid for costs then it is up to the program office whether to pay them or let the task order expire and recompete later. Issue a bilateral mod.

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Guest Vern Edwards

So, you want to put the contract into suspended animation for one year and then revive it. Is that it?

I never stop being amazed by the ridiculous situations government contracting personnel find themselves in because they will do anything, ANYTHING, to avoid having to conduct a procurement.

Sure. Write a supplemental agreement holding the second option (which is an offer) open for one year despite the government's decision not to exercise the first option. That would not violate any law or regulation that I know of. You will need to give the contractor some consideration.

Now I suppose you will want to know if you'll need a J&A for the supplemental agreement. I don't know. There may be a GAO decision pertaining to the proposed course of action, but I don't know of one.

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As you too have speculated, I'm also not thinking that this action would be within the scope of the contract as originally contemplated. Accepting an option is a unilateral right of the Government. I'm sure that the parties - especially the task order proposers - contemplated that the 2nd year option would be a follow-on to the first year option for pricing purposes, which would not include demobilizing personnel and resources, then reconstituting a workforce and re-mobilizing it.

So, I don't think that one can "exercise the option" unilaterally. This would seem to require the agreement of the contractor and would be out of scope. If the pricing of the second year "option" would change due to the delay, then it would seem to be the equivalent of an up-priced option.

I also don't think that this is a logical follow-on action to justify going to only to the current task holder to avoid fair opportunity..

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Guest Vern Edwards

Now that I think of it, if you look at the standard clause, Option to Extend the Term of the Contract (MAR 2000), FAR 52.217-9, it says that the government can exercise the option by giving notice of intent "at least" 60 days before the contract expires. When does the contract expire? Well, if the first option is not exercised it will expire at the end of the first term. Why not give notice of intent to exercise the second option at least 60 days before expiration of the first term, skipping the first option, and then exercise the second option immediately, this year, with performance to begin in 2014? Why not do it, if the contractor won't object? Does the contact say that exercise of the second option is conditioned upon exercise of the first?

You won't need funds, unless the contract stipulates a minimum for the second option. You would not commit the government to anything. If you don't have a minimum you don't have to buy anything during the second option. You are, however, committing the contractor. Using this approach, you don't have to modify the contract in any way, except to exercise the second option, so you won't have to give the contractor any consideration and won't need a J&A. Get the contractor to send you a letter saying that it has no objection. I don't think there is a scope issue with this approach.

I wouldn't try it if the contractor says it will object. But if it doesn't, why not take a shot? What's the worst that can happen? It's unorthodox, but I don't see anything in FAR or in the option clause that forbids it. I am not aware of any GAO decision saying you cannot do it. I don't see how it violates CICA or any other statute of which I am aware. Get ready for people to tell you you cannot do it. If anyone does, ask them to show you why you can't. And don't run around asking permission unless local policy or procedure requires it.

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Thanks Vern and Joel. Vern I like your suggested approach. I will study it a bit more before committing to the program office. [edited]

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Not trying to beat a dead horse, but I came across an answer to a question that someone posted to Ask a Professor. The question regarded the exercise of options. In the answer, the "professor" states "the Government cannot then exercise an option period which commences affter a lapse in performance." The "professor" also states "Once there is a break in the performance period, the contract has terminated by operation of law and cannot be revived."

Unfortunately, this "professor" did not provide any citations or references to statues or GAO decisions that might support to his/her answer. Do you have any idea of where this person may have gotten his/her information from? I've included a link to the question and answer. The text in question begins in the third paragraph of the answer.

https://dap.dau.mil/...estionID=107037

What operation of law is he/she referring to?

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Guest Vern Edwards

What operation of law is he/she referring to?

I have no idea. You are beating a dead horse.

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Instead of starting a new discussion thread, I feel my question is a good follow on to this discussion. What restrictions/limitations, if any, does a CO have on exercising an option on a "dead" contract? Let's say the Government does not exercise OY II on a contract, but wants to exercise OY III. A letter of intent was not issued IAW FAR clause 52.217-9, because the Government did not anticipate exercising any future option periods after OY I.

I was reading up on contract closeouts and one of the requirements for a physically complete contract is, all option provisions have expired.

4.804-4 Physically completed contracts.

(a) Except as provided in paragraph (B) of this section, a contract is considered to be physically completed when—

(1)(i) The contractor has completed the required deliveries and the Government has inspected and accepted the supplies;

(ii) The contractor has performed all services and the Government has accepted these services; and

(iii) All option provisions, if any, have expired;

A CO can begin processing closeouts once they receive evidence that a contract is physically complete. In FAR subpart 4.804-4, they use the language, "All option provisions...have expired." Since a CO cannot closeout a contract until all option provisions have expired, could one make the argument that an option on a "dead" contract can still be exercised (bilateral basis), since the contract cannot be closed until the last option provision has expired, otherwise what's the point of leaving the contract open?

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Guest Vern Edwards

Instead of starting a new discussion thread, I feel my question is a good follow on to this discussion. What restrictions/limitations, if any, does a CO have on exercising an option on a "dead" contract? Let's say the Government does not exercise OY II on a contract, but wants to exercise OY III. A letter of intent was not issued IAW FAR clause 52.217-9, because the Government did not anticipate exercising any future option periods after OY I.

Why does this keep coming up?

Look -- a CO's authority/right to exercise an option depends on the terms of the option.

Now, read 52.217-9. It doesn't use the phrase "dead" contract, does it? FAR 2.101 does not define "dead" contract. FAR Part 17 does not define "dead" contract? In fact, FAR does not use the term "dead" contract. I searched the records of the GAO, the boards of contract appeals, the Court of Federal Claims and its predecessors, and the United States Court of Appeals for the Federal Circuit and could find the phrase "dead contract" only once -- in a GAO decision of 1966. It was quoting the protester, and it denied the protest, which didn't have anything to do with options. So why are you using the phrase "dead' contract? What do you mean by it?

What does 52.217-9 say about the right to exercise an option? That's the answer to your question.

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I'm putting the term dead in quotes, because I acknowledge it is not the correct term; however have heard many people use this term to describe an option year contract with lapsed options.

My confusion lies in the fact that I do not understand the intent behind not being able to closeout an option contract until all prospective options have expired. If the Government has not extended the contract IAW FAR clause 52.217-9, why can't I closeout out the contract once performance (physically) is complete? Why would I have to wait until all option provisions have expired?

I'm understanding 4.804-4 to mean all option periods in the contract when they say "all prospective options", not just the exercised ones.

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I'm putting the term dead in quotes, because I acknowledge it is not the correct term; however have heard many people use this term to describe an option year contract with lapsed options.

My confusion lies in the fact that I do not understand the intent behind not being able to closeout an option contract until all prospective options have expired. If the Government has not extended the contract IAW FAR clause 52.217-9, why can't I closeout out the contract once performance (physically) is complete? Why would I have to wait until all option provisions have expired?

I'm understanding 4.804-4 to mean all option periods in the contract when they say "all prospective options", not just the exercised ones.

Cardi, this is a different question than originally posed earlier this morning. You can close out the contract if there are unawarded options. Apparently you are referring to 4.804-4 -- Physically Completed Contracts.

"(a) Except as provided in paragraph (b ) below, a contract is considered to be physically completed when --

(1) (iii) All option provisions, if any, have expired; or..."

Common sense ought to tell you that, if the Government doesn't intend to award them, any unawarded options are considered to be "expired" . It's the Government's choice whether or not to award an option within its terms.

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From Formation of Government Contracts (4 ed), Cibinic, Nash and Yukins (p. 1431).

Regarding sequential options.

"If options are sequential, failure to exercise the option properly for one year will preclude the government from exercising future year options, Grumman Tech. Servs. Inc., ASBCA 46040, 95.2 BCA 27,918. There the board reasoned that the contarct "came to an end" when an annual option was not exercised; in effect, no potions then remained for future years."

Another case is found at https://bulk.resource.org/courts.gov/c/F3/149/149.F3d.1377.97-1469.html

LOCKHEED MARTIN CORPORATION, Appellant, v. Robert M. WALKER, Secretary of the Army, Appellee.

No. 97-1469. United States Court of Appeals, Federal Circuit.

"We hold that the Board's interpretation of the Contract to permit the government to exercise options out of sequence was error. Indeed, we are convinced that the only reasonable interpretation of the Contract is that it requires that the options be exercised in sequential order. As an initial matter, the express contractual language of Section F.3.1 indicates such an interpretation. Section F.3.1 permits the government to exercise its options "in accordance with the following schedule." The use of the term "schedule" in this clause followed by the table of successive time periods for exercising each successive, cheaper option, while not dispositive, indicates an intent to require option exercise in accordance with the specified sequence."

In this case the court had another, more primary reason for determining the options had to be sequential, but also inlcuded the basis quoted above as part of their decision.

The only exception I can think of is if the contract specifically authorized "skipping" of sequential options.

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From Formation of Government Contracts (4 ed), Cibinic, Nash and Yukins (p. 1431).

Regarding sequential options.

"If options are sequential, failure to exercise the option properly for one year will preclude the government from exercising future year options, Grumman Tech. Servs. Inc., ASBCA 46040, 95.2 BCA 27,918. There the board reasoned that the contarct "came to an end" when an annual option was not exercised; in effect, no potions then remained for future years."

Another case is found at https://bulk.resource.org/courts.gov/c/F3/149/149.F3d.1377.97-1469.html

LOCKHEED MARTIN CORPORATION, Appellant, v. Robert M. WALKER, Secretary of the Army, Appellee.

No. 97-1469. United States Court of Appeals, Federal Circuit.

"We hold that the Board's interpretation of the Contract to permit the government to exercise options out of sequence was error. Indeed, we are convinced that the only reasonable interpretation of the Contract is that it requires that the options be exercised in sequential order. As an initial matter, the express contractual language of Section F.3.1 indicates such an interpretation. Section F.3.1 permits the government to exercise its options "in accordance with the following schedule." The use of the term "schedule" in this clause followed by the table of successive time periods for exercising each successive, cheaper option, while not dispositive, indicates an intent to require option exercise in accordance with the specified sequence."

In this case the court had another, more primary reason for determining the options had to be sequential, but also inlcuded the basis quoted above as part of their decision.

The only exception I can think of is if the contract specifically authorized "skipping" of sequential options.

Great addition to the topic! Thanks!

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How does FAR 17.204(d) play into all this? My read is, the contract shall state the period in which the option may be exercised and that period may extend beyond the completion date of the contract. If the FAR says that you can exercise an option at some point after the service is complete, after a time void of payment or reciept of services, how can it be said that you cannot exercise an option after the PoP is ended?

17.204 -- Contracts.

(a) The contract shall specify limits on the purchase of additional supplies or services, or the overall duration of the term of the contract, including any extension.

(B) The contract shall state the period within which the option may be exercised.

© The period shall be set so as to provide the contractor adequate lead time to ensure continuous production.

(d) The period may extend beyond the contract completion date for service contracts. This is necessary for situations when exercise of the option would result in the obligation of funds that are not available in the fiscal year in which the contract would otherwise be completed.

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FAR 52.217-9 includes two fill-ins. If you tailor the fill in appropriately, then the clause should allow you to do that. For example: ... The Government may extend the term
of this contract by written notice to the Contractor within 30 days before the contract ends or within 30 days of funds becoming available for the contract.

You're still required to provide timely preliminary notice to the contractor, but the language of the clause would now allow you to perform the actual extension up to 30 days after the contract's POP has passed (assuming you delayed exercising the option because funds were not available).

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