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When an agency intends to exercise an option (usual authority 52.217-9; 30 days) and for various financial, operational, etc. concerns the incumbent contractor informs the agency that the incumbent contractor does not desire to continue performance during the upcoming option period; is that a termination for convenience, termination for default or does the agency just simply not exercise the option and begin the acquisition cycle for a new solicitation?

Has anyone experienced this scenario and what are some of the applicable notification requirements/regulations/parameters for an incumbent contractor electing to decline/not accept/reject/not perform (not sure the correct verb to use there) a pre-priced option period?

Thanks in advance,

 

Additional Context: 

DOD, Service Contract

 

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1 hour ago, prudentmindstx said:

When an agency intends to exercise an option (usual authority 52.217-9; 30 days) and for various financial, operational, etc. concerns the incumbent contractor informs the agency that the incumbent contractor does not desire to continue performance during the upcoming option period; is that a termination for convenience, termination for default or does the agency just simply not exercise the option and begin the acquisition cycle for a new solicitation?

Has anyone experienced this scenario and what are some of the applicable notification requirements/regulations/parameters for an incumbent contractor electing to decline/not accept/reject/not perform (not sure the correct verb to use there) a pre-priced option period?

It depends on the situation. . . 

The contractor has no right to refuse the government to perform under the option (if everything was done correctly as identified in 52.217-9). They agreed to at the time of contract award. 

That being said, if they are coming to you and asking to be let out of it for business reasons, they are not going to be able to perform anyway if they are being truthful.

1. The easiest thing to do is not exercise the option. That decision is the unilateral right of the government. Less paperwork and just re-compete the requirement.

2. You can exercise the option and then terminate for cause (commercial)/default (non-commercial)/convenience.

     2.1 - Why terminate for convenience when you can just not exercise the option. Makes no since if you are just going to let them out anyway.

     2.2  - Cause/Default would be used to make sure they get de-barred, make sure it is reported for future evaluators or go after then for damages of some kind (cost of the re-compete/disruption of services/etc.). 

3. You can require them to perform.

Edited by Constricting Officer
Add an omission.
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29 minutes ago, Constricting Officer said:

1. The easiest thing to do is not exercise the option. That decision is the unilateral right of the government. Less paperwork and just re-compete the requirement.

Thank you. Agree that #1 would be the easiest. Is there any notification requirement that the incumbent contractor is subject to? I.e. must notify Government agency of their intent to decline option within 30-60-90 days or anything like that? Or provide agency "reasonable notice"? Kind of the reverse of the requirement for the Government to give an LOI to exercise an option? 

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10 minutes ago, prudentmindstx said:

is there any notification requirement that the incumbent contractor is subject to? I.e. must notify Government agency of their intent to decline option within 30-60-90 days or anything like that? Or provide agency "reasonable notice"?

Notice would be required if it is included as a requirement in the contract.

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prudent,

The original posting spoke of "usual" -- usually, there is no mechanism for a contractor to decline an option -- a contractor can indicate it's preference, but the contractor has already promised to perform if the government exercises the option.

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14 hours ago, ji20874 said:

there is no mechanism for a contractor to decline an option 

@ji20874 I agree its atypical and I'm also not familiar with any mechanism, either. I'm wondering if the contractor gives four (4) months written notice on an approx. $10M/yr service contract, if the agency would be more inclined to LOI/extend option and terminate or if they would just issue a new solicitation and "walk away" from struggling incumbent. I think @Constricting Officer suggests the easiest thing to do is the latter and issue a new solicitation. Does "easiest" translate to "most likely" thing an agency should do? 🙂

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17 hours ago, prudentmindstx said:

and for various financial, operational, etc. concerns the incumbent contractor informs the agency that the incumbent contractor does not desire to continue performance

I agree its the governments unilateral right to exercise or not.  But a contract is a two way street as well.

I would offer based on basic information offered by the OP that the "usual mechanism" would be for the incumbent to communicate its concerns on taking on the option to the government in writing which I would hope is the basis for the original question.   If so then as I see it the contractors intent has been stated the next step is how to make it happen if the government agrees to let the contractor go.

There is an alternative as well.  What can the government do to assist the incumbent in overcoming the financial and operational issues?  Lots of folks are going to chime in and scream about helping the contractor but there is lots of missing information about the contract - payment terms, performance terms, etc. - all where there might - again might - be opportunity adjust the contract.  Heck there is even something called partial termination.

All said if the decision to terminate has been reached then the thread has addressed the basics.   However if the decision has not been made to terminate I would hope that the government and contractor are looking at possible alternatives.

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21 hours ago, prudentmindstx said:

for various financial, operational, etc. concerns the incumbent contractor informs the agency that the incumbent contractor does not desire to continue performance during the upcoming option period;

The question is not whether the incumbent "desires" to perform the option, but whether it can perform the option.  The contracting officer has an obligation to consider the interests of the government when dealing with a contractor.  In this regard, if the contracting officer follows the procedure for exercising an option and determines that is the best way forward for the government, why would the contracting officer agree to let the contractor off the hook merely because the contractor does not "desire" to perform the option, go through the time and expense of a new procurement, and likely pay an increased price? 

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Quote

I'm wondering if the contractor gives four (4) months written notice on an approx. $10M/yr service contract, if the agency would be more inclined to LOI/extend option and terminate or if they would just issue a new solicitation and "walk away" from struggling incumbent.

Certainly, 4 months notice is more likely to provide the desired result than 4 days notice.  But still, this is a request and perhaps a negotiation, not a notice.

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In use of options, one consideration given is undue risk to contractor (17.202(c)(1)). Is it possible that the contractor could cite several undue risks (performance, reputation, financial, operational, etc.) they would expose both themselves and the agency to risks far beyond the value of exercising the OY (and then ending up in termination/litigation)?

I.e. it's in everyone's best interest to 'walk away' from this OY? Cost of new procurement < Cost of LOI/Exercise OY/termination/ligitation. 

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2 hours ago, Retreadfed said:

The question is not whether the incumbent "desires" to perform the option, but whether it can perform the option.  The contracting officer has an obligation to consider the interests of the government when dealing with a contractor.  In this regard, if the contracting officer follows the procedure for exercising an option and determines that is the best way forward for the government, why would the contracting officer agree to let the contractor off the hook merely because the contractor does not "desire" to perform the option, go through the time and expense of a new procurement, and likely pay an increased price? 

Of interest the exercise of an option is a "may" not a "shall".   CO discretion on what is best all the way around.   Facts dictate but if in the review of such a request by an incumbent that it is clear that they have significant operation and financial issues I am not sure I would be the CO to exercise the option knowing that such issues will cause significant problems in the exercised option period.   "It depends" is most operational in a matter such at this in my view.

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2 hours ago, prudentmindstx said:

In use of options, one consideration given is undue risk to contractor (17.202(c)(1)). Is it possible that the contractor could cite several undue risks (performance, reputation, financial, operational, etc.) they would expose both themselves and the agency to risks far beyond the value of exercising the OY (and then ending up in termination/litigation)?

I.e. it's in everyone's best interest to 'walk away' from this OY? Cost of new procurement < Cost of LOI/Exercise OY/termination/ligitation. 

 

49 minutes ago, C Culham said:

Of interest the exercise of an option is a "may" not a "shall".   CO discretion on what is best all the way around.   Facts dictate but if in the review of such a request by an incumbent that it is clear that they have significant operation and financial issues I am not sure I would be the CO to exercise the option knowing that such issues will cause significant problems in the exercised option period.   "It depends" is most operational in a matter such at this in my view.

Two excellent posts in my opinion.  It’s not in the governments best interests to drive a contractor into the ground or into default.  COs have a lot of discretion intentionally by Congress and the President in legislation, regulations and policies as well as case law.  The all too common issue is many can’t or won’t exercise it.  

When I took my first procurement course man years ago at Ft Lee, VA, an instructor said “there are old contracting officers.  Then there are bold COs.  But you won’t find an old, bold CO.”

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2 hours ago, prudentmindstx said:

In use of options, one consideration given is undue risk to contractor (17.202(c)(1)).

FAR 17.202 provides guidance on when including an option in a contract may be desirable.  FAR 17.207 provides guidance on what factors a contracting officer should consider when deciding to exercise an option that was included in a contract. 

Carl, and formerfed, while exercising an option is discretionary with the government, I don't think a contractor saying it does not "desire" to perform an option is sufficient.  Assume that the contractor realizes it will not make as much profit as it originally thought if it performs the option, therefore, it does not desire to perform it.  More specifically, take the situation where the contract is for PPE.  If the contracting officer does not exercise the option, the contractor can direct its resources toward fulfilling other demands for PPE, but charge a higher price for it than it would get under the option.  Hopefully, neither of you would say that the government should not exercise the option in this case if the contracting officer has followed the guidance in 17.207 and has determined that the exercise of the option is the best way to satisfy the government's needs.  Something more than the contractor's desire would have to be present for the contracting officer not to exercise the option.

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I hesitate to acknowledge or even suggest a contractor right of refusal for an option.

FAR 17.202 provides guidance on exercising options.  Exercising an option is generally at the Government's sole discretion.  For any option exercise, the Government could decide not to exercise the option and to do a new procurement instead, for any number of reasons.

I think we're in agreement -- I'm stressing the unilateral right of the Government angle, and Carl is stressing the good business sense angle.

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15 hours ago, ji20874 said:

I'm stressing the unilateral right of the Government angle, and Carl is stressing the good business sense angle.

Agreed with a slight change.  I am stressing the discretion angle and its application to the basic scenario the OP has posed.

PS - A discretion in my experience that is rarely documented either way in accord with FAR part 17. 

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On 4/30/2020 at 12:13 PM, Retreadfed said:

The question is not whether the incumbent "desires" to perform the option, but whether it can perform the option.  The contracting officer has an obligation to consider the interests of the government when dealing with a contractor.  In this regard, if the contracting officer follows the procedure for exercising an option and determines that is the best way forward for the government, why would the contracting officer agree to let the contractor off the hook merely because the contractor does not "desire" to perform the option, go through the time and expense of a new procurement, and likely pay an increased price? 

I agree. The federal government isn’t obligated to guarantee that a contractor is necessarily entitled to make a profit.

I wouldn’t necessarily exercise an option if I know it would.ruin or cripple a contractor. But if the contractor COULD perform the option (that it contractually proposed and agreed to as a condition for award), it doesn’t matter if the contractor wants to be able to pursue or divert its resources to more attractive or more profitable efforts.

If a contractor informed us that it wouldn’t be able to perform the option, then I feel that it should at least be be reflected and documented in the contractor’s performance evaluation.

After all, look at those protest decisions which hold that the contractor is entitled to offer unrealistically low prices for FFP solicitations - as long as the government would not be able to show that such would affect the pre-award determination of a contractor’s responsibility for award. 

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