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Stated Ceiling Price on Contracts with Option Periods

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Apologies in advance if this has already been answered, but what is the appropriate method for stating a contract's ceiling price on a contract with multiple optional periods of performance? Should one state the ceiling price for the entire contract, inclusive of options, or state the ceiling price for the current period of performance? I've done it different ways, but I'd like to know if there is a correct way. I usually state a ceiling price and a "total funded amount" when I fund the contract incrementally. When I do this, I include language similar to:

"Notwithstanding the contract's stated ceiling price, the Government's liability to the contractor is limited to $XXX,XXXX.XX, the total amount funded on the contract. The contractor shall not perform work under this contract that will cause it to exceed this amount, except at its own risk."

When I have options I state the ceiling price as: "The Ceiling Price for this period of performance is $XXX,XXX.XX." If the contract is incrementally funded, I'll add "Total Funded Amount" language similar to the one above. But I always wonder if I should be stating the Ceiling Price based on the estimated value of the entire contract, inclusive of options.

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Guest Vern Edwards

What do you mean by "ceiling price"? Are you talking literally about the ceiling price of a fixed-price incentive contract? Or are you talking about the maximum quantity or dollar amount of an IDIQ contract, the maximum limit on the government's obligation to order under a requirements contract, or some other limitation?

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I'm referring to the not to exceed amount on a time-and-materials or labor hour contract. I believe it applies to cost type contracts too, but I'm not working on any. The term is used in the FAR. The Time-and-Materials Payment clause uses the term also.

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So your question is, "I always wonder if I should be stating the Ceiling Price based on the estimated value of the entire contract, inclusive of options."?

What you are doing now is not wrong, you are just recalculating the ceiling whenever you exercise an option. Honestly you could do it either way and not be wrong.

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Guest Vern Edwards

I disagree with j_dude77.

Read 52.232-7, paragraphs (d) and (e), and explain to me what sense it would make to include the value of extension options in the ceiling price of a T&M contract or line item.

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I guess it depends on the definition of "this contract" as used throughout paragraph (d) below:

52.232-7(d) Total cost. It is estimated that the total cost to the Government for the performance of this contract shall not exceed the ceiling price set forth in the Schedule.

Does the definition the FAR gives to the term "this contract" mean the current period of performance, exclusive of options; or does it mean the entire contract period, inclusive of options?

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Guest Vern Edwards

Read the clause. Think. What's the purpose of the ceiling price? In light of that purpose, does it make sense to include the value of options? Or does it make more sense to have a ceiling price for each option?

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Thank you Vern. It makes more sense to me that the ceiling price would refer to the current period of performance, but this still leaves my second question unanswered. And also, what makes sense to me isn't always consistent with what the FAR intends.

Whenever the FAR uses the term "this contract", should I understand the term to mean the contract's current period of performance, exclusive of options, or does it have different meanings throughout the FAR?

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Guest Vern Edwards

Sigh.

The purpose of the ceiling price of a T&M contract is to limit the respective performance obligations of the parties in relation to a specific undertaking, because they cannot determine the cost of that undertaking at the time they form their relationship and government funding is limited.

An option imposes no performance obligations on the parties unless and until it is exercised. Thus, to include the value of options in the ceiling price of a T&M contract would not only serve no useful purpose, but it would conflict with the intended purpose. Suppose that you have a base period and two option periods and that each is estimated to cost $1,000,000. Assuming that the periods are funded by different appropriations, setting a ceiling price of $3,000,000 would be contrary to the interests of the government and could lead to an Anti-deficiency Act violation.

In anticipation of your next question, when the government exercises an extension option, the extension period should have its own ceiling price, for the reasons set for above. The parties should not increase the ceiling price for the base period to include the value of the option period.

As for the meaning of "this contract," it depends entirely on context and the interpretive result of reading of the regulation or a contract as a whole. There is no one correct interpretation. It could refer to the entire contract or only one line item of the contract. Thus, if you have a contract with a cost-reimbursement line item and a fixed-price line item, "this contract," as used in the Limitation of Funds clause, FAR 52.232-20, would clearly refer to the cost-reimbursement line item, not to the entire contract.

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