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Martin

Minimum Guarantee - Supply IDIQ

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Unfortunately I was not able to respond to a question posed by Mr. Edwards under jwomack's "Termination Fee or Minimum Guarantee" post. The post was recently locked by Admin.

I had recommended setting a minimum guarantee of $3,000 under a supply IDIQ contract for which the unit price of an item was $10,000.

Mr. Edwards stated:

But it may be that you can make the minimum a dollar amount without promising to buy a quantity of supplies. If the price of 1 item is $10,000 and you set the minimum at $3,000, you would be promising to pay that amount instead of buying 1 item, but what would you get for it? It's an interesting idea, and I think it could work if you could sell it to your agency.

Going out on a limb here as I know my proposed approach is unorthodox to say the least…

FAR 16.504( a ) states that quantity limits may be stated as a number of units or as dollar values. In addition:

B-295530 states in part:

To ensure that a contract is binding, the minimum quantity must be more than a nominal amount, but should not exceed the amount the agency is fairly certain to order. FAR§ 16.504(a). There is no “magic number” that the FAR or our decisions set as adequate consideration for a contract; instead, the determination of whether a stated minimum quantity is “nominal” must consider the nature of the acquisition as a whole.

It stands to reason that you will likely not be able to order 0.3 items ($3,000 out of $10,000). Does that necessarily mean that the minimum guarantee (expressed as a dollar value) under a supply IDIQ contract has to cover the price of at least 1 item? Don’t know, but I think a case may be made that it doesn’t necessarily have to.

For example: IDIQ contract for widgets. The solicitation established a minimum guarantee for the contract of $20,000. The minimum guarantee corresponds to the price the agency expects to pay for 1 widget based on their IGCE. Award is made to a vendor for $21,000. Would you increase the minimum guarantee to $21,000 to award the contract? If so, would you notify all other offerors of the change in the minimum guarantee and allow them to submit revised proposals?

Assuming the agency approves and prospective contractors don't protest I would proceed and award the contract with a $3,000 minimum guarantee. I would be promising to order at least $3,000 worth of supplies. In practical terms when I issue an order for 1 item ($10,000) I would have met the minimum. If I don’t meet the minimum then it is a breach of contract and the Contractor may take action as they see fit.

If the contractor sues for breach of contract I would have to refer to 285 F.3d 1040: Thomas E. White, Secretary of the Army, Appellant, v. Delta Construction International, Inc. (United States Court of Appeals, Federal Circuit).

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I don't think this is an issue with respect to IDIQ contracts for services. The issue lies with IDIQ contracts for supplies. And I don't think there is a contract law issue. There is a FAR deviation issue.

The IDIQ clause, 52.216-22, says: "The Government shall order at least the quantity of supplies or services designated in the Schedule as the 'minimum.'" For services, the minimum "quantity" can easily be stated as a dollar amount without too much of a stretch of the imagination or logic. But supplies?

I think that if you have an IDIQ contract for supplies, and if the price of a single, indivisible unit is $10,000, and if you set a minimum of $3,000, then you have a serious problem in logic. How can you fulfill the obligation to buy the minimum without spending $10,000? In order to fulfill your obligation, won't you really have to spend $10,000? Shouldn't you record an obligation of $10,000? Or is the promise to buy a minimum really a sham promise?

If it weren't for that "minimum quantity" language, I don't think there would be any problem with providing consideration by promising to "pay the contractor $3,000 for its promise to deliver, either by payment at the end of the ordering period without ordering supplies or through one or more orders of supplies" without promising to buy a "minimum quantity".

But agencies routinely deviate from the FAR without authorization. So maybe, as a practical matter, it's not really an issue at all. In any case, I think one could write a "Section H" clause that explains that the Government will fulfill its obligation under 52.216-22 either by paying the contractor $3,000 at the end of the ordering period, if it does not order anything, or by ordering at least one unit of the supplies. I think that would work. Upon award, the Government would obligate $3,000.

You'll probably get an argument about the obligation amount from some people, but I think it's a legitimate approach.

If you promise to buy a minimum of one, and if one costs $10,000, then an advance termination for convenience settlement agreement of $3,000 won't solve the obligation problem. You'll have to obligate $10,000. However, the advance termination for convenience settlement agreement might be a good idea for other reasons.

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I too was about ready to post a thought so including it here. Absent from the discussion here and previously is any specific reference to the GAO Red Book. I believe the discussions have bordered on the principles (and absolutes) of the Red Book especially that found in Volume II, Chapter 7. In short I would be concerned not only about unauthorized deviations from the FAR but with potential violation of Federal appropriation law with regard to any manipulation of obligating a IDIQ's stated minimum guarantee.

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FAR 16.504( a ) states that quantity limits may be stated as a number of units or as dollar values.

16.504 also states, “and the contractor to furnish at least a stated minimum quantity of supplies or services”. For supplies, I don’t think the government could reasonably expect the contractor to comply with furnishing anything less than one unit.

I think the CLIN offering consideration to bind the contract would need to be defined in some other manner.

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Don Mansfield from previous thread:

"Vern Edwards, on 08 Jul 2014 - 2:11 PM, said:

However, in your example you appear to have both an IDIQ CLIN and a non-IDIQ CLIN. In that case, the promise to buy the non-IDIQ CLIN items should be sufficient consideration to bind the parties to both CLINS. I say that you would not need a minimum for the IDIQ CLIN. No minimum, no obligation to buy. No obligation to buy, no need to obligate funds, and no need for an advance termination settlement agreement. The only duty associated with the IDIQ CLIN would be the contractor’s duty to deliver upon receipt of a government order. As long as such consideration is acceptable to the parties, it should be acceptable to the boards and courts. (You would still need a maximum quantity.) I don’t think such an arrangement would constitute a deviation or otherwise violate FAR.

That's not how I understood jwomack's example in his post #11. I understood his CLIN 0002 to be IDIQ as well. "

Any CLIN offering consideration that does not follow the “minimum guarantee” protocol would, by definition, be a non-IDIQ CLIN, correct?

I agree with Vern’s summarization except that I think a FAR deviation would be appropriate. How else do you get away with not establishing a minimum guarantee, which, as Don previously stated, “FAR 16.504(a) could not be clearer.” Can you elaborate, Mr. Edwards?

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Vern – To your question.

This quote from the Red Book at Volume II, Page 7-20 suggests strongly that what is to be obligated for an IDIQ is the stated minimum.

“What does all this signify from the perspective of obligating appropriations? As we noted at the outset, the obligational impact of a variable quantity contract depends on exactly what the government has bound itself to do. A fairly simple generalization can be deduced from the decisions: In a variable quantity contract (requirements or indefinite-quantity), any required minimum purchase must be obligated when the contract is executed; subsequent obligations occur as work orders or delivery orders are placed, and are chargeable to the fiscal year in which the order is placed. B-302358, Dec. 27, 2004.”

Further read beyond this quote suggests that contingent sums and what I will call reserved amounts (I might terminate you) are not to be obligated as they are not precise amounts of the government’s liability. Reference page 7-23 and this statement -

“The possibility that the contractor may not perform up to the level specified in the contract does not provide a basis for recording less than the full contract price as the obligation. However, for many types of obligations, the precise amount of the government’s liability cannot be known at the time the liability is incurred.”

Admittedly a quick read and response to your question but when I first read through the Red Book my thought was the suggestions of the responses of the above lead me to think that one would still be dealing with a maybe ( the word “either”) regarding the $3,000 and therefore it is not logical to use it as the obligation rather the higher of the amounts is the true precise amount of the governments liability. Sort of like a FFP contract with an option or variation which the Red Book speaks to as well, it is not what might be but the absolute of the total liability created by the contract.

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jwomack,

Your hypothetical Schedule looked like this:

IDIQ.

CLIN 1, quantity of 1, minimum guarantee, value $10,000.

CLIN 2, quantity of 49, total value $490,000.

CLIN 3, pre-negotiated termination fee (maybe “settlement fee” would be more appropriate verbiage), value $3,000.

Contract language. “CLIN 3 may be ordered in lieu of CLIN 1.”

For CLIN 2, is the Government ordering 49 units or is 49 an estimate (i.e., the Government could order 0-49 units)?

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I agree with Vern’s summarization except that I think a FAR deviation would be appropriate. How else do you get away with not establishing a minimum guarantee, which, as Don previously stated, “FAR 16.504(a) could not be clearer.” Can you elaborate, Mr. Edwards?

What I proposed was not omitting the minimum required by FAR 16.504(d)(2), as provided in FAR 52.216-22, but fulfilling it in a special way. Here is how I described it:

I think one could write a "Section H" clause that explains that the Government will fulfill its obligation under 52.216-22 either by paying the contractor $3,000 at the end of the ordering period, if it does not order anything, or by ordering at least one unit of the supplies.

I would take the position that I'm not deviating from FAR, but fulfilling its intent. FAR 52.216-22 would be in the contract, but in the Schedule, under "minimum" I would place the following:

"The parties agree that the Government will fulfill its obligation to order a minimum quantity by paying the Contractor $3,000 at the end of the ordering period, unless it orders one unit of CLIN 0001 before that time, which would otherwise fulfill the obligation."

Maybe I'm being too clever by half. It certainly would not hurt to seek approval for a deviation, but it would be a pain in the neck.

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For CLIN 2, is the Government ordering 49 units or is 49 an estimate (i.e., the Government could order 0-49 units)?

Sorry. 49 would be the max. Should be 0 - 49.

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