Insufficient Funds Available for Option Exercise

[firstteam7479]

I am prime contractor working a cost reimbursement contract ? Research and Development -- that is nearing the end of its option term and preparing to go into a subsequent option term ? if exercised by the USG. This contract was a sole source award ? citing national security exemption from CICA -- and it contains FAR 52.217-9 Option to Extend the Term of the Contract. Upon examination of all the pertinent facts to support exercising the next option, the program office found itself very short of the available funding ? due to end of GFY drills -- to authorize the next option. In this analysis of what courses of action were available to the PCO, I concluded there could be at least two reasonable courses of action that he could execute. One approach would be to reduce the subsequent option price to the amount of funding now allocated to the program for the next term. Another approach could be to just do a sole-source procurement and add on to that same contract (since it would still be within the same general scope). It is understood that either of these options will require preparation of a J&A since GAO considers both of these approaches (per past precedent See: Outdoor Venture Corporation, B-279777, July 17, 1998; Magnavox Elec. Sys., Co., B-231795, 88-2 CPD ? 431; and, Varian Associates, B-208281, 83-1 CPD ? 78) as new procurements that would require compliance with CICA or sole source justification.

The PCO, however, is considering extending the term of the current option citing FAR 52.217-9 and increasing the value of the current option by the amount of funding now available for the program. Now ? although this appears to be a derivative of option two above, FAR 52.217-9 is a not a fit. First of all, a J&A has to be staffed by the PCO for a new procurement. Secondly, FAR 52.217-9 is the clause mechanism to extend the term of the contract by the exercise of an option as opposed to just ? extending the contract option. All of that said ? it also understood that given this contract is an R&D type contract ? Part 17 Option rules of engagement are not applicable to R&D.

So my questions are ?

1. What is your take on the two possible courses of action presented in the first paragraph?

2. What is your opinion on the use of 52.217-9 as the mechanism to extend the current option and increase value to the option? (Assume that a J&A has to be and will be staffed).

Thanks in advance for your input.

[FAR Fetched]

I'm not sure what you're trying to gain; you're the Prime Contractor, the CO has funding and wants to extend the Contract.

What's the problem?

[formerfed]

Does the contract contain the Limitation of Funds clause (FAR 52.232-22)?

[firstteam7479]

I'm not sure what you're trying to gain; you're the Prime Contractor, the CO has funding and wants to extend the Contract.

What's the problem?

Pleased about the extension etc. And not trying to gain anything else -- other than a clear comprehension on the correct process on the execution of the transaction. As a Contractor -- we have fiduciary responsibility to "help" our PCO if we believe they may be going down the wrong path. Not saying this is the case here, but rather, I am just trying to collect information to determine if the "mechanics" of the transaction are proper. It is a process and it is important to execute it correctly and be compliant with all of the applicable regulations and law. The more we know and understand the process the PCO must execute -- the better we can advise -- but at the end of the day, it is their decision -- that is what that Contracting Officer Warrant hanging on the wall is all about.

[firstteam7479]

Does the contract contain the Limitation of Funds clause (FAR 52.232-22)?

Formerfed -- Yes it does contain FAR 52.232-22.

[Guest Vern Edwards]

I concluded there could be at least two reasonable courses of action that [the PCO] could execute. One approach would be to reduce the subsequent option price to the amount of funding now allocated to the program for the next term. Another approach could be to just do a sole-source procurement and add on to that same contract (since it would still be within the same general scope).

So my questions are ?

1. What is your take on the two possible courses of action presented in the first paragraph?

2. What is your opinion on the use of 52.217-9 as the mechanism to extend the current option and increase value to the option? (Assume that a J&A has to be and will be staffed).

There is no substantive difference between the two courses of action. While in the private sector the parties may renegotiate the terms of an option, under GAO's interpretation of the Competition in Contracting Act renegotiation of an option is a new procurement, for which full and open competition must be obtained unless a justification for other than full and open competition is made and approved. See Cibinic and Nash, Formation of Government Contracts, 3d ed., page 1271.

Thus, in the world of government contracting the two courses of action are the same--negotiation of sole source extension of the contract. Procedurally, I don't know what the rules of the agency are, but it should not make much difference in terms of workload whether the thing is done one way or another. Either way, it's a sole source extension and must be repriced and documented. By the way, extension of the contract other than through exercise of the option would be, by definition, outside the general scope of the contract.

You said:

The PCO, however, is considering extending the term of the current option citing FAR 52.217-9 and increasing the value of the current option by the amount of funding now available for the program.

I assume that you meant decreasing the value of the current option to the level of the funding available, since the problem appears to be insufficient funds to exercise the option as is. Once the PCO decides not to exercise the option as is, the option clause no longer applies. Under government rules, he or she would be negotiating an out-of-scope extension of the contract, not exercising an option.

[formerfed]

If there is a likely chance that the option gets fully funded during the period of performance, as the CO I would exercise it subject to the limitation of funds clause. I would also get the contractors signature via a supplemental agreement to recognize it's funded for less than the option amount.

[woops85]

If Limitation of Funds clause is available and it's a cost reimbursement type contract, what is the issue? If I am reading your post correctly, you are funded through the end of your current option period but the Govt is short of funds for the next period. Since Limitation of Funds is in the order, the Govt can incrementally fund your option period.

If your PCO wants to extend the term of the existing period, you would need to have 52.217-8, Option to Extend Services in your order. 52.217-9 is the clause that allowed you to have option periods in the first place.

[firstteam7479]

There is no substantive difference between the two courses of action. While in the private sector the parties may renegotiate the terms of an option, under GAO's interpretation of the Competition in Contracting Act renegotiation of an option is a new procurement, for which full and open competition must be obtained unless a justification for other than full and open competition is made and approved. See Cibinic and Nash, Formation of Government Contracts, 3d ed., page 1271.

Thus, in the world of government contracting the two courses of action are the same--negotiation of sole source extension of the contract. Procedurally, I don't know what the rules of the agency are, but it should not make much difference in terms of workload whether the thing is done one way or another. Either way, it's a sole source extension and must be repriced and documented. By the way, extension of the contract other than through exercise of the option would be, by definition, outside the general scope of the contract.

You said:

I assume that you meant decreasing the value of the current option to the level of the funding available, since the problem appears to be insufficient funds to exercise the option as is. Once the PCO decides not to exercise the option as is, the option clause no longer applies. Under government rules, he or she would be negotiating an out-of-scope extension of the contract, not exercising an option.

Hello Vern -- thanks for the response. I agree with your comments relative to the two courses of action. On the second part -- where you assumed I meant "decreasing" the value -- no, I meant exactly as I stated initially -- "increasing" the value of the option we are currently in by the amount of funding available for the subsequent term citing FAR 52.217-8 as basis for the change. In other words -- Current Option Value + Available Funding = New Value. My (procedural) issue is using 52.217-8 as the basis for the change. What say you?

[FAR Fetched]

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[Guest Vern Edwards]

Hi firstteam:

I understand now. Same problem. Extending the current period of performance would be a change in scope, a new procurement, for which the CO would need a J&A. Somebody mentioned using the option clause at 52.217-8. I do not believe that the use of that clause in this situation would be consistent with the policy at FAR 37.111.

Vern

P.S. About your moniker: firstteam. Were you with the Cav?

[firstteam7479]

Hi firstteam:

I understand now. Same problem. Extending the current period of performance would be a change in scope, a new procurement, for which the CO would need a J&A. Somebody mentioned using the option clause at 52.217-8. I do not believe that the use of that clause in this situation would be consistent with the policy at FAR 37.111.

Vern

P.S. About your moniker: firstteam. Were you with the Cav?

Vern -- thank you and that was my thinking as well.

Concerning the moniker -- yes I was. From 74 to 79; B Co, 1/12th Cav and then with G Co. 27th MNT BN. And you are a Cav Trooper yourself correct?

[Guest Vern Edwards]

Yes, but long ago:. Dec 65 - Dec 66. We were at An Khe then.

Sometimes it's hard to accept that I have been home from my war longer than my father was home from WWII when he died.

Anyway, Welcome to Wifcon.