Wifcon.Forum Archives

Early Exercise of Option

By alexreb on Wednesday, January 08, 2003 - 06:38 pm:

I awarded a contract that includes FAR clause 52.217-9 (Option to Extend the Term of the Contract). It has a total performance time of four years, i.e., a base year and three option years and a maximum contract amount of $150,000 for each contract period (base yr. and each option yr.). We are only in the 5th month of the base year and we have already issued task orders that total $150,000.

Would anything prevent me from exercising the first option even though we are only 5 months into the base year?

By Anonymous on Wednesday, January 08, 2003 - 07:18 pm:

Assuming that (1) you properly filled in the two blanks in paragraph (a) of the option clause, (2) you are within the "window" established by paragraph (a), and (3) no other contract provisions limit your ability to exercise the option at this time, then I see no reason why you cannot exercise the first option now. Although it is not common for the Govt to exercise an option months before the base period expires, it is not unheard of. You might want to consider sending the "intent to exercise" letter a day or two before you send the "exercise" letter & mod, though.

It would be helpful to know what EXACT words and times you inserted into the two blanks in paragraph (a) of the option clause (52.217-9).

By Vern Edwards on Wednesday, January 08, 2003 - 07:43 pm:

Wait a minute. Those options extend the term of the contract; they do not increase the maximum amount.

Doesn't your contract specify a period of performance for each option term? Contracts with options to extend the term of the contract usually specify the period of performance to be covered by each option term. What is the period of performance for the option that you want to exercise?

If the contract periods of performance run 1 Oct through 30 Sep, and if the period of performance for the option that you want to exercise would run 1 Oct 2003 though 30 Sep 2004, what good would it do to exercise that option now?

By Fred on Thursday, January 09, 2003 - 04:28 am:

Although not our preferred course of action, we had options exercised early on several different contracts. The government's focus was on contract ceiling (because of 8(a) sole-source threshold issues), not on period of performance. I think in one case we ended up performing what would have been a 3-year contract in a year and a half. Our preference would have been to increase the ceiling for each year of the contract to accommodate the actual level of activity required by our technical customer, but the Contracting Officer stood their ground by exercising options early to gain the additional ceiling.

By formerfed on Thursday, January 09, 2003 - 07:57 am:

I've never understood the need to set a min and max quantity or dollar amount for each separate option year. What is wrong about doing it for the entire contract and just have options extend the period of performance? Setting separate maximum amounts for each year can really restrict your ability to order.

By Anonymous on Thursday, January 09, 2003 - 08:18 am:

Vern, I agree with you and did not mean to imply otherwise. The question was whether the option could be exercised now, not whether he could order work now under the exercised option. If the first option year doesn't begin for another seven months then work cannot be ordered under the option until then.

The contract presumably could be modified (bilaterally) to permit work to be ordered under the first option immediately, but this would probably be protestable as being beyond the original scope of the competition.

By Vern Edwards on Thursday, January 09, 2003 - 08:55 am:

Anonymous:

I don't disagree with you that the option could perhaps be exercised early. What I want to know is how early exercise of a term extension would solve the problem of having reached the maximum sooner than expected in the present term.

By alexreb on Thursday, January 09, 2003 - 09:07 am:

The performance period for each contract term is 1 Oct. thru 30 Sep. Total contract duration cannot exceed 4 yrs. It is an indefinite delivery type contract for A&E services.

It sounds like I can exercise an option early, but it wouldn't do much good, as work could not be ordered. If

For future reference, is there language I could include in contracts that would allow the early exercise of an option period?

By Vern Edwards on Thursday, January 09, 2003 - 10:45 am:

axelreb:

What you need is an option to increase the maximum contract amount within an ordering period. There is no standard FAR clause for such an option, so you would have to write one. It would be similar to the option for increased quantity clause for supply contract, FAR § 52.217-6.

An option to extend the term is just that--it extends the term from one date to another. Such an option would not solve your problem.

By Vern Edwards on Thursday, January 09, 2003 - 10:55 am:

axelreb:

Here is a clause:

The Government may unilaterally increase the maximum quantity specified in the Schedule by $___________, from $___________ to $___________, at the unit price specified. The Contracting Officer may exercise this option at any time prior to the end of the ordering period by written notice to the Contractor. All other contract terms shall remain unchanged.

(End of Clause)

This clause would allow you to increase the maximum either before or after you reach it ("at any time").

You could write the clause to allow you to increase the maximum more than once in an ordering period.

You could write the contract to provide for lower unit unit prices in the event of an increase in the maximum.

By anon1 on Thursday, January 09, 2003 - 11:26 am:

Would the dollar amounts stated in such a clause have to be considered when determining the total value of the contract?

By alexreb on Thursday, January 09, 2003 - 11:27 am:

I was going to ask if exceeding the maximum quantity of an IDIQ would be considered outside the scope of a contract. However, I found the the answer to my question in the FORUM ARCHIVE, in a posting made by Vern (see Vern's Tuesday, July 25, 2000 response in "Ceiling Increase to Multiple Award IDIQ 8(a) (7/00)").

Jeanie:

An increase in the maximum quantity of an IDIQ contract (other than through the exercise of an option) would increase its scope and constitute a new procurement, requiring either full and open competition or a J&A. See: Liebert Corp., 70
Comp. Gen. 448 (Apr. 29, 1991), in which the GAO stated:

"An order in excess of the maximum quantity stated in the contract would be outside the scope of the contract. Such an order would result in a contract materially different from that for which the original competition was held and, absent a valid sole-source determination, would be subject to CICA requirements for competition. See Neal R. Gross & Co., Inc., 69 Comp. Gen. 292 (1990), 90-1 CPD ¶ 212; Clean Giant, Inc., B-229885, supra. We therefore sustain the protest to the extent that the quantities to be ordered are in excess of the stated maximum quantities in the Exide contract."

(The GAO cited Neal R. Gross & Co., Inc. incorrectly. The correct citation is 69 Comp. Gen. 247.)

Also see FAR 16.505(a)(7). The contract in Liebert was a requirements contract and not an IDIQ contract, but I don't think that has any bearing on the GAO's holding. I presume that since an order that exceeds the maximum quantity would be outside the scope of the contract a modification to increase the maximum quantity would also be outside the scope of the contract.

Good answer. Thanks Vern.

By anon1 on Thursday, January 09, 2003 - 11:37 am:

The last agency I worked for put a provision in their IDIQ AE contracts stating that options could be exercised early, at which point task orders could be issued using the capacity offered by the option. The way the contracts were worded, they were not bound by a certain period of performance for those options. There was a term specified with a caviat that the term was subject to change based on the needs of the organization. So, even though the base year was supposed to go through 30 September, if the capacity for that year was used up by March, the 1st option could be exercised with the new term for that option being 1 April through the next 12 months. As long as the intent was clearly stated up front, and all competitors were working off the same page, there was no room for argument later. But if I was the CO on alexreb's contract, I'd be going back to the requiring activity to have them validate their expected usage on this contract and consider putting out a new solicitation based on their actual needs. One way or another, at this rate you'll run out of capacity within the next 12 months even if you can exercise all of your options early.

By Vern Edwards on Thursday, January 09, 2003 - 11:57 am:

anon1:

I do not believe that you would have to consider the dollar amounts in the option clause for increasing the maximum quantity when evaluating proposals. When evaluating proposals for an IDIQ contract you are supposed to do so at an estimated quantity, rather than either the minimum quantity or the maximum quantity.

By Linda Koone on Thursday, January 09, 2003 - 02:48 pm:

Vern:

But you would consider the dollar amounts in the option clause for increasing the maximum quantity for determining the expected value of the contract IAW FAR 1.108(c), right?

By anonconorig on Thursday, January 09, 2003 - 04:31 pm:

Was curious if the particular contract talked about has FAR 52.216-19 in it. If so, would it be possible to solve the maximum order limitation under sub-paragraph (d)of the clause?

By Vern Edwards on Thursday, January 09, 2003 - 04:53 pm:

Linda:

That's what FAR § 1.108(c) says to do. It says to include "the highest final priced alternative to the Government, including the dollar value of all options."

Vern

By Anonymous on Friday, January 10, 2003 - 11:02 am:

Would 1.108(c) be construed to also apply to the warrant level required for a contracting officer to sign the contract.

For example, could a KO with a $100,000 warrant sign a long-term contract with the following characteristics:
Estimated annual value at $100,000
One year base period with 4 one year options
Maximum contract limitation of $1,000,000 (applicable across the life of the contract, in this case up to 5 years)

Or would this require a warrant of $1,000,000 or unlimited? I have seen other discussions that focus on the value of the individual contract action (i.e mod value) but given the verbage of 1.108 and the potential that the aggregate of orders in any year may exceed $100,000 and go up to $1,000,000, I wonder.

By Vern Edwards on Friday, January 10, 2003 - 11:39 am:

It is not clear, at least not to me, that the rule in FAR § 1.108(c) is to be applied to the interpretation of CO dollar authority as it appears on certificates of appointment (warrants). I think dollar authorities on certificates of appointment must be interpreted in light of the intent of the appointing official. I'm not sure that there is a standard rule about this; it may vary from agency to agency, or even contracting office to contracting office.

By Dave Barnett on Friday, January 10, 2003 - 01:59 pm:

I think you're right on that one Vern, I've been in agencies where the signatory authority was based on the value (or estimated value) of the acquisition (which would include the value of unexercised options), other agencies held the warrant limit to what one could obligate at the time the singular obligation action was signed, i.e. a warrant of $250K could sign a contract with a base year value of 200K with multiple options to extend valued in excess of 250K (these, of course, being signed by the same PCO as later obligation modifications provided each mod did not exceed the warrant authority).

By formerfed on Friday, January 10, 2003 - 03:04 pm:

The subject of CO warrants and what actions they can sign is a constant source of confusion. Even when the appointment official reasons he/she has everything covered with the language on the certificate, somebody uncovers a situation with more than one interpretation. For example, who signs a very controversial and highly visible settlement that reduces the contract value?

I personally like to see everyone in a procurement office with reasonable common sense and thatdemonstrates responsibility to have unlimited warrants. I know that's generally not possible especially when any office needs to bring in people at the trainee level. But my dream world included making everyone a CO with unlimited authority. Furthermore they don't need any approvals and reviews of their work. They are expected to show responsibility, use whatever resources they need to be certain the action is proper and complete, and accept the fact that they and no one else is accountable when they sign their name.

By Anon2U on Friday, January 10, 2003 - 10:29 pm:

At my agency the Warrent Authority is for each action. For IDIQ contracts it is the ceiling amount. Most GS13s have $1M limits and the GS14 supervisors have unlimited authority (with some exceptions). So therefore, on an IDIQ contract with a $40M ceiling, the branch chief has to sign the contract even though it has no real funds on it, but the GS13 CO can sign all the delivery orders as long as they are under $1M.

Some may think it micromanaging but when I was a Branch Chief in my first career I reviewed every thing entering the branch and everything after completion. Why?

Coming in: I want to know what my branch is doing at all times and get misrouted items to the proper Branch.

Going out: I want to ensure the finished product is uniform amoung my workers and favorably reflects on everyone. By seeing all the finished products I can identify the best workers for awards and provide training (or discipline) to those that are substandard. Everyone knows I am looking. I can spot best practices and pass them on to everyone else. Yes everyone should show responsibility but many don't and I will not let them reflect unfavorably on everyone else.

Thirty years ago when I first entered the Air Force, I saw the Branch Chief across the hall use this method and the branch consistently won every award that came down the pike. I adopted it and was also highly sucessful.

By Anonymous on Tuesday, March 11, 2003 - 09:16 pm:

On a similar note regarding OPTIONS: can a CO exercise an option year on a FFP contract if funds are not available, providing the 'subject to availability of funds' clause is included - or - does the 'subject to availability of funds' clause only apply to cost type contract. In short, is the above scenario a violation of the anti-deficiency act???

By dave on Wednesday, March 12, 2003 - 01:56 pm:

We exercise options on FFP contracts subject to availibility of funds provided the clause 52.232-18 is in the contract and the other requirements of 32.703-2 are met...Congress consistently approves funding...necessary for normal ops, etc.

By Anonymous on Friday, May 09, 2003 - 11:57 am:

We at the Army Corps have exercised option years prior to expiration. We inlcude in the clause that the Gov't reserves the right to exercise the options early providing proper notification is given. We push unused capacity into option periods as well.

The reason we do this is because we can't realistically determine how much capacity we need for some IDIQs.