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FAR 17.207: Exercise of options

Comptroller General - Key Excerpts

The protester argues that the agency’s exercise of the option failed to consider the determinations required by FAR § 17.207(d). Protest at 4.

A determination that the option price is the most advantageous must be based on one of the following findings: (1) a new solicitation fails to produce a better price; (2) an informal market survey or price analysis indicates that the option price is lower; or (3) the time between contract award and option exercise is short enough and the market stable enough that the option price is the most advantageous. FAR § 17.207(d). The CO shall also consider such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services. Id. The FAR also directs that the CO’s consideration of “other factors” should take into account the need for continuity of operations, as well as the potential costs of disrupting operations. FAR § 17.207(e).

While our Office views an agency’s decision not to exercise an option as a matter of contract administration, we will entertain protests arguing that an agency unreasonably decided to exercise an option in an existing contract, rather than conduct a new procurement. Antmarin Inc.; Georgios P. Tzanakos; Domar S.r.l., B-296317, July 26, 2005, 2005 CPD ¶ 149 at 2 n.2. Because the exercise of an option permits an agency to satisfy current needs for goods or services without going through formal competitive procedures, the FAR provides that before an option can be exercised, an agency must make a determination that exercise of the option is the most advantageous method of fulfilling its need, price and other factors considered. FAR § 17.207(c)(3). As a general rule, option provisions in a contract are exercisable at the discretion of the government. PR Newswire Assoc., LLC, B-401692, Nov. 5, 2009, 2009 CPD ¶ 223 at 2. Our Office will not question an agency’s exercise of an option under an existing contract unless the protester shows that the agency failed to follow applicable regulations or that the determination to exercise the option, rather than conduct a new procurement, was unreasonable. Sippican, Inc., B-257047.2, Nov. 13, 1995, 95-2 CPD ¶ 220 at 2; Tycho Tech., Inc., B-222413.2, May 25, 1990, 90-1 CPD ¶ 500 at 3.

We find no basis to question the agency’s exercise of the option here. As noted above, the record shows that the CO based her decision to exercise the option on the short timeframe between award and exercise of the option, in accordance with FAR § 17.207(d)(3). AR, Tab 4, D&F, at 1. In this regard, the CO considered that the location of services had not changed in the three months since contract award.

The CO also considered that: (1) Maxim’s negotiated rate was determined to be fair and reasonable; (2) Maxim’s performance on the base contract was satisfactory; (3) continuity of services was necessary to provide continuous medical care; (4) the agency was preparing a competitive procurement for award for its longer term needs; (5) any transition period between the current and new contractor was estimated to take three months; and (6) potential costs could be incurred if operations were disrupted. The agency also considered that InGenesis’s unsolicited proposal offered lower rates than the rates under Maxim’s option, but did not find InGenesis to present a reasonable alternative due to its [deleted], which the CO attributed to its [deleted], on an existing contract performing similar work. Accordingly, the agency appropriately considered both pricing and other information, as permitted by the FAR, and reasonably determined that the exercise of the option under Maxim’s sole-source contract was the most advantageous method of fulfilling its needs. FAR § 17.207(d)(3) and (e).

The protester also contends that the agency’s post-protest explanations of the considerations included in the D&F are improper. Protester’s Comments at 4. We find no merit to this argument. Our Office generally considers post-protest explanations, such as the one presented here, where the explanations provide a detailed rationale for contemporaneous conclusions and fill in previously unrecorded details, so long as the explanations are credible and consistent with the contemporaneous record. See SRA Int’l, Inc., B-411773, B-411773.2, Oct. 20, 2015, 2015 CPD ¶ 323 at 5 n.3

The protest is denied.  (InGenesis, Inc. B-412101.2: Mar 28, 2016)  (pdf)
 

The crux of the protester's argument is that the contracting officer did not give appropriate consideration to Nutriom's new manufacturing process for this dehydrated egg product, or to Nutriom's claim that it could provide the egg product at a lower price than OFD's second option year price. In addition, the protester complains that the DLA should have conducted the market survey earlier to avoid a concern about continuity of operations.

As a general rule, option provisions in a contract are exercisable at the discretion of the government. AAA Eng'g & Drafting, Inc., B-236034.3, Apr. 6, 1993, 93-1 CPD para. 295 at 5. Our Office will not question an agency's exercise of an option under an existing contract unless the protester shows that the agency failed to follow applicable regulations or that the determination to exercise the option, rather than conduct a new procurement, was unreasonable. Sippican, Inc., B-257047.2, Nov. 13, 1995, 95-2 CPD para. 220 at 2; Tycho Tech., Inc., B-222413.2, May 25, 1990, 90-1 CPD para. 500. Before an option can be exercised, an agency must make a determination that exercise of the option is the most advantageous method of fulfilling its need, price and other factors considered. Federal Acquisition Regulation (FAR) sect. 17.207(c)(3). One of the means available under the FAR for determining whether option exercise is the most advantageous method is an informal market survey or price analysis. FAR sect. 17.207(d)(2). The FAR also directs that the contracting officer's consideration of "other factors" should take into account the need for continuity of operations, as well as the potential costs of disrupting operations. FAR sect. 17.207(e).

Where, as here, an agency elects to conduct an informal market survey, the form the survey takes is largely within the discretion of the contracting officer, as long as it is reasonable. National Customer Eng'g, B-251034, Feb. 11, 1993, 93-1 CPD para. 129 at 5. The intent of the regulations is not to afford a firm that offered high prices under an original solicitation an opportunity to remedy this business judgment by undercutting the option price of the successful offeror. Person-System Integration, Ltd., B-246142, B-246142.2, Feb. 19, 1992, 92-1 CPD para. 204 at 2.

Here, we find no basis to question the agency's exercise of the option in OFD's contract. The record shows that, before deciding to exercise the option, the contract specialist conducted an informal market survey of the unsuccessful offerors under the original RFP and specifically considered Nutriom's statement that it could provide the dehydrated egg product at a lower unit price than OFD's second option year price, due to its new manufacturing process. The contracting officer weighed several factors, including: (1) the status of unitized group rations as a critical mission-support item for the military with a need for quality, continuity of performance and competitive price; (2) Nutriom's ability to continually provide a compliant product at its stated market price; and (3) OFD's excellent past performance record of providing a quality product in a timely manner, particularly under surge requirements. See Contracting Officer's Statement at 6-8.

Contrary to Nutriom's arguments, we do not agree that the agency's informal survey was unreasonable because the agency did not discuss with Nutriom the agency's concerns with Nutriom's survey price and new manufacturing process. As noted above, the record shows that DLA was concerned that Nutriom's new manufacturing process had not yet been tested. In addition, the agency was concerned about the discrepancy between Nutriom's claimed price for the UGR-H&S dehydrated egg product and the firm's higher price for the UGR-A egg product, which requires a less expensive and less complicated manufacturing process. Although Nutriom disagrees with the agency's judgment and argues that it could have addressed the agency's concerns, the FAR does not require a contracting agency to conduct a new procurement or to perform extensive or detailed research into the marketplace to determine whether the exercise of a contract option is most advantageous to the government. See Alice Roofing & Sheet Metal Works, Inc., B‑283153, Oct. 13, 1999, 99-2 CPD para. 70 at 4. Rather, as noted above, the regulations permit a contracting agency to base its judgment upon an informal survey and price analysis. See FAR sect. 17.207(d)(2).

We also find no merit to Nutriom's complaint that DLA should have conducted the informal market survey earlier. Here, the record shows that the agency first received pricing information from Nutriom more than 2 months before--and conducted its informal market survey a month before--the exercise of the option. Again, there is no requirement that the agency conduct a full-blown procurement in order to determine whether the exercise of a contract option is the most advantageous method of fulfilling its needs.

In sum, the contracting officer concluded here that it was more advantageous to exercise the option in OFD's contract than to conduct a new procurement, given that exercising the option would ensure continuity of operations for the supply of a critical item and given the contracting officer's concerns with Nutriom's market survey price. A contracting officer is accorded broad discretion in making the determination that the exercise of an option is in the best interest of the government, and we will not question the contracting officer's decision unless, unlike here, it is shown to be unreasonable or contrary to applicable regulations. Sippican, Inc., supra, at 2. (Nutriom, LLC, B-402511, May 11, 2010) (pdf)


We agree with the agency that the circumstances presented met the requirements for an exception to full and open competition due to an unusual and compelling urgency, when, at the end of DAV Prime JV's contract, it did not have a follow-on contract in place for services during the summer months--when the portable chemical toilet services would be most used. However, the record here evidences that the urgency resulted from the Army's failure to adequately plan for this procurement in advance and that DAV Prime JV was not the only firm interested and capable of performing these services.

The Army knew in August 2008 of the OHA's decision that DAV Prime JV was not an SDVOSBC. Both the SBA and our Office's decision in November 2008 suggested that the Army should consider whether to exercise an option, since DAV Prime JV had been found not to be an eligible SDVOSBC. In early March 2009, approximately 5 months later, the agency finally determined that it would not exercise the first option year because DAV Prime JV was not pursuing efforts to meet the eligibility requirements for an SDVOSBC joint venture.

The agency points to the delay in issuing a new solicitation--due to a rather broad NAICS Code for septic tank and related services--as the reason for the delay in procuring follow-on services and the cause of the urgency. However, as the market survey took longer than expected, it is apparent that the agency should reasonably have been aware that the follow-on contract would not be in place by May 31, the date DAV Prime JV's contract expired, and that the agency was required to plan how it would obtain these services until the follow-on contract would be in place.

If there was not time for full and open competition for the interim services until the follow-on contract was executed, in accordance with FAR Subpart 6.3, the agency should have conducted a limited competition among qualified sources who the agency found would be interested in performing the services. While the final results of the market survey, which ultimately led to the agency's decision to issue the follow-on procurement as a small business set-aside, took longer than the Army anticipated, the survey identified potential qualified sources that would be interested in providing these services and could have been included in a limited competition. Further, because the Fort Drum requirement for portable chemical restroom services was "a recurring requirement that has been procured by contract for at least the last 10 years," see MCS's Sept. 19, 2008 Protest, Agency Acquisition Strategy, at 1, the Army was presumably already familiar with the potential sources who could provide these interim services. Indeed, MCS, a qualified firm, had already indicated its interest and capability of providing these services. Thus, the record evidences that DAV Prime JV was not the only firm capable of performing these services.

Based on this record, the agency's has not provided a reasonable basis for the sole‑source extension. It is apparent that the Army did not properly plan in advance for its requirement to extend this contract; we do not think that the agency could sit idly by in the face of the circumstances here and not take action to obtain more competition for its requirements. VSE Corp.; Johnson Controls World Servs., Inc., B‑290452.3, et al., May 23, 2005, 2005 CPD para. 103 at 9.

MCS's protest is sustained.  (Major Contracting Services, Inc., B-401472, September 14, 2009)  (pdf)


Toward the end of the base year period of performance under Business Wire's contract, PR Newswire contacted the agency to announce that the firm had recently received a General Services Administration (GSA) Federal Supply Schedule (FSS) contract under which it could provide the services required under the solicitation. The protester advised that it would discount its FSS contract prices to offer a more advantageous price to the agency than the price available under Business Wire's contract for performance in the first option year. The protester initially stated that it would perform the year's work for $10,000, but subsequently increased its price to $10,750 to include a fee associated with its GSA FSS contract. Business Wire's contract provided a price of $12,240 for the first option year. The agency conducted an informal analysis of market prices which failed to suggest that lower prices would be submitted if a new competition was held; while the agency did consider the protester's informal price of $10,750, it questioned whether, in light of the firm's substantially higher FSS contract prices, and the fact that the firm already had increased its initial price (from $10,000 to $10,750), the protester might increase its price again during a new competition. In any event, the agency found that the costs associated with conducting a new competition would outweigh the savings associated with the protester's lower price, even if that price were offered under a new solicitation. The agency then chose to exercise the option available under Business Wire's contract. This protest followed.

Before an option can be exercised, an agency must make a determination that exercise of the option is the most advantageous method of fulfilling its needs, price and other factors considered. Federal Acquisition Regulation (FAR) sect. 17.207(c)(3). This determination may be based upon an informal market survey or price analysis that indicates that the option price is lower or more advantageous, and the contracting officer may consider other advantages from the exercise of the option. FAR sect. 17.207(c)(3), (d), (e). The contracting officer is accorded broad discretion in making this determination, and our Office therefore will not question the decision to exercise an option, rather than conduct a new procurement, unless it is shown to be unreasonable or contrary to applicable regulations. Sippican, Inc., B-257047.2, Nov. 13, 1995, 95-2 CPD para. 220 at 2.

We find no basis to question the agency's exercise of the option here. As noted above, the record shows that, before deciding to exercise the option, the agency conducted an informal price analysis and considered the costs of reprocuring its requirement instead of exercising the option. The agency also took into account the fact that the awardee's performance was satisfactory and that the option price was reasonable. In challenging the agency's decision to exercise the option, the protester primarily questions the agency's informal price analysis, arguing that it was based on prices for services that are not comparable to the services required here. We need not address the protester's contentions in this regard given that the record shows that the agency also concluded that the administrative costs associated with conducting a new competitive procurement for the services would be at least $1,930 (reflecting the costs associated with, for instance, preparing and issuing the solicitation, and reviewing proposals prior to making an award). AR, Tab 1, Contracting Officer's Statement at 5. This amount is higher than the greatest potential savings associated with the protester's informal offer of $10,750.

Given that the agency considered the awardee's performance acceptable, found the option price reasonable, and concluded that any savings resulting from the protester's informal offer would be more than offset by the costs of reprocurement, and in light of the agency's broad discretion in this area, we have no basis to question the propriety of the agency's exercise of the option. Person-System Integration, Ltd., B-246142, B-246142.2, Feb. 19, 1992, 92-1 CPD para. 204 at 3; Washington Consulting and Mgmt. Assocs., Inc., B-243116.2, July 19, 1991, 91-2 CPD para. 76 at 2-3.  (PR Newswire Association, LLC, B-401692, November 5, 2009) (pdf)


Before an option can be exercised, an agency must make a determination that exercise of the option is the most advantageous method of fulfilling its needs, price and other factors considered. FAR sect. 17.207(c)(3). This determination must be based on one of the following findings: (1) a new solicitation fails to produce a better price or a more advantageous offer; (2) an informal market survey or price analysis indicates that the option price is lower or the more advantageous offer; or (3) the time between contract award and option exercise is short enough and the market stable enough that the option price is the lowest price obtainable or the more advantageous offer. FAR sect. 17.207(d). With regard to the consideration of “other factors,” under FAR sect. 17.207(c)(3), the contracting officer should take into account the need for continuity of operations as well as the potential costs of disrupting operations. FAR sect. 17.207(e). The contracting officer is accorded broad discretion in making this determination, and our Office will therefore not question the decision to exercise an option, rather than conduct a new procurement, unless it is shown to be unreasonable or contrary to applicable regulations. Sippican, Inc., B-257047.2, Nov. 13, 1995, 95-2 CPD para. 220 at 2. We find no basis to question the agency’s exercise of option 6. The record reflects that the contracting officer based her decision to exercise option 6 on an “informal analysis of prices or an examination of the market.” AR, Tab 7, Determination to Exercise Option Year Six. More specifically, the Navy considered the fact that during the initial competition, MLS’s price (to include options) was 43 percent lower than the best composite pricing drawn from the other offerors, that MLS’s escalation in prices from option year 5 to for option year 6 was close in line with that of other offerors in the original competition, and that MLS’s escalation in price from the base year to option year 6 was less than that of other offerors in the original competition. (Antmarin Inc.; Georgios P. Tzanakos; Domar S.r.l., B-296317, July 26, 2005) (pdf)


Our Office will not consider an incumbent contractor's protest of an agency's refusal to exercise an option under an existing contract since this decision is a matter of contract administration outside the scope of our bid protest function. American Consulting Servs., Inc., B-276149.2, B-276537.2, July 31, 1997, 97-2 CPD para. 37 at 9. We will not consider the matter even where, as here, the protester alleges that the agency's decision to not exercise an option in its contract was made in bad faith. [5] Walmac, Inc., B-244741, Oct. 22, 1991, 91-2 CPD para. 358 at 2.  (Jones, Russotto & Walker, B-283288.2, December 17, 1999)


We conclude that the agency's determination that exercising the option was most advantageous was reasonable. In reaching this conclusion, we emphasize that the regulations do not require the agency to perform extensive or detailed research into the marketplace; rather, the agency was required only to perform an informal market survey or price analysis. We also note that the intent of the regulations concerning the exercise of options is not to afford a firm that offered high prices under an original solicitation a second chance to beat the contractor's option price. Valentec Wells, supra, at 3. Thus, the mere fact that a protester claims that it can perform a requirement for less than the option price does not establish that exercising the option is unreasonable.  (Alice Roofing & Sheet Metal Works, Inc., B-283153, October 13, 1999)

Comptroller General - Listing of Decisions

For the Government For the Protester
InGenesis, Inc. B-412101.2: Mar 28, 2016  (pdf) Major Contracting Services, Inc., B-401472, September 14, 2009  (pdf)
Nutriom, LLC, B-402511, May 11, 2010 (pdf)  
PR Newswire Association, LLC, B-401692, November 5, 2009 (pdf)  
Antmarin Inc.; Georgios P. Tzanakos; Domar S.r.l., B-296317, July 26, 2005 (pdf)  
Ken Leahy Construction, Inc., B-290186, June 10, 2002 (pdf)  
Jones, Russotto & Walker, B-283288.2, December 17, 1999  
Alice Roofing & Sheet Metal Works, Inc., B-283153, October 13, 1999  

U. S. Court of Federal Claims - Key Excerpts

These consolidated bid protests arise out of the United States Air Force’s (“Air Force’s”) exercise of options on four of six indefinite delivery/indefinite quantity (“ID/IQ”) contracts to supply health care service providers. Plaintiffs Magnum Opus Technologies, Inc. (“Magnum Opus”) and The Healing Staff, Inc. (“Healing Staff”) held the two ID/IQ contracts for which the Air Force chose not to exercise the options. Plaintiffs contend that the exercise of the options of the other four awardees violated the Competition in Contracting Act (“CICA”) and Federal Acquisition Regulation (“FAR”) § 17.207, and the Air Force was legally required to hold a new competition for the option work. Defendant and defendant-intervenor Luke & Associates, Inc. (“Luke,” collectively “defendants”) counter that this court lacks jurisdiction to consider cases arising out of options and plaintiffs lack standing to assert these claims. Defendants also contend that the Government’s exercise of the options complied with the law.

(sections deleted)

IV. Defendant Failed to Comply with FAR § 17.207(f) in Exercising the ID/IQ Options

Turning to the merits, the parties have cross-moved for judgment upon the administrative record pursuant to RCFC 52.1. In a manner “akin to an expedited trial on the paper record,” the court will make findings of fact where necessary to resolve these motions. CHE Consulting, Inc. v. United States, 78 Fed. Cl. 380, 387 (2007). The Court will set aside agency action if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A); 28 U.S.C. § 1491(b)(4); Banknote Corp. of Am. Inc. v. United States, 365 F.3d 1345, 1350 (Fed. Cir. 2004). In a bid protest, the protestor will succeed when “(1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure.” Banknote Corp. of Am., 365 F.3d at 1351 (quoting Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324, 1332 (Fed. Cir. 2001)). To show a violation of procurement regulation or procedure, the protestor bears a heavy burden and must show a “clear and prejudicial violation of applicable statutes or regulations.” Id.

The most significant alleged regulatory violation in this case is of FAR § 17.207(f). That provision mandates that for the Government to validly exercise an option, “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.” Id.

A. Defendant Cannot Satisfy FAR § 17.207(f) By Relying On the Price Analysis Done At the Time of Award

At the time of the initial award of these ID/IQ contracts, the Government evaluated the price of offerors’ proposals by “adding the total price of all Section B positions at all locations for each year of the base period, Option 1 and Option 2.” AR Tab 1 at 196. That is, the offerors proposed a base rate and an escalation rate that increased that base rate throughout the potential ten-year term of the contract. In awarding the contract, the Air Force considered this proposed pricing, including the option periods, for the positions contained in the upper half of Table 1 in calculating the total evaluated price for the proposal.20 Def.’s Reply at 6; AR Tab 1 at 196; see also Carl L. Vacketta & Gail D. Frulla, “Option” Clauses, 88-13 Briefing Papers 1 (Dec. 1988) (noting that options can be priced by modifying the contract unit price with an escalation rate).

The Government contends that “[t]he exercise of the option didn’t change the validity of the initial reasonableness analysis,” Oral Arg. Tr. at 55, but the Court cannot agree. After the contract modifications rendered the NTE rates in Table 1 non-binding, the price evaluation conducted at the time of the initial award was no longer useful. At the time the options were exercised, the NTE rates were only advisory, and the contractors could increase their labor rates at will. The relative costs to the Government of the various contractors’ options, therefore, was then entirely unknown.

The Government’s contention that it was merely reacting to changing market conditions does not assist it in showing regulatory compliance. In AAA Engineering & Drafting, Inc., B- 236034, 92-1 CPD ¶ 307, 1992 WL 70955 (Comp. Gen. March 26, 1992) and Banknote Corp. of America, B-250151, 92-2 CPD ¶ 413, 1992 WL 373640 (Comp. Gen. Dec. 14, 1992), the GAO found that once the Government acknowledged that the market had changed since its initial evaluation, it could not rely upon its evaluation at the time of the award to establish the reasonableness of pricing in exercising options. Both of these cases found that relying upon the price evaluation at the time of award despite changed market conditions violated FAR § 17.207(d); thus the Government’s position would merely move it from the frying pan to the fire. The upper Table 1 NTE rates, which were the only prices that were evaluated, were no longer binding at the time the options were exercised. Therefore, defendant may not rely upon the initial reasonableness determination to show the legality of the option exercise.

Although defendants make much of the fact that the escalation rates were still considered to be binding, Luke Reply Br. at 9; Oral Arg. Tr. at 48, if the underlying NTE rate was not binding, then the question is “escalating what?” An escalation rate must be applied to some other number; it is not clear how the escalation rate can be considered “binding” in the absence< of any prescribed base price to escalate. While the escalation rates may be binding, and they may play some role in determining the cost to the Government of performance, they alone are “too unreliable an indicator of a proposal’s relative cost to the government.” S.J. Thomas Co., 1999 WL 961750, at *3 (disapproving use of offerors’ mark-up rates as sole basis for determining relative costs of proposals); see West Coast Copy, B-254044, 93-2 CPD ¶ 283, 1993 WL 476970, at *5 (Comp. Gen. Nov. 16, 1993) (“Where competing proposals for indefinite quantity contracts are evaluated on the basis of unit prices without extending those prices by estimated quantities, there is no necessary relationship between the evaluated price of a particular offeror and the actual price of performance by that offeror.”); KISS Eng’g Corp., B-221356, 86-1 CPD ¶ 425, 1986 WL 60624, at *3 (Comp. Gen. May 2, 1986) (comparison of average labor rates is insufficient because there is “no necessary relationship between this rate and the likely actual cost of the contract”); see also Health Servs. Int’l Inc., B-247433, 92-1 CPD ¶ 493, 1992 WL 135371, at *2 (Comp. Gen. June 5, 1992) (same).

The Court cannot concur with defendants that “ongoing control of the escalation rates, in conjunction with the price lowering effects of competition, would ensure that pricing could not deviate substantially from the proposed rates that the Air Force found to be reasonable at the time of the Contract award.” Luke’s Reply at 9. Even if the escalation rates themselves continued to be binding, the lack of any control on the underlying price to be escalated deprived the rates of their essential meaning. The pricing of the options, as exercised, was not “evaluated as part of the initial competition.”

B. Defendant Fails to Satisfy the Second Clause of FAR § 17.207(f)

Defendants have, moreover, failed to satisfy the second clause of § 17.207(f), namely that the option was “exercisable at an amount specified in or reasonably determinable from the terms of the basic contract.” Defendant offers three reasons why the exercise of the contract options complied with FAR § 17.207(f)’s mandate: (1) the contract contained “points of reference” in the form of prices from historical task orders and the non-binding NTE rates, which remained in the contract; (2) competition for task orders provided the necessary price control; and (3) the contract set a total fixed price for the option period and thus the option was “priced” within the meaning of the FAR. Defendants argue that these factors, individually and in combination, provided the Air Force with sufficient pricing information that it could determine that the options were fairly and reasonably priced.

1. While There is Flexibility in Price Evaluation for ID/IQ Contracts, There Must be Some Binding Price

It is true that “the evaluation of price or cost in the award of an ID/IQ ‘umbrella’ contract can be challenging, particularly in the procurement of services, because the more meaningful price competition may take place at the time individual task or delivery orders are to be issued.” CW Gov’t Travel—Reconsideration, B-295530.2, 2005 CPD ¶ 139, 2005 WL 1805945, at *4 (Comp. Gen. July 25, 2005). But Congress requires the evaluation of price in making any contract award. See, e.g., 10 U.S.C. § 2305(a)(3)(A)(ii); FAR § 15.304(c)(1). Thus even when price is the least important factor for award, the agency must meaningfully consider price. The MIL Corp., B-294836, 2005 CPD ¶ 29, 2004 WL 3190217, at *5 (Comp. Gen. Dec. 30. 2004); AR Tab 1 at 190. It is therefore impermissible to evaluate relative cost based only upon nonbinding proposals, because such a comparison is not meaningful. CW Gov’t Travel— Reconsideration, 2005 WL 1805945, at *4.

The same is true when evaluating the price of an option in an ID/IQ contract, which is a doubly tricky proposition. As Professors Nash and Cibinic observe, the FAR contains a “lukewarm caveat against the use of options in IDIQ contracts.” Ralph C. Nash & John Cibinic, IDIQ Contracts and Options: Varied Guaranteed Minimums, 16 No. 9 Nash & Cibinic Report ¶ 43 (Sept. 2002) (“We have never been advocates of the use of options in indefinite delivery, indefinite quantity (IDIQ) contracts. A multiple-year IDIQ contract contains all of the advantages of an option with none of the disadvantages. One of the major disadvantages of options is that if they were not evaluated at the time of initial award, they must be competed.”). That is, FAR § 17.202(b) states that an option is “normally not in the Government’s interest when . . . [a]n indefinite quantity or requirements contract would be more appropriate than a contract with options.” The regulation goes on, however, to say “this does not preclude the use of an indefinite quantity contract . . . with options,” which Professors Nash and Cibinic characterize as authorizing the contracting officer “to do a dumb thing.” IDIQ Contracts & Options, 16 No. 9 Nash & Cibinic Report ¶ 43.

The Air Force argues that requiring compliance with FAR § 17.207 in the context of the exercise of an option in an ID/IQ contract “would essentially invalidate the exercise of a contract option in an ID/IQ context,” Def.’s Supp. Br. at 9 n.9, but including an option in an ID/IQ contract at all is perhaps an unwise decision. Professor Nash contends that “contracting for services raises issues that the policymakers have not addressed,” and that amendment of the laws or regulations may be required to eliminate problems caused by requiring binding prices in ID/IQ contracts. Ralph C. Nash, Evaluating Price or Cost in Task Order Contracts, 19 No. 11 Nash & Cibinic Report ¶ 52 (Nov. 2005). That may be so, but this Court’s mandate is to enforce the law as currently in effect. See Turtle Island Restoration Network v. Evans, 284 F.3d 1282, 1296-97 (Fed. Cir. 2002) (recognizing that judicial action must halt when reaching areas of legislative judgment). When an option is nonetheless included in an ID/IQ contract, the Government has set itself the challenge of complying with the applicable laws and regulations in exercising that option. That is, the agency must “make a written determination for the contract file that exercise [of the option] is in accordance with the terms of the option, the requirements of this section, and [FAR] part 6.” FAR § 17.207(f). And the regulations specify that “[t]o satisfy 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.” Id. As Mr. Boudreau, the Contracting Officer, himself observed, the Air Force had “to have some pricing in the contract, so [it] could never do away with all of [the] NTEs. . . . No question about that.” AR Tab 35 at 4506. The result of the TerraHealth settlement was, however, to do exactly what Mr. Boudreau said could not be done—all of the NTEs were declared non-binding. Although this was “not a contract about getting the cheapest doctor” but “getting value,” the law still requires valid pricing in the contract.22 Oral Arg. Tr. at 57.

In arguing that it nonetheless had a basis for evaluating the option pricing, the Air Force contends that it continued to apply “cost control measures,” Oral Arg. Tr. at 48, such as enforcing the escalation rates and utilizing the NTE rates, which remained in the contract, “for reference,” Oral Arg. Tr. at 55, along with the contracting officer’s knowledge of the historical evidence “about what types of prices these contractors would submit.” Oral Arg. Tr. at 56. At the same time, however, the Government admits that it does not “have [a] ceiling anymore,” Oral Arg. Tr. at 56, and thus is unable to compare the maximum costs of the offerors’ performance of the work covered by the options. But the manner in which the pricing was evaluated on this contract was to compare offerors’ proposals on the basis of NTE rates. This type of evaluation only permitted the Government to evaluate the relative maximum cost. The contract modifications thus removed the only basis the Air Force possessed for meaningfully comparing the cost to the Government of the contractors’ options. Notwithstanding these “cost control” measures, the price of the options was not “reasonably determinable” from the ID/IQ contracts. It is therefore unavailing for Luke to argue that the Government could (and did) waive these so-called “binding” rates, making the NTEs “far less important” than plaintiffs contend,23 Oral Arg. Tr. at 70, because this in essence argues that even if the NTEs were still in place, the price still may not have been reasonably determinable. Luke’s argument digs the hole deeper rather than providing a way out for defendants.

2. Competition for Task Orders is Not Sufficient to Establish Prices For the Options

The Government further relies on the competition among contractors at the task order level as establishing a sufficient control on prices that the exercise of the options was reasonable. Oral Arg. Tr. at 50; Luke Reply Br. at 3. It has been established, however, that “[t]he statutory requirement that cost to the government be considered in the evaluation and selection of proposals for award is not satisfied by the promise that cost or price will be considered later, during the award of individual task orders.” CW Gov’t Travel—Reconsideration, 2005 WL 1805945, at *4; MIL Corp., 2004 WL 3190217, at *7 (“[T]here is no exception to the requirement set forth in CICA that cost or price to the government be considered in selecting proposals for award because the selected awardees will be provided the opportunity to compete for task orders under the awarded contracts.”); see also Serco, Inc., 81 Fed. Cl. at 493 (rejecting the Government’s task order competition argument and finding that the agency “gave price neither the weight it was entitled to under the Solicitation nor that which it must be afforded under CICA and the FAR”). The Air Force may not substitute competition at the task order level for compliance with the applicable laws and regulations.

3. The Maximum Contract Value for the ID/IQ Contract Did Not Establish a “Price”

Defendants’ final argument is that the fixed prices of the overall contracts and each option period remain in effect, and therefore the price of the work to be performed in the option period was “reasonably determinable.” Oral Arg. Tr. at 43-45; id. at 44 (“[A]lthough the way the government gets to its dollar value has changed, the overall value has not changed. . . .”). For support, defendants point to AR Tab 10 at 3389-90, which is Magnum Medical’s ID/IQ contract. The prices set forth on these pages are the maximum orders to be placed under the contract. With respect to the first option period, the contract specifies a maximum, not-to-exceed order amount of $600,000,000.00. The total “Contract Minimum/Maximum Quantity and Contract Value” is a minimum of $500,000 and a maximum of $1,926,000,000. Id.

Defendants maintain these provisions set a fixed maximum contract value for the option period; thus the option is “priced” and the question is “how the government wants to use its dollars, not a matter of how much of the public fisc will be utilized by this contract.” Oral Arg. Tr. at 85. That is, defendants argue that all the Air Force did was reallocate an existing budget between line items within a contract, which is perfectly permissible. CCL, Inc., 39 Fed. Cl. at 792.

There are a number of flaws in this argument, the first being the idea that the maximum contract value was “evaluated” at the time of the initial award. Luke’s Supp. Br. at 10 n.9 (“Since the price of the options in the ID/IQ Contracts was evaluated as part of the initial competition, and the options were exercised in the amount specified in the Contract award, the exercise of those options was consistent with the FAR and should be upheld.”); Def.’s Supp. Br. at 10 n.10 (“Specifically, the contracting officer’s analysis indicated that the price at the time of award was considered fair and reasonable—which included the option periods—and those maximums are still present. AR 5221-24. Accordingly the ‘maximum amount’ for the option period is the same as it is on the contract line item at the time of award and therefore determinable by the contracting officer when following FAR § 17.207(f).”). The only indication how the $1.9 billion maximum total contract amount came to be divided, resulting in a maximum value for the first option period of $600 million, is in a footnote in defendant’s supplemental brief: “The amount listed on the SF-30 [sic] for the base or the options was determined by the contracting officer as an amount roughly equal to the overall $1.9 billion dollar value of the procurement over 10 years.” Def.’s Supp. Br. at 9 n.9. That is, the contracting officer looked at the total contract value and made a guess as to how to divide it between the base period and the two option periods. That is not an “evaluated” price within the meaning of CICA and the FAR.

Furthermore, if this argument were accepted, it would mean that every ID/IQ contract containing a maximum contract value would be “priced” and the Government would not be required to actually evaluate individual proposals to determine how quickly an awardee might reach this “fixed” cap. This would eviscerate § 17.207 and an untold number of other laws and regulations. Plaintiffs quite reasonably respond that “a maximum amount in a contract for an option period for six different ID/IQ holders is not a fixed price that was evaluated for the options at the time of award, so it would not satisfy the requirements of 17.207(f).” Oral Arg. Tr. at 72. The maximum contract value for an ID/IQ contract is not a “price” satisfying the statutory and regulatory requirements for evaluation of price. It is likewise futile to argue that “[t]here was a full year of performance after the NTE rate caps were removed, and they were still coming in under budget [that is, the maximum ID/IQ contract value] for this. So there was ample reason for them to determine that their initial price determination for the option period was still valid.” Oral Arg. Tr. at 62. The Government would have done an excessively poor job of contract management if it had come up against the maximum order amount of $600 million for the first option period in one year.  (Magnum Opus Technologies, Inc., v. U. S. and Luke & Associates, Inc. and TerraHealth, Inc., Nos. 10-106C, 10-127C; May 28, 2010) (pdf)

U. S. Court of Federal Claims - Listing of Decisions
For the Government For the Protester
  Magnum Opus Technologies, Inc., v. U. S. and Luke & Associates, Inc. and TerraHealth, Inc., Nos. 10-106C, 10-127C; May 28, 2010 (pdf)
U. S. Court of Appeals for the Federal Circuit - Key Excerpts
New The parties agree that the Task Orders contain a base term and that Section H.1 of each Task Order sets forth an Option that permits the government to unilaterally extend the term of the Task Order pursuant to that option up to 24 months for a total ordering period (base term + optional extensions) that does not exceed 60 months:

H.1 FAR 52.217-9, Option to Extend the Term of the Task Order (March 2000) Tailored
(a) The Government may extend the term of this Task Order . . .
(b) If the Government exercises this option, the extended Task Order shall be considered to include this option clause.
(c) The total duration of the first Ordering Period of performance of this Task Order, including the exercise of any optional Ordering Periods under this clause, shall not exceed 60 months from the date of contract award, excluding any award term(s) earned.
(d) The Government may, at its discretion, exercise option periods of up to 24 months, provided that the total Task Order period of performance does not exceed 60 months from the date of the award.

 J.A. 1419. This option in the Task Order parallels the FAR which it expressly cites. It is undisputed that if the government exercises an option under H.1 to extend the Task Order, no new Task Order is issued. See J.A. 1419. Section “H.3 FAR 52.217-8 Option to Extend Services” similarly permits the government to unilaterally require continued performance under the Task Order for up to 6 additional months. This extension provision likewise parrots the language of the FAR which it expressly cites. Education exercised its options under Sections H.1 and H.3 for both Pioneer and Enterprise, unilaterally extending their 2009 Task Orders to February 21, 2015 and April 21, 2015, respectively.

Each Task Order also included a clause entitled “H.4 Award Term Extension,” which provided that the contrac-tor could earn award-term extensions in addition to the base period and any options exercised pursuant to Sections H.1 and H.3:

the Contractor may earn performance extensions (hereinafter called “award terms”), based upon the quality of performance during the evaluation periods. If the Contractor has an average [Contractor Performance and Continuous Surveillance (“CPCS”)] rating of 752 or greater over the life of the Task Order, or the last 12 CPCS periods (whichever is shorter), the Government may[] award the Contractor an award-term extension in accordance with the terms of this clause in recognition of the Contractor’s excellent or better quality performance.

J.A. 1419–20. Section H.4 also specified that “[a]ny award term extensions awarded under this clause will be executed in the form of a new Task Order issued by the Contracting Officer under the Contractor’s then current GSA schedule contract.” J.A. 1420.

(Section deleted)

On February 20, 2015, Education notified Pioneer and Enterprise of its decision not to issue award-term Task Orders to them. One day later, Education notified five other contractors (collectively, “the competitors”) that it intended to issue award-term Task Orders to them for a period not to exceed a specified number of months. These letters, titled Notification of Award Term Extension and each signed by the Contracting Officer, expressly stated: “If the contract is extended pursuant to H.4, it will be accomplished via a contracting action, which will specifically identify all of the terms and conditions.” J.A. 2107 (emphasis added).

(sections deleted)

Under the Tucker Act, as amended, the Court of Federal Claims has bid protest jurisdiction over “action[s] by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S.C. § 1491(b)(1).3 We conclude that the proposed issuance of award-term extensions under H.4 to the five contractors to permit them to continue offering debt collection services under the GSA Schedule contract constitutes “a proposed award or the award of a contract” pursuant to § 1491 and thus the Court of Federal Claims has jurisdiction over the bid protest. The government’s decision to issue new Task Orders to contractors under the GSA Schedule contract falls within the plain language of § 1491.

There is no dispute that the award-term extension under H.4 requires the government to issue a new Task Order for the extension of debt collection services for the competitors. The Supreme Court recently held that issuance of a new Task Order against a GSA Federal Supply Schedule contract constitutes an award of a contract. See Kingdomware Techs., Inc. v. United States, No. 14-916, 2016 WL 3317563, at *8–9 (U.S. June 16, 2016). It is thus a protestable event under § 1491(b). Data Mgmt. Servs. JV v. United States, 78 Fed. Cl. 366, 371 (2007) (“The court’s protest jurisdiction extends to protests of task or delivery orders placed against a GSA schedule contract.”); IDEA Int’l, Inc. v. United States, 74 Fed. Cl. 129, 135–37 (2006) (holding that the Court of Federal Claims has jurisdiction over protests relating to issuance of Task Orders under GSA Federal Supply Schedule contracts).

(section deleted)

 In this case, however, the Court of Federal Claims concluded that these proposed new Task Orders (for the award-term extensions) should not be considered “the award of a contract.” It acknowledged that the awardterm extensions would be issued as new Task Orders, but concluded that treating them as such for purposes of bid protest jurisdiction would “elevate[] form over substance.” Coast Prof’l, Inc. v. United States, 120 Fed. Cl. 727, 734 (2015). It held that “the award-term extensions added more work to the existing contract only in the context of those task order provisions-but nothing more.” Id.

(section deleted)

 We cannot agree however that the award-term extension issued in the form of a new Task Order is properly treated as an option governed by the CDA. Even when a new Task Order contracts for the same work previously performed by the same contractor under the GSA Schedule contract, this new Task Order is the award of a new contract. Although the government recognizes that new rounds of Task Orders under the same GSA Schedule contract amount to a new procurement, it attempts to distinguish the award-term extension at issue from “the next round of PCA Task Orders” by arguing the awardterm extensions are not the subject of a separate procurement. Gov’t Br. 30 n.8. But H.4 expressly anticipates that the Task Orders issued for the award-term extensions will issue concurrently with Task Orders issued pursuant to additional rounds of procurement beyond the 60 months permitted under the 2009 Task Orders. “It is the Government’s intent to time any award-term extension so that the extension period will coincide with the award date of the next round of Task Orders.” J.A. 1419. That the government has preselected some of the contractors who will receive the new Task Orders through the award-term extension clause does not nullify the contractual effect of these Task Orders. Each new round of Task Orders under a GSA Schedule contract is a “proposed award or the award of a contract” falling under the plain language of § 1491. See Data Mgmt. Servs. JV, 78 Fed. Cl. at 371; IDEA Int’l, Inc., 74 Fed. Cl. at 135–37.

(section deleted)

 CONCLUSION

Because we conclude that the Court of Federal Claims erred in concluding that the award-term Task Orders were not new Task Orders for purposes of § 1491(b)(1), we vacate and remand for further proceedings consistent with this opinion.  (Coast Professional Inc., National Recoveries, Inc., Pioneer Credit Recovery, Inc., Enterprise Recovery Systems, Inc. v. U. S., et al. 2015-5077, July 12, 2016) (pdf)

U. S. Court of Appeals for the Federal Circuit - Listing of Decisions
For the Government For the Protester
  New Coast Professional Inc., National Recoveries, Inc., Pioneer Credit Recovery, Inc., Enterprise Recovery Systems, Inc. v. U. S., et al. 2015-5077, July 12, 2016 (pdf)
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