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How to price option years?

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Hello everyone--

I'm a small business owner, preparing my first quotation for the federal gov't.  I have a couple questions about option years which I'm hoping to get some help with.  In particular:

[1] If I'm understanding things, the gov't is in complete control when it comes to exercising, or not exercising, option years.  I.e. if three years down the road, we don't want to provide this service anymore, we nonetheless must, if the gov't wants it.  Is that right?

[2] Any rules-of-thumb for pricing option years?  Of course we're accounting for inflation, but there's also the risk that four years from now, our company will be much bigger and these contracts will no longer make sense for us.  Is it typical to see much, much higher prices quoted for future years?

[3] Does the gov't look at the option years, or just the base year, when deciding whom to award the contract to?

Many thanks!

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With respect to (1) above, generally you are correct. However, there may defenses to non-performance. For example, "impossibility of performance" may provide a complete defense non performance. You can research that on the internet. My example: your company completely left the field of service it was in and now only produces goods instead. I will leave (2) and (3) to others.  

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1.  See definition of "option in FAR 2.101 which states:

Quote

“Option” means a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract.

As long as the Government exercises the option in strict accordance with the contract's terms and conditions, it is their unilateral right and you would have to comply or otherwise be in breach of the contract.

 

2.  Be diligent - you should know your company and your market better than I do so estimate as accurately as possible and with care.

 

3.  Read the solicitation.  It should have either FAR 52.217-3 "Evaluation Exclusive of Options" or FAR 52.217-5 "Evaluation of Options."  Generally, the Government evaluates the base year plus all options.

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29 minutes ago, MiamiSB said:

[2] Any rules-of-thumb for pricing option years?  Of course we're accounting for inflation, but there's also the risk that four years from now, our company will be much bigger and these contracts will no longer make sense for us.  Is it typical to see much, much higher prices quoted for future years?

What approach to pricing will you take? Cost-based or market-based?

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1.  That’s the default.  The Government may be open to negotiating those terms especially if you’re the only source or bring some other great value that others don’t have.  That negotiation would generally need to take place as part of establishing the initial contract and not down the road after contract award and when they’re about to exercise an option.

 

3.  In addition to Matthew’s answer, if the solicitation doesn’t say one way or the other (like it should) then you should assume the option periods will be evaluated as well. 

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1 hour ago, Matthew Fleharty said:

3.  Read the solicitation.  It should have either FAR 52.217-3 "Evaluation Exclusive of Options" or FAR 52.217-5 "Evaluation of Options."  Generally, the Government evaluates the base year plus all options.

Unfortunately, it does not, although it does cite 52.217-8 and 52.217-9.  The former makes it sound like any extension can only be for six months, although they ask for five years. . . .

 

 

1 hour ago, Vern Edwards said:

What approach to pricing will you take? Cost-based or market-based?

Market-based.

 

Thanks to all for your help thus far.

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28 minutes ago, MiamiSB said:

Unfortunately, it does not, although it does cite 52.217-8 and 52.217-9.  The former makes it sound like any extension can only be for six months, although they ask for five years. . . .

Does the solicitation have the provision FAR 52.212-2 "Evaluation - Commercial Items"?  If so, check paragraph (b) which reads:

Quote

(b) Options. The Government will evaluate offers for award purposes by adding the total price for all options to the total price for the basic requirement. The Government may determine that an offer is unacceptable if the option prices are significantly unbalanced. Evaluation of options shall not obligate the Government to exercise the option(s).

 

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3 hours ago, MiamiSB said:

[2] Any rules-of-thumb for pricing option years?  Of course we're accounting for inflation, but there's also the risk that four years from now, our company will be much bigger and these contracts will no longer make sense for us.  Is it typical to see much, much higher prices quoted for future years?

[3] Does the gov't look at the option years, or just the base year, when deciding whom to award the contract to?

 

[2] Most of the time companies simply escalate their prices from year to year by some percentage that they expect will match their cost increases.  This is usually 1% to 3% year.

[3] Usually they look to the sum all years, including all option years.  Usually they do not count the FAR 52.217-8 Option to Extend Services, but I have seen that counted, too.  They do not use a present value calculation, but do sometimes look for what they consider unbalanced pricing (" the price of one or more contract line items is significantly overstated or understated, as indicated by the application of cost or price analysis techniques").

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8 hours ago, MiamiSB said:

Hello everyone--

I'm a small business owner, preparing my first quotation for the federal gov't.  I have a couple questions about option years which I'm hoping to get some help with.  In particular:

[1] If I'm understanding things, the gov't is in complete control when it comes to exercising, or not exercising, option years.  I.e. if three years down the road, we don't want to provide this service anymore, we nonetheless must, if the gov't wants it.  Is that right?

[2] Any rules-of-thumb for pricing option years?  Of course we're accounting for inflation, but there's also the risk that four years from now, our company will be much bigger and these contracts will no longer make sense for us.  Is it typical to see much, much higher prices quoted for future years?

[3] Does the gov't look at the option years, or just the base year, when deciding whom to award the contract to?

Many thanks!

1. Yep. You are in for the long haul.

2. No it is not typical to see much higher prices quoted for future years, unless the goods/services being provided are subject to a lot of cost volatility. In theory, if your company is much bigger four years from now then the marginal cost of providing your goods/services should actually decrease, because your General, Administrative & Selling costs shouldn't scale linearly with revenue growth.

3. Typically they look at the whole enchilada but your solicitation should tell you exactly how your bid will be evaluated.

4. You need a good advisor. This forum is a good place for answers but you need your own person who understands your business.

Hope this helps.

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20 hours ago, MiamiSB said:

[2] Any rules-of-thumb for pricing option years?  Of course we're accounting for inflation, but there's also the risk that four years from now, our company will be much bigger and these contracts will no longer make sense for us.  Is it typical to see much, much higher prices quoted for future years?

Unstated is whether your effort is with regard to a product or service.   If services one item that I see folks miss is to give consideration to FAR 52.222-43 if  in the solicitation (and resulting contract) and how it might effect a pricing strategy for the option periods of performance.

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