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Scenario: An agency wants to award a CPAF contract that provides for the repair of ships over a five-year period. Other than the number of ships that will require repair and when they will be available, the agency cannot specify the actual work that will be required before award. The agency does not use an indefinite delivery type contract. Instead it structures the contract with options such that each option will be for the repair of a particular ship during a particular fiscal year. During source selection, the agency instructs offerors to submit pricing based on a sample ship repair. When submitting pricing for the options, the offerors are to assume that the work under the option will be substantially similar to that which is stated in the sample task. However, there is an understanding (not stated in the contract) that the parties will renegotiate the price of the option once the actual work requirements under the option are known. To that effect, Section L of the solicitation states the following:

Offeror?s response to this portion of the RFP shall be based on the Government?s best estimate of the work items most likely required during the ship?s availability, i.e., the sample task. Inasmuch as the actual work needed to be performed will undoubtedly differ to some extent from the sample task, the contractor will be given the opportunity to renegotiate the CLIN prices based upon an actual work package prior to actually beginning work on the ship.

After award, as specific work requirements become known, the parties renegotiate the prices of the options.

1. Does the CO have to execute a sole source J&A before renegotiating the option prices?

2. If your answer to #1 is yes, then would a J&A be required if the agency exercised the option as proposed and then renegotiated the prices?

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What has to be renegotiated?

I would suggest no J&A is required if the requirements of FAR 17.207(f)(3) are met. It provides:

To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g. -- ... (3) In the case of a cost-type contract, if --(i) The option contains a fixed or maximum fee; or (ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102? [prohibiting cost-plus-percentage-cost]);

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What has to be renegotiated?

When the contract is awarded, the estimated cost and fee of the option are not based on the actual work that will be performed under the option. It is based on the sample task. After award, the actual work requirement under the option is identified. The estimated cost and fee to perform the required work could be more or less than the estimated cost and fee to perform the sample task. The parties renegotiate the option to reflect the estimated cost and fee for the actual work requirement.

The option does contain the required elements stated at FAR 17.207(f)(3) when the contract is awarded. However, those elements are renegotiated.

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Guest Vern Edwards

You are obviously thinking of decisions in which GAO has disapproved of renegotiation of an option. I don't know whether you would need a J&A or not. Unless you know of a protest decision on which your scenario is based, I think any answer would be speculative. The obvious answer, based your last statement, is that the option could not be exercised without a J&A. But the fact that you've asked the question in the face of an obvious answer suggests that the answer might be different.

But why use options? Too many needless complications. Here's how I might do it, off the top of my head:

I would write a requirements contract.

I would establish a "baseline" estimated cost and fee for each ship repair based on a representative sample task.

I would negotiate annual ceilings on overhead and G&A.

I would require that the contractor agree to perform upon receipt of an order, based on modifications to the sample task specification, if necessary, with an adjusted estimated cost, but with no fee adjustment no matter what changes are made and included in the order as initially issued. The contract would provide that changes to the sample task that are included in an initial order would not be considered contract modifications.

I would write an advance no-cost termination settlement agreement applicable to the contract, but not to any order that has been issued.

The word "option" would appear nowhere in the contract. Option pricing problem solved.

This is just brain storming and only one of many possible strategies that would not employ options, so don't ask me a lot of what-about-this questions. Any CO with half a brain could think up a way to answer any question that you could think to ask.

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Don,

It isn't clear to me how well-defined the requirements are at (1) the time the basic is awarded; and (2) the time the option is exercised. More importantly, it isn't clear to me how well-defined you feel they need to be before binding a contractor to a fixed fee. As this is a CPAF contract, I would suggest the requirements need not be more defined than your facts suggest. It seems we know enough to know when the contractor is complete--the ships are repaired. What differs is the initial state of the ships. For a cost-reimbursement contract, your facts don't seem like they would preclude responsible offerors from offering a determinable fee for the options.

If I've missed the "boat," and the requirement (WRT to option) at the time the basic is awarded is so illusive as to preclude an agreement on a formula for determining fee, it doesn't really sound much like an option to me (in the FAR 17.207(f) sense--but a duty to negotiate in good faith).

Perhaps more details would be helpful.

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It's interesting to me to know why the agency chose to award an contract with multiple options rather than a requirements or ID/IQ contract. I wonder if they were trying to avoid the new right for contractors to protest delivery order awards over $10M, which most ship repair actions would likely to deal with.

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You are obviously thinking of decisions in which GAO has disapproved of renegotiation of an option. I don't know whether you would need a J&A or not. Unless you know of a protest decision on which your scenario is based, I think any answer would be speculative. The obvious answer, based your last statement, is that the option could not be exercised without a J&A. But the fact that you've asked the question in the face of an obvious answer suggests that the answer might be different.

My initial answer was that a J&A would be required based on VARIAN ASSOCIATES, INC., B-208281, FEBRUARY 16, 1983, 83-1 CPD 160 and DEPARTMENT OF THE ARMY - RECONSIDERATION, B-208281.2, JUL 12, 1983. However, I've been told that the agency would argue that, because they advised all competitors that the option prices would be subject to renegotiation, the subsequent modification of option prices would be within the scope of the competition. As such, there would be no CICA issue. I'm not sure what to make of their argument. Based on my reading of the GAO decisions, I don't see how it matters what the agency told offerors in the solicitation. In the second decision I cited, the GAO doesn't condition its statement of the rule on renegotiating options on what was told to offerors in the initial competition:

AN OPTION IS AN UNACCEPTED OFFER TO SELL UPON TERMS SPELLED OUT IN THE SOLICITATION WHICH MAY BE UNILATERALLY ACCEPTED BY THE GOVERNMENT. THE GOVERNMENT MAY NOT RENEGOTIATE ANY TERMS OF AN OPTION WITHOUT ISSUING A NEW SOLICITATION WHERE THE FACTS INDICATE THAT PRICE COMPETITION MAY BE AVAILABLE.

One contracting activity has been using this approach for years for its ship repair contracts. Another contracting activity is thinking of adopting the approach for acquiring services as a way around the new restrictions on awarding IDIQ contracts over $100 million to a single source. It may catch on.

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Guest Vern Edwards

Why don't they just use a requirements contract?

I wouldn't argue too hard about what GAO would do. They are not reliable in such matters. The situation you describe is different enough from Varian that they might buy it.

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Don,

It isn't clear to me how well-defined the requirements are at (1) the time the basic is awarded; and (2) the time the option is exercised. More importantly, it isn't clear to me how well-defined you feel they need to be before binding a contractor to a fixed fee. As this is a CPAF contract, I would suggest the requirements need not be more defined than your facts suggest. It seems we know enough to know when the contractor is complete--the ships are repaired. What differs is the initial state of the ships. For a cost-reimbursement contract, your facts don't seem like they would preclude responsible offerors from offering a determinable fee for the options.

If I've missed the "boat," and the requirement (WRT to option) at the time the basic is awarded is so illusive as to preclude an agreement on a formula for determining fee, it doesn't really sound much like an option to me (in the FAR 17.207(f) sense--but a duty to negotiate in good faith).

Perhaps more details would be helpful.

Jacques,

Think of the estimated cost in the original contract as a ROM estimate to complete the work under the option. The estimated cost to perform the actual work requirement would typically differ from the ROM estimate by ~20%.

The contract contains an estimated cost and fee for the option when awarded. I don't think that compliance with FAR 17.207(f) is an issue.

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Why don't they just use a requirements contract?

Because the scope of the contract would be so broad that they fear breaching a requirements contract, which is probably a legitimate concern. They have other contracts that could potentially overlap the contract in question. The activity doesn't seem to have much control over its contracts.

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Don, I appreciate your patience as I struggle.

It seems to me that either what you're describing is a soft option (that would require a sole source justification), or the government can exercise the option unilaterally. On soft options, see Ralph C. Nash, Options for Additional Years of Work: Are They Overused?, 23 N&CR ? 4 (Jan. 2009); Cibinic & Nash, Formation of Government Contracts (3d Ed. 1998), at 1277.

You seem to be saying FAR 17.207(f) is not an issue because you have evaluated AN option, but apparently not THE option you intend to exercise. If the option has changed as a result of negotiation in a way different from what would have resulted under the terms of the basic contract (e.g., equitable adjustments under Changes clause, etc.), wouldn't FAR 17.207(f) present a hurdle?

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Because the scope of the contract would be so broad that they fear breaching a requirements contract, which is probably a legitimate concern. They have other contracts that could potentially overlap the contract in question. The activity doesn't seem to have much control over its contracts.

How about an IDIQ type then.

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Don,

This isn't unique to ship repairs. A similar situation happens fairly often in other types of work. I've seen it with IT system deployment and site preparation and installation. The agency has a new IT system to be deployed at multiple sites across the country. They provide hardware and software and the contractor makes the site ready and installs the system including cables, power, network, etc. The agency specifies in the SOW how many sites and locations but that's it.

Companies proposes T&M for the overall work using a government developed cost model and assoicaied assumptions. They also use the cost information in the model to price a sample task. After award of an IDIQ contract is made, the contractor does a site visit/survey to see what the actual work consists of and submits a detailed proposal using the cost/prices in the contract. The agency then issues a task order after negotiations are complete.

What's the difference with ships other than the costing is much more involved?

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Don,

This isn't unique to ship repairs. A similar situation happens fairly often in other types of work. I've seen it with IT system deployment and site preparation and installation. The agency has a new IT system to be deployed at multiple sites across the country. They provide hardware and software and the contractor makes the site ready and installs the system including cables, power, network, etc. The agency specifies in the SOW how many sites and locations but that's it.

Companies proposes T&M for the overall work using a government developed cost model and assoicaied assumptions. They also use the cost information in the model to price a sample task. After award of an IDIQ contract is made, the contractor does a site visit/survey to see what the actual work consists of and submits a detailed proposal using the cost/prices in the contract. The agency then issues a task order after negotiations are complete.

What's the difference with ships other than the costing is much more involved?

In the scenario that I described, the agency doesn't want to use an IDIQ because they want to award a contract over $100 million to a single source and they don't want to have to seek approval from the agency head. The uncertainty of the requirement at award is certainly not unique to ship repair. What's unique is the agency's use of priced options subject to renegotiation instead of an IDIQ or requirements contract.

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You seem to be saying FAR 17.207(f) is not an issue because you have evaluated AN option, but apparently not THE option you intend to exercise. If the option has changed as a result of negotiation in a way different from what would have resulted under the terms of the basic contract (e.g., equitable adjustments under Changes clause, etc.), wouldn't FAR 17.207(f) present a hurdle?

Yes, it would. However, the agency could argue that the change is the type of change permitted by the Changes clause--a change in work specifications. That is, the work specifications that were used as a basis for pricing the original option (i.e., the sample task) are being replaced with the actual work specifications.

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Guest Vern Edwards
Because the scope of the contract would be so broad that they fear breaching a requirements contract, which is probably a legitimate concern. They have other contracts that could potentially overlap the contract in question. The activity doesn't seem to have much control over its contracts.

For what it's worth, I spoke today with a very knowledgeable retired Navy contracting officer who used to administer the contracts that you are talking about. He said that he told them years ago that the approach they were using was contrary to FAR and that they should award requirements contracts instead. In my opinion, the scope argument against a requirements contract is dumb.

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For what it's worth, I spoke today with a very knowledgeable retired Navy contracting officer who used to administer the contracts that you are talking about. He said that he told them years ago that the approach they were using was contrary to FAR and that they should award requirements contracts instead. In my opinion, the scope argument against a requirements contract is dumb.

I really liked Vern's original idea until Don said that some tasks overlap other contracts. It would seem that the Navy could compete those tasks between the various contracts to get the best price.

Oops, I didn't mean to submit this post. I had decided not to and thought I was "going back", not "submitting", because I don't know what flexibility the agency has in selecting the source or location for ship repairs. I didn't know why only one firm would be selected to do the work or if others were in the local vicinity. Obviously, a ship has to be berthed somewhere so that it can be examined to better define the scope of services required.

Vern's next post below is very informative.

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Guest Vern Edwards

Don said "the scope of the contract would be so broad that they fear breaching a requirements contract." That's ridiculous. Scope is what you define it to be. There are any number of ways to limit the scope of a requirements contract, including the one in question.

The Navy has found a way that works for them and that has not yet been challenged by protest and may never be. They don't want to change. It's too much trouble and the industry has gotten used to it. I understand that. No problem. But we shouldn't accede to dumb things like, We can't find a way to write a requirements contract that would clearly define our obligation. My guess is that Don was teaching, he told the class that you can't renegotiate an option, and someone said, We do it all the time. When pressed, the person said that they use options because they can't define the requirement clearly enough to set boundaries on a requirements contract. That's an assertion that could be dismantled in about two minutes. The scope of any contract can be defined as clearly as you want it to be defined.

I don't know whether GAO would find the arrangement in question to be contrary to FAR 17.207(f) or to the rule that you can't renegotiate an option without a J&A. I have read enough GAO decisions to know that they are not perfectly predictable about things like this. There are a lot of unorthodox pricing arrangements out there that have been there now for a long time. This is one of them. I've been told that the Navy has been doing this for at least a decade. We can only speculate about what the outcome of a protest might be. All I can say is that if a contract specialist came to me with this Rube Goldberg scheme I would reject it just as soon as I could stop laughing.

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Don said "the scope of the contract would be so broad that they fear breaching a requirements contract." That's ridiculous. Scope is what you define it to be. There are any number of ways to limit the scope of a requirements contract, including the one in question.

The Navy has found a way that works for them and that has not yet been challenged by protest and may never be. They don't want to change. It's too much trouble and the industry has gotten used to it. I understand that. No problem. But we shouldn't accede to dumb things like, We can't find a way to write a requirements contract that would clearly define our obligation. My guess is that Don was teaching, he told the class that you can't renegotiate an option, and someone said, We do it all the time. When pressed, the person said that they use options because they can't define the requirement clearly enough to set boundaries on a requirements contract. That's an assertion that could be dismantled in about two minutes. The scope of any contract can be defined as clearly as you want it to be defined.

I don't know whether GAO would find the arrangement in question to be contrary to FAR 17.207(f) or to the rule that you can't renegotiate an option without a J&A. I have read enough GAO decisions to know that they are not perfectly predictable about things like this. There are a lot of unorthodox pricing arrangements out there that have been there now for a long time. This is one of them. I've been told that the Navy has been doing this for at least a decade. We can only speculate about what the outcome of a protest might be. All I can say is that if a contract specialist came to me with this Rube Goldberg scheme I would reject it just as soon as I could stop laughing.

Interestingly, the activity uses a requirements contract if the acquisition is sole source. They use the Rube Goldberg scheme if the acquisition is competitive. I don't know why. I'll see what I can find out.

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Interestingly, the activity uses a requirements contract if the acquisition is sole source. They use the Rube Goldberg scheme if the acquisition is competitive. I don't know why. I'll see what I can find out.

Don, were you able to find out anything else about why things are done that way?

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