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Partially Exercising Option Periods Early


Chip13

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Scenario:

Our command has a CPFF/LOE contract with a base and four option periods. The LOE for the base period has been reached and the command has a need for additional LOE in the base period. Rather that soliciting the contractor for the additional effort in the base period, the CO wants to partially exercise Option 1 and Option 2 and move the associated LOE to the base period. It seems to me that the LOE and related costs and fixed fee are associated with a future PoP that may be based on escalated labor rates and different indirect rates. Is this a feasible approach to add more LOE to the base period?

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We never moved effort but we have excercised options early many times. It shortens the total contract period of course and sometimes causes option year prices to be charged early. One five year contract got wiped out in 2 years because of changing world events. Expeditious but not necessarily cost effective.

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Guest Vern Edwards

YOU MUST EXERCISE OPTIONS IN STRICT ACCORDANCE WITH THEIR TERMS. There is no such thing as partially exercising an option. This is elementary contracting knowledge, both in terms of the common law of contracts and FAR 17.207(f).

A CO who suggests partially exercising an option ought to lose his or her appointment on grounds of bonehead ignorance of the fundamentals. That CO is not thinking outside of the box. He or she is just not thinking.

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Vern

I agree, the Government must exercise an option in strict accordance with its terms. In this sense, however, I think "exercise the option" refers to a unilateral action by the contracting officer. If an option provides for performance in a specific period, the Government cannot unilaterally exercise the option for a different period. However, can the contracting officer "exercise the option" early bilaterally, with the agreement of the contractor (exercise the option in quotes, since it is not technically an option exercise). I don't know, but I suspect that is what is meant in the posts so far. Do we have, perhaps, an improper use of terminology rather than an improper action by the contracting officer?

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Vern

I agree, the Government must exercise an option in strict accordance with its terms. In this sense, however, I think "exercise the option" refers to a unilateral action by the contracting officer. If an option provides for performance in a specific period, the Government cannot unilaterally exercise the option for a different period. However, can the contracting officer "exercise the option" early bilaterally, with the agreement of the contractor (exercise the option in quotes, since it is not technically an option exercise). I don't know, but I suspect that is what is meant in the posts so far. Do we have, perhaps, an improper use of terminology rather than an improper action by the contracting officer?

I agree with Vern. The KO is trying to (unilaterally) exercise a portion of the options early, unilaterally "moving" the line items to the current period of performance.

To me, that is not only wrong, it is DUMB. As Chip 13 correctly points out a future line item may well be based upon projections of higher costs plus fee on the higher costs. in addition, the remaining "non-execised" line items, if later exercised, may not cover all the contractor's fixed costs for the future performance periods, as they should theoretically be apportioned against the various line items within the option. Thus, the KO would be changing the options - which is a change [ EDIT - see below*]. It would be especially dumb to pay higher rates if the option pricing is higher than the current rates, if you could obtain the effort at lower, current rates.

wvanup, you suggest doing this bi-laterally. [EDIT - see below*]. Simply agreeing to split up future option pricing without evaluating and determining the proper pricing of the additional work to be performed during the current period or its effect on the remainder of the option pricing would be wrong.

By requesting and negotiating [EDIT - see below*] a proposal for additional hours, the government may be able to obtain the additional labor hours at current rates or perhaps negotiate lower rates, if a portion of the pricing is comprised of fixed or one time costs that have already been recovered during the current period of performance. [EDIT - Deleted sentence]

[*EDIT - see next two posts below] If the KO wants to buy additional LOE on an LOE contract, it would be out-of scope action. I don't think that it is within the scope of the Changes clause.

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Guest Vern Edwards

Vern

I agree, the Government must exercise an option in strict accordance with its terms. In this sense, however, I think "exercise the option" refers to a unilateral action by the contracting officer. If an option provides for performance in a specific period, the Government cannot unilaterally exercise the option for a different period. However, can the contracting officer "exercise the option" early bilaterally, with the agreement of the contractor (exercise the option in quotes, since it is not technically an option exercise). I don't know, but I suspect that is what is meant in the posts so far. Do we have, perhaps, an improper use of terminology rather than an improper action by the contracting officer?

How would I know? Until I learn otherwise, I assume that someone who posts here knows what he or she is talking about and uses terminoiogy appropriate to what they want to say. But even if what was meant was bilaterally, adding LOE to an FFP-LOE-Term contract would be an out of scope mod, which would be a problem of another sort requiring a sole source justification. I suspect the CO knows that, which is why he or she wants to call it the partial exercise of an option.

Not creative, just dumb. Beyond dumb.

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I realized that adding scope to an LOE contract is not within the scope of the Changes clause after posting above but Vern responded before I could correct my post (duh, STUPID ME - sorry). So, regardless of the method used to add LOE if necessary, it would be an out-of-scope mod, requiring approvals/exceptions to full and open competion, etc. and bi-lateral procedures.

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It is unilateral. Apparenly, the contract has language stating that all options can be exercised in whole or in part, from time to time, and at any time. The contract is CPFF/LOE, so no worries about paying fixed rates associated with future periods (at least for hours performed by the prime as some of the subcontractors have T&M contracts with the prime), as the contractor will be reimbursed for actual costs incurred, but certainly the estimated costs and fixed fee were predicated upon escalated labor, future projected indirect rates and a mix of prime and subcontractor efforrt. Also since the labor was based on a mix of prime and subs and the contractor will have to increase hours in the base period, the mix of prime and subs may change or even necessitate bringing on additional subcontractors that weren't even priced in the base or any of the option periods.

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From Joel:

To me, that is not only wrong, it is DUMB. As Chip 13 correctly points out a future line item may well be based upon projections of higher costs plus fee on the higher costs. in addition, the remaining "non-execised" line items, if later exercised, may not cover all the contractor's fixed costs for the future performance periods, as they should theoretically be apportioned against the various line items within the option. Thus, the KO would be changing the options - which is a change. It would be especially dumb to pay higher rates if the option pricing is higher than the current rates, if you could obtain the effort at lower, current rates.

You are correct that the "future line item may well be based upon projections of higher costs plus fee on the higher costs" and that the remaining work "may not cover all the contractor's fixed costs for the future performance periods." OTOH, the contractor may well have no problem with recovering costs, and there may well be no increase, or just a minimal increase, in the option price, so that "exercising" the option early does not result in additional cost (or the administrative expense would not be worth the savings that could result from trying to get the services at current prices). Would it then be DUMB?

From Joel:

wvanup, you suggest doing this bi-laterally - which would also require a change. Simply agreeing to a change that would split up future option pricing without following change procedures, without evaluating and determining the proper pricing of the change to be performed during the current period, would be wrong.

I did not "suggest" doing it bilaterally, I asked if it could be done bilaterally, and then suggested the possibility that this was what was really meant. I made no comment on the wisdom of doing it bilaterally, as that would depend on too many factors to be able to reach any valid conclusions (e.g., would there be a price increase, what is the impact of stopping now -- if we do not add effort at this time -- and resuming when the option can be exercised unilaterally, etc.).

From Vern:

How would I know? Until I learn otherwise, I assume that someone who posts here knows what he or she is talking about and uses terminoiogy appropriate to what they want to say. But even if what was meant was bilaterally, adding LOE to an FFP-LOE-Term contract would be an out of scope mod, which would be a problem of another sort requiring a sole source justification. I suspect the CO knows that, which is why he or she wants to call it the partial exercise of an option.

What I believe has been suggested is, in effect, obtaining the original LOE earlier. There is no indication that the total LOE required by the contract (base plus options) will be increased. I consider that an in-scope change (not a change that can be done unilaterally, but in-scope nonetheless) that does not require a sole source justification (if I remember GAO decisions correctly, not all quantity increases are out-of-scope modifications that require sole source justification). If the option were for additional quantities of widgets rather than LOE, and the option clause had an exercise date of not earlier than 1 August 2014, would I need a sole source justification for an agreement to change the option exercise date to 1 June 2014? I do not think so, and I do not see the difference between a supply option and a services option in that respect.

As for what was actually meant by option exercise, I do not know either. Chip 13, does your contracting officer want to partially exercise the option unilaterally or with the agreement of the contractor? Boof, when you shortened the performance period to two years, was that done unilaterally or with the agreement of the contractor? Should the focus of the discussion be on what should be done, or should we focus on what may well be a poor choice of words to describe the situation?

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It is unilateral. Apparenly, the contract has language stating that all options can be exercised in whole or in part, from time to time, and at any time. The contract is CPFF/LOE, so no worries about paying fixed rates associated with future periods (at least for hours performed by the prime as some of the subcontractors have T&M contracts with the prime), as the contractor will be reimbursed for actual costs incurred, but certainly the estimated costs and fixed fee were predicated upon escalated labor, future projected indirect rates and a mix of prime and subcontractor efforrt. Also since the labor was based on a mix of prime and subs and the contractor will have to increase hours in the base period, the mix of prime and subs may change or even necessitate bringing on additional subcontractors that weren't even priced in the base or any of the option periods.

OK, the question is not whether it can be done (if your description of the option clause is accurate it can) but whether it should be done. You seem to have three choices: (1) exercise the options and pay the out year rates now; (2) negotiate new rates based on performing the work early; or (3) waiting to exercise the option if you cannot negotiate new rates and the option rates are too high at this time. I have no basis for speculating which of these is best for you.

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Guest Vern Edwards

Okay, so now I know that Chip13 does not give us all the pertinent facts when he posts to ask a question. I stand by my posts here. I'm more disgusted now than I was at first.

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Guest Vern Edwards

You're right, I should have said CPFF/LOE. My apologies.

Same rule, though. Adding LOE would be out of scope. If the options are for LOE in further periods of time, partially exercising an option for a future period to add LOE to a current period would also be out of scope in my opinion, even if the option provides for partial exercise.

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