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jtolli

Exercising Options As Written

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I have always been under the belief that option years must be exercised as written in the contract, and no changes can be made. FAR 17.207(f) states in part that the contracting officer shall make a written determination that "exercise is in accordance with the terms of the option." However, it seems that it is common practice to make changes to options at the time they are exercised.

I recently attended CON 120 and this issue was briefly discussed in regards to one of the class room scenarios. The primary instructor indicated that you could make changes with the option when exercising it. A couple of us questioned this, and the instructor in essence said that as long as no one (implying another contractor) found out, then it was OK. When we questioned the second instructor on the side about this, she did say that options had to be exercised as written.

We now have a situation at hand where the government wants to exercise an option on a services contract, but reduce the work required which would require the contractor to provide less people to do the work. Could this be done without entering into sole source negotiations with the contractor? Could this be considered a partial termination for the convenience of the government? Could it be considered a de-scope? Would partially terminating or de-scoping the contract upon exercising the option put the government in a sole source environment?

I would be interested to know of any case law regarding this. While I was attending CON 120 I was able to find some case law, but it was rather old and wasn't exactly relevant to the scenario presented in the class or the situation now at hand. By the way, the contracting officer for this contract says that you can make changes to the requirement when exercising the option year, but I am skeptical based on what I have been told in the past and would like to have some case law to support my position if my position is correct.

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At the risk of not answering the question posed, what would prevent a bilateral modification descoping the anticipated effort and then later exercising the option?

Deleting work is often handled through a partial termination for convenience. There may also be circumstances where a deductive change may be within the scope of the contract's Changes clause. That said, in either case, you wouldn't want to exercise the option in conjunction with the change. It is typically in the government's interest to negotiate the effect of these changes in advance (i.e., a bilateral modification), and the best time to do that would be before exercise of the option, so the government could make an informed decision on whether or not to exercise.

Further, there are times when a change descoping the effort would be outside of the scope of the competition (for instance, does it relax the requirement to such an extent that the field of potential offerors is different). Whether that change is within the scope of the competition obviously hinges on your facts.

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Per OP's request.

The government may not include new terms in the option. See

4737 Connor Co., L.L.C. v. United States, 2003 U.S. App. LEXIS

3289 (Fed. Cir. 2003) (option exercise was invalid where the

Government added a termination provision not present in the base

period of the contract at the time of exercise of the option); VARO,

Inc., ASBCA No. 47945, 47946, 96-1 BCA ? 28,161 (inclusion of

eight additional contract clauses in option exercise invalidated the

option).

The government must follow the option mechanics in the contract

to include timing of notice. See Lockheed Martin Corp. v. Walker,

149 F.3d 1377 (Fed. Cir. 1998) (Government wrongfully exercised

options out of sequence); The Boeing Co., ASBCA No. 37579, 90-

3 BCA ? 23,202 (Navy failed to exercise the option within the 60

days allowed in the contract and the board invalidated the option);

and White Sands Construction, Inc., ASBCA Nos. 51875, 54029

(Apr. 16, 2004) (Exercise improper when preliminary notice of

intent to exercise mailed on last day available and contractor

received it after the deadline). Compare The Cessna Aircraft Co.

v. Dalton, 126 F.3d 1442 (Fed. Cir. 1997) (exercise of option on 1

Oct. proper).

If a contractor contends that an option was exercised improperly, and

performs, it may be entitled to an equitable adjustment. See Lockheed

Martin IR Imaging Sys., Inc. v. West, 108 F.3d 319 (1997) (partial

exercise of an option was held to be a constructive change to the contract).

If you do not have access to a subscribed legal database I reccommend google scholar search tool. Its great and its free.

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Guest Vern Edwards

There is no absolute prohibition against the modification of an option prior to or at the the time of its exercise. There are two issues concerning the modification and exercise of options. I will call them the Validity Issue and the Scope of the Contract/Competition Issue.

THE VALIDITY ISSUE

First, an option is an offer and must be accepted in accordance with its terms. Exercise of an option that is not in accordance with its terms is not valid and not binding on the contractor. This is the ?Validity Issue.? The government has some authority to unilaterally modify an option ⎯ e.g., the changes clause or the termination for convenience clause. Exercise of such authority would be in accordance with the terms of the contract, including any options, and would not prevent exercise of the options as changed. Moreover, the parties can bilaterally agree to modify an option prior to or concurrent with its exercise, which would preserve its validity. The GAO addressed this issue in Varian Assocs, Inc., B-208281, 83-1 CPD ? 160:

Basically, an option is an unaccepted offer to sell upon agreed terms which may be unilaterally accepted by the Government. 1 Comp. Gen. 752 (1922) and DAR ? 1?1501 (1976). An option should be clear and definite and should not require further negotiations to work out important and essential terms. Department of Health and Human Services?Reconsideration, B?198911.3, October 6, 1981, 81?2 CPD 279. Therefore, the essential terms of an option and the corresponding commitment on the part of the contractor have to be established at the time the underlying contract is awarded. If they are not, there is no option for exercise by the Government.

Thus, like any offer, the terms of an option must be reasonably definite and exercise (acceptance) must be in accordance with its terms. This is Contract Law 101. The cases cited by Charles, 4737 Connor Co., L.L.C. v. United States, a non-precedential unpublished decision, which may be found at 65 Fed. Appx. 264 (Federal Circuit, 2003), and VARO, Inc., ASBCA No. 47945, 47946, 96-1 BCA ? 28,161, address the Validity Issue, not the Scope of the Contract/Competition Issue, which is what jtolli is asking about.

THE SCOPE OF THE COMPETITION ISSUE

The issue addressed by FAR 17.207(f) is the ?Scope of the Contract/Competition Issue.? In order to be compliant with the Competition in Contracting Act the terms of an option when exercised must be within the scope of the contract and the original competition. Any out-of-scope modification of the option must be justified and approved in accordance with FAR Part 6. A within-scope change to an option and an equitable adjustment to the option price would not violate FAR 17.207(f) and prevent the exercise of the option. There is no need to seek new competition or obtain approval of a justification for other than full and open competition in order to make a within-scope change and price adjustment. However, a modification to reprice an option in response only to new market conditions, or to add a clause that would substantively effect the rights and obligations of the parties, or to increase quantities, or to add work that is not within scope would require a new competition or a CICA justification and approval to negotiate with only one source.

The GAO discussed this issue in Department of the Army -- Reconsideration, B-401472.2, 2009 CPD ? 250:

We sustained MCS's protest because we found that the exercise of the option did not comply with FAR requirements. Specifically, FAR sect. 17.207(f) requires that a contracting officer, before exercising an option, make a written determination that the exercise of the option is in accordance with the terms of the option and the requirements of FAR sect. 17.207 and FAR Part 6, and further specifies that in order to meet the requirements of FAR 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. We found that the option to extend DAV's contract had not been evaluated as part of the initial competition, so that the agency was required to justify the use of noncompetitive procurement procedures in accordance with FAR Subpart 6.3 before exercising this option. The contracting officer's memorandum, despite its asserted compliance with FAR sect. 17.207 and FAR Part 6, provided no specific justification for the sole-source extension in accordance with FAR sect. 6.303.

See also Stoehner Security Services, Inc., B-248077, 92-2 CPD ? 285:

We find that the modification requiring Guard II services at the LaClede Towne Apartments exceeded the scope of the original contract. Although the contract is for guard services for HUD properties in the St. Louis area and is specifically tailored to allow the addition and deletion of properties as HUD's needs dictate, the modification went beyond the contract that HUD originally awarded. That contract contained only one set of guard prices (one price for armed guards and one price for unarmed guards); there were no separate prices for Guard I and Guard II services. As stated above, the requirements in the SOW all were to be satisfied with Guard I services. In fact, the loaded rates charged by St. Louis Security in the basic contract, including profit and overhead, reflect the rates required to be paid Guard I personnel. We think the awardee's bid prices and resulting contract were predicated on the furnishing of Guard I services in the locations identified in the SOW and others that could be added after contract award.

"DE-SCOPE" MODS TO OPTIONS

Modifications to reduce the amount of work to be done, which might be handled as partial terminations for convenience or deductive change orders, can be tricky. The GAO has found such mods to change the work so fundamentally as to be outside the scope of the competition. See Poly?Pacific Technologies, Inc., B-296029, 2005 CPD P 105, 2005, which Professor Nash discussed in Deductive Changes Outside the Scope of the Contract: A Rare Bird, 19 N&CR ? 40 (The Nash & Cibinic Report, August 2005), and which I discussed in Postscript: Deductive Changes Outside the Scope of the Contract, 19 N&CR ? 48 (October 2005).

So any partial termination or deductive change to an option must be carefully considered in light of the Scope of the Contract/Competition issue.

Those DAU professors are idiots if they said what jtolli says they said.

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