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Exercising Options without funding


AFOpsCON

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For DoD services contracts with options, can the options be exercised prior to availability of funds? I have seen this several times with O&M 1-yr options aligning with the FY. The contractor notification requirements are met and the option is exercised via contract modification with no funding. A second modification is then completed to fund the option once funds are made available (01Oct).

Based on the requirements of FAR 17.207(c)(1), how is that allowable. Am I interpreting the statement "Funds are available" incorrectly?

If allowed, is the authority derived from FAR 32.703-2(a) - initiating a contract action before funds are available for O&M and continuing services necessary for normal operations (paraphrasing the section). Does the term "contract action" include exercising an option?

Cheers!

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Are you asking about awarding a contract (or exercising an option) subject to availability of funds in the next fiscal year by appropriately using the clause at FAR 52.232-18?

6 hours ago, AFOpsCON said:

Does the term "contract action" include exercising an option?

Sure, why not?

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There are two possible issues. First, does the contractor object? Second, does FAR permit?

As to contractor objections, there have been a number of board of contract appeals decisions based on a contractor's objection to the exercise of an option subject to the availability of funds.

Contractually, an option must be exercised in strict accordance with its terms. It appears that the government cannot exercise an option subject to the availability of funds unless the contract permits it to do so. The boards have rejected attempts by the government to insert an availability of funds clause at the time of option exercise.  See Grumman Technical Services, Inc., ASBCA 46040, Sept. 5, 1995.

But if the Availability of Funds clause, FAR 52.232-18, is already in the contract, then the government may exercise an option subject to the availability of funds. See American Contract Services, Inc., ASBCA 46788, April 6, 1994:

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This question is settled. So long as FAR 52.232-18 is included in the basic contract, the Government may validly exercise an option even though funds are not presently available for the work. Cessna Aircraft Company, ASBCA No. 43195, 93-3 BCA ¶ 25,912; United Food Services, ASBCA No. 43711, 93-1 BCA ¶ 25,462; Western States Management Services,Inc., ASBCA 37504 et al., 92-1 BCA ¶ 24,663. It is undisputed that this contract included FAR 52.232-18. Accordingly, the contracting officer was not required to wait until appropriated funds become available to exercise the option. 

As to whether FAR permits, 32.703-2(a) applies to contract actions. See the definition of contract action in FAR 32.001:

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Contract action means an action resulting in a contract, as defined in subpart  2.1, including actions for additional supplies or services outside the existing contract scope, but not including actions that are within the scope and under the terms of the existing contract, such as contract modifications issued pursuant to the Changes clause, or funding and other administrative changes.

I don't think the exercise of an option is a contract action under that  definition. Nevertheless, it is clear from cases that agencies apply the availability of funds clause when exercising options, so go figure. 

I have not done extensive research. The cases I cited are a little old, and your agency may have a policy about exercising an option subject to the availability of funds. So I suggest that you confirm the above in consultation with your CO and your attorney before attempting to exercise an option subject to the availability of funds. 

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So, if the contractor would agree, would it follow that the parties could bilaterally add the clause at 52.232-18 to the contract? It would appear here that it would be mutually  beneficial. The option currently must be exercised or the notice must be issued prior to the availability of the next year’s funding.

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9 minutes ago, joel hoffman said:

So, if the contractor would agree, would it follow that the parties could bilaterally add the clause at 52.232-18 to the contract? It would appear here that it would be mutually  beneficial. The option currently must be exercised or the notice must be issued prior to the availability of the next year’s funding.

It would be okay between the parties, but a competitor who learns about it (unlikely)  might protest that the parties changed the terms of the option. See FAR  17.207(f). I don't know what the outcome would be.

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Don’t know the specific circumstances of the contract in question. However, it would seem that the -18 clause should have been included in the solicitation and contract or in the contract at award to fit the applicable circumstances, regardless of who would win the competition for the contract. 

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I enjoy researching subjects with my limited capabilities.   I agree with the comments in the thread.   I would offer one further comment.  Internal regulation or policy may have an impact on a decision and action by a CO as well.   I do realize the OP states "DoD" yet there are several entities in DoD.   By example the below from the EPA FAR supplement seems to add some additional considerations a CO would have to make if with EPA.   Does something exist within DoD?  I do not know just noting to express my view that I would suggest the OP may want to do some research internal to his or her organization beyond a reach to WIFCON.

"1517.207 Exercise of options.

(a) Unless otherwise approved by the Chief of the Contracting Office, contracts for services employing option periods shall require that a preliminary written notice of the Government's intention to exercise the option be furnished to the Contractor a minimum of sixty (60) calendar days prior to the date for the exercise of the option. Failure to provide such preliminary notice within the timeframe established in the contract waives the Government's right to unilaterally exercise the option and requires the negotiation of a bilateral contract modification in order to extend the period of performance, where such an extension is authorized.

(b) When the term of the service contract coincides with the fiscal year and delays in receipt of authority to obligate funds for the new fiscal year are anticipated, the Contracting Officer, if the contract so provides (see FAR 17.204(d)), may, within 60 days after the end of the fiscal year, unilaterally exercise an option to extend the term of the contract. The option may be exercised only if funds become available within the 60-day period. In the event that sufficient funding is not available within the 60 day period, the Government waives the right to exercise the option, thereby rendering any additional requirements subject to full and open competition requirements.

(c) The Contracting Officer, if the contract so provides, may, subject to the conditions in FAR 17.204(d), 32.703-2, and 32.705-1(a), exercise an option contingent upon the availability of funds. To exercise such an option, the contract must contain the clause in FAR 52.232-18, Availability of Funds. Under no circumstances shall any action be taken which could be construed as creating a legal liability on the part of the Government until a formal notice of availability of funds in the form of a contract modification has been issued by the Contracting Officer."

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I suppose I should know the answer to this. Is the contractor obligated to perform at the beginning of the option period prior to funding being obligated?

The -18 clause only addresses the liability of the government and that no payments can be made; it doesn’t address or excuse any obligation of the contractor to perform any work prior to funding. 

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18 minutes ago, joel hoffman said:

I suppose I should know the answer to this. Is the contractor obligated to perform at the beginning of the option period prior to funding being obligated?

No funds, no obligation. Think about it. See also 31 USC 1341.

This is Contracting 101. The OP's question has been answered.

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3 hours ago, Vern Edwards said:

No funds, no obligation. Think about it. See also 31 USC 1341.

This is Contracting 101. The OP's question has been answered.

Thanks. Makes perfect 101 sense. I started second guessing myself after reading the clause, which is completely silent regarding contractor actions and focuses on government liability for payment, e.g., “No legal liability on the part of the Government for any  payment may arise until funds are  made available to the Contracting Officer for this contract and until the Contractor receives notice of such availability, to be confirmed in writing by the Contracting Officer.”

It could be interpreted by a contractor that it wont be paid until funds are obligated but is free to begin performance, pending funds being received and obligated. Something to the effect of “Proceed at your own risk until funds become available”. 

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3 hours ago, joel hoffman said:

Thanks. Makes perfect 101 sense.

Actually, if it were Contracting 101, it should describe the government’s freedom from liability. It should also caution or direct the contractor not to begin performance on a voluntary basis pending the government obligating necessary funding. 

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Maybe true professionals should study, know, and understand the what, how and why of the regulations, policies, and organizational norms that govern their routine tasks. Then, when determining a course of action, they should: (1) ascertain the facts of their situation, (2) consider their objective(s), (3) consider what the regulations, policies, and norms require and would permit, (4) consider their resources, (5) tentatively develop a preferred plan of action and an argument in support of it, (6) consider arguments against, and (7) develop a fallback plan in case they can't sell their preferred plan.

And remember the maxim: People who know what and how work for the people who know why.

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