All:

Thanks for all your great responses. I apologize for not responding recently. I'm helping out at the ranch this week; we've been branding calves and moving cows. We're a long way from everything and I don't have ready Internet access at the house. But I had to come into town this morning (60 miles away) and I discovered that a young couple has opened an internet cafe here! I can't get over it.

I'll read your responses. Good work everyone.

Vern

By Eric Ottinger on Wednesday, May 3, 2000 - 12:43 pm:

Linda,

I hear you. However, the only consistent rationale that I can think of to support a sole source, when you know there is competition, is to state that only one source can satisfy the Government's requirement in the time frame required.

This might be acceptable if it is true at the time that you make your decision. I doubt many of us write the determination for the option exercise six months in advance.

For obvious reasons, I wouldn't decide on a course of action then wait six months so that I can honestly say that I don't have enough lead time for a competition. I think the GAO would frown.

However, there might be some grey area situations where you could obtain competition for a large buy, including all of the options, but no other offeror would have the tooling, specialized labor, etc. to do the option at a reasonable price. In this kind of case you could write a solid J&A.

As for the larger question, I don't like "Heads I win; Tails you lose" business arrangements. A business can easily lose money on a Government contract. It isn't a bad thing for a business to make a profit on occasion; particularly, when the reasonableness of the price has been validated by competition.

Renegotiating options isn't the same thing as going back to the Renegotiation Board (Remember that Vern?), but the underlying philosophy would be the same.

Eric

By Linda Koone on Wednesday, May 3, 2000 - 12:07 pm:

Vern:

Maybe the answer to your original question is as simple as whether you have the authority to negotiate.

You can negotiate under full and open competition -- or you can negotiate under one of the exceptions to full and open competition, with the appropriately executed J&A/D&F.

If you are unable to exercise the option under the conditions set forth in the contract and pursuant to FAR 17.207, then you negotiate the option under full and open competition, or negotiate on a sole source or limited competitive basis using an exception to full and open competition, presuming one exists.

If you can support negotiating with one company and you get the required approval, then you could negotiate a reduced option price.

By Eric Ottinger on Wednesday, May 3, 2000 - 11:59 am:

Vern,

Here is the exact language out of the Magnavox case--

Magnavox Electronic Systems Company, (Nov. 02, 1988)

"An agency is not permitted to negotiate with the awardee to reduce the option price stated in the contract if price competition for the option quantity is available. Varian Associates, Inc., B-208281, Feb. 16, 1983, 83-1 CPD 160, aff’d in relevant part sub nom Department of the Army--Reconsideration, B-208281.2, July 12, 1983, 83-2 CPD 78."

...

"We do not object, necessarily, to an agency attempting to negotiate for a lower price than that stated in an option. Where, however, the facts indicate that a competition likely would result in the lowest price obtainable, the agency should conduct such a competition rather than negotiate on a sole-source basis. Varian Associates, Inc., B-208281, supra. Here, we think that based on the pricing information available, the Navy should have concluded that a competition for additional sonobuoys likely would have resulted in a lower unit price for the additional units than the $214.30 negotiated with Sparton on a sole-source basis. ..."

Eric

By Kennedy How on Wednesday, May 3, 2000 - 10:46 am:

The (FFP) supply contracts we generate would have 100% Options, which means the exercise of an option would effectively double the quantity. The reason why we'd inquire about price breaks is because often times, there is a price change for quantity (usually in raw materials). Our practice is to check to ensure we are getting a reasonable price. Also, these contracts are a result of full and open competition.

Realistically, the contractor has 3 choices. He could tell us there is no price change (whether there is or not), lower the price so it's Win/Win for him and the Government, or lower it all the way so his profit stays the same as what was he calculated at original award.

I was looking at FAR Part 17.20x again, and I noticed the blurb about informal price analysis 17.207(d)(2). While you could say that the current price IS NOT advantageous based on a price reduction, that price reduction only applies to the current contractor, because the reduction is predicated on adding on to the quantity already on contract. Which is why we ask.

I apologize now for drifting further off-topic; I can see lots of permutations over this.

Kennedy

By Eric Ottinger on Wednesday, May 3, 2000 - 10:06 am:

Linda,

I should have said--

Voluntary offers to discount the price would be nice, but I question whether such would ALWAYS be voluntary in any way but the form.

The instances that you cite are of course the interesting ones.

I think the need for closure is the most important principle. We shouldn't reopen these things unless the circumstances are really compelling.

However, I can see where it would be hard to turn down a real Win/Win.

I can imagine circumstance where a renegotiated option and a J&A would do (i.e. You make your decision at a point when you don't have the necessary lead time for a competition). But I would not recommend strategizing to do that. You would have to tell a fib at some point.

Eric

By bob antonio on Wednesday, May 3, 2000 - 09:22 am:

Vern:

This is the way I would approach it if I stumbled over this procurement. However, there are unmentioned variables in your example, eg. value of items etc. So you must follow the assumptions and fill in some facts along the way.

I assume that the option is for priced items and the option prices were a part of the original competition. If this is the case, I view it as a "fairness" issue and then a potential full and open competition issue. I think the sequence of events has at least some significance.

If I approach this as a full and open competition issue, I would want to determine whether there were other offerors in the original procurement. Your example states that it was competitive so I assume that there were competitive prices and items. In my mind, there now is the potential for competition under the option from the original offerors also.

When should the contracting officer discuss revised prices with the option contractor? If I were the contracting officer, I would want the other agency's contract in my hands and I would share it with the requiring activity. Suppose the requring activity agrees that the other agency's item is the same item available under the option. The contracting officer must make a determination if the exercise of the option is most advantageous to the government.

Suppose the contracting officer finds the option is not the most advantageous deal for the government. This business decision will be evaluated on its reasonableness. Assume the decision is reasonable. Then there is no option to be exercised. End of contractual relationship in my view.

Suppose the contracting officer begins negotiations with the option contractor. On what basis? On what agreement? Will this be a sole-source negotiation? Will the other agency's contractor be invited for a limited competition. Will the offerors on the original procurement be invited to submit offers? These would be my opening questions of the contracting officer.

By Linda Koone on Wednesday, May 3, 2000 - 09:19 am:

Eric:

I've actually had instances of voluntary price reductions for options.

The contractor has simply sent a letter offering to reduce the option price. An obvious attempt to lure us into exercising the option, but totally unsolicited from me.

By Eric Ottinger on Wednesday, May 3, 2000 - 09:06 am:

Vern,

Short answer. I believe that GAO meant Part 15 competitive negotiation when they said that it would be OK to renegotiate.

The Magnavox case cites the rule from the Varian case in unambiguous terms.

I will try to provide more specifics later.

Joel,

The GAO grounded the Varian case in the FAR language regarding options. This is the basis for saying that options must be exercised consistent with the terms of the options. The FAR has a long list of situations where the price may vary for some reason. Otherwise, it is pretty clear that the price of the option should remain fixed.

We do have mechanisms where contractors can improve their offers (e.g.. technology refreshment.) Also under task order competitions, an offeror can bid lower for the Task/Delivery Order than he/she did for the initial competition.

However, I don't think this would be a good general policy for the reasons that I stated. As a rule we value aggressive negotiations, but we also value closure.

Voluntary offers to discount the price would be nice, but I question whether such would be voluntary in any way but the form.

Eric

By Linda Koone on Wednesday, May 3, 2000 - 09:02 am:

Vern:

There's a recent GAO Decision in which the protestor used the Varian and Magnavox decisions to support its protest - it's available at the GPO Access website:

Decision # B-279777
TITLE: Outdoor Venture Corporation, B-279777, July 17, 1998

This case was different from the Varian and Magnavox case in that the contract was awarded on a sole source basis to maintain an industrial mobilization base [10 USC 2304(C)(3)], but it provides a little insight into the Varian and Magnavox cases. In its decision, the GAO writes:

"The decisions cited by OVC are inapplicable here, since they involved firms which had competed unsuccessfully for the original award and which then protested that they could have offered better option prices than those negotiated without competition with the awardee Magnavox Elec. Sys., Co., B-231795, supra; Varian Assocs., Inc., supra. This was true even in Magnavox, where there was less than full and open competition for the initial award. In that case, the agency had conducted a limited competition among industrial mobilization base producers, and had made its original award decision, in part, on the basis of low price. Subsequently, the agency modified the awardee's contract to acquire additional units at a lower price. We sustained the protest, holding that the additional quantity should have been competed, because the record showed that another of the mobilization base competitors may have been the low-priced offeror, and therefore entitled to the award, had the agency originally awarded a contract for the increased quantity. In the current case, there was no competition among industrial mobilization base producers for the original award; rather, the agency made award to TBE on a sole-source basis--admittedly at a price premium--in order to maintain that firm's manufacturing capacity. Because, as explained above, the sole-source justification remained valid at the time the option was exercised, nothing in Magnavox or Varian suggests that a competition had to be held for the option quantity."

I would agree, in principle, that there is nothing wrong with renegotiating option prices. But I believe that you need to be careful when you do it in a competitive environment, particularly when low price was a factor in the award decision and you have information that indicates that a better price is available through competition.

None of the cases involved a best value source selection with award to other than the low offeror.

Any opinions on whether you may have more flexibility in negotiating a better option price on a best value source selection decision?

My opinion is based on the assumption that the option was evaluated at the time of award. Somehow that sentence disappeared from my text, below. Happy Sails!

By Joel Hoffman on Wednesday, May 3, 2000 - 08:10 am:

Eric, I believe there are two basic reasons the Government can't tinker with or "request" a change in the contractual, technical, price or time terms of an offered "option."

First, if the Government expects to retain its unilateral right to accept or decline the "option", it can't change the terms that the item was competed under. That is to protect the contractor.

Second consideration would be to the rest of the competitive community. The Government might have to recompete the work, where more appropriate.

(I don'tbelieve that means a contractor can't volunteer a discount, in order to encourage or allow the Government to award the work included in the option, if it otherwise would refrain from doing awarding due to lack of funds or an opinion that the price is unreasonable.

I feel that the first reason above would no longer be an obstacle; the Contractor is offering to improve its otherwise successful offer. I am not aware of any FAR prohibition against this. It is specifically allowed prior to award - why not after award?

BUT - if the Government decides to try to negotiate with the contractor - not simply accept the revised "option" offer - the unilateral right to award anything other than the originally offered price is gone.

There was adequate competition the first time around. In my opinion, the rest of the community already had its chance. So, why can't the Contractor volunteer to improve its offered terms?

We can continue this line of discussion under another thread - I really wanted to explain why the Government can't try to change the terms of the option, and still expect to retain the unilateral right to award the option.) Happy Sails!

By Vern Edwards on Tuesday, May 2, 2000 - 10:24 pm:

Linda:

Good work! But the GAO quote seems to indicate that there is nothing wrong in principle with renegotiating an option price. Is that right? (I can't get to my GAO decisions right now.)

Vern

By Eric Ottinger on Tuesday, May 2, 2000 - 02:31 pm:

Kudos to Linda,

I did a word search and came up with nothing. Linda is obviously more persistent.

Magnovox would seem to be of limited help. It would be difficult in most circumstances to say with certainty that you couldn't get a lower price with competition.

It strikes me that I may have taken the Ask A Professor quote out of context. The person asking the question wanted to know if it was possible to exercise an option late. The answer said that it would be all right if done bilaterally. This clearly contemplates renegotiating something in the option (i.e. the option exercise date). In short you must excercise in accordance with the terms, but that doesn't prevent you from renegotiating such terms before the option exercise.

The GAO imput is interesting, but I think the legal argument gets to the question of what an option has to be, to be legally enforceable.

Eric

By Linda Koone on Tuesday, May 2, 2000 - 02:04 pm:

Vern:

Sorry to throw a monkey wrench into the discussion. I withdraw my question.

In Varian Associates, Decision B-208281, Feb 83, (83-1 CPD para. 160), the Comp Gen determined that it was inappropriate for the Navy to negotiate with the contractor to reduce the option price where price competion for the option quantity was available.

In Magnavox, B-231795, Nov 2, 1988, 88-2 CPD Para. 431, the Comp Gen writes about the Varian decision and states:

'We do not object, necessarily, to an agency attempting to negotiate a lower price than that stated in an option. Where, however, the facts indicate that a competition would result in the lowest price obtainable, an agency should conduct competition rather than negotiate on a sole source basis.'

(Please excuse any paraphrasing due to my scribbled hand-written notes from the case)

The option pricing was not evaluated at the time of award in either of these cases as I recall, however.

As far as Eric's discussion on what the lawyers say, I believe that the Comp Gen has long held that an option should be clear and definite enough to exercise without further discussion/ negotiation, otherwise it's not an option.

My answer, then, would be that you would not be permitted to negotiate the option price without first conducting a competition with other sources.

If the contractor submits the best offer through the competition, perhaps then it would be acceptable to use this price as the option price rather than award a new contract.

By Eric Ottinger on Tuesday, May 2, 2000 - 01:28 pm:

Vern,

At the risk of quoting the highly suspect Ask A Professor site--

"The general rule is that an option must be exercised in accordance with its terms."

I have seen this rule in similar form several times and I would assume that it is the legal rule. An explicit reopener might be a way around.

I claim no additional expertise. Linda and I may open our own thread so that we can have fun speculating.

Regards,

Eric

By Vern Edwards on Tuesday, May 2, 2000 - 01:15 pm:

Kennedy:

"[A]sked the contractor if he can do any better on price before exercising the option" sure sounds like negotiating for a lower price to me.

Vern

By Vern Edwards on Tuesday, May 2, 2000 - 01:12 pm:

Eric:

In any dispute half of the lawyers are wrong and I don't know which lawyers you're talking about. The lawyers can speak for themselves, for Peet's sake. What do you say?

Vern

By Kennedy How on Tuesday, May 2, 2000 - 12:32 pm:

Vern,

I'm not sure if I'm answering the question either, but I know in the past (and, maybe even now), our activity has asked the contractor if he can do any better on his price before exercising the option. The contractor was under no obligation to change his price, though there were times that he did. The contracting officer would then proceeded to make the award, mainly because we had the need for the item, and it wasn't going to be cost-effective to recompete (which, by the way, I what I'd seriously consider in the case you give). I don't ever recall a time where we'd officially attempt to reopen negotiations on any FFP contract (you say only fixed priced). The only time we even thought of doing something like that, we required a reopener clause.

I'll stop here, because I know I'll get even further off-topic.....

Kennedy

By Eric Ottinger on Tuesday, May 2, 2000 - 12:28 pm:

Vern,

I think the lawyers would say that options must be exercised exactly in accordance with the language in the contract.

Eric

By Vern Edwards on Tuesday, May 2, 2000 - 12:08 pm:

Eric:

Are you saying that negotiating a change to the option price is a bad idea, or are you saying that the law forbids it? If the latter, is your "no" answer based on statute, regulation, or common law?

The issue at this time is not whether renegotiation of option prices is a good idea, sound policy, or good business practice. The issue is whether or not it is permitted.

Vern

By Vern Edwards on Tuesday, May 2, 2000 - 12:00 pm:

Linda:

The option was evaluated at the time of award.

If you don't mind, let's stick to the question of whether or not a contracting officer can negotiate with a contractor to reduce an option price without getting new competition. If we entertain your question about voluntary price reductions at this point we'll get irretrievably off track.

Vern

By Eric Ottinger on Tuesday, May 2, 2000 - 11:59 am:

I think not.

1) I don’t have the exact words. But the lawyers usually say that an option has to be exercised precisely consistent with the terms and conditions of the option in the contract.

2) There are several arrangements which explicitly contemplate negotiating lower prices than the prices specified in the schedule. If you could negotiate less without such explicit language, I would assume that there wouldn’t be a need for it.

3) It would set up a scenario where the customer could routinely demand price reductions from the contractor as the price of not having another competition. It would invite an ugly sort of auctioning which would leave the contractor with very little or no profit.

I think the third is the most cogent argument. Although it would be a good thing to do in many situations, it would be bad public policy overall.

One could probably do a comparison between the option prices and the market prices, determine that the option prices are too high, ask the contractor for reduced prices, and do a J&A stating that there is not enough lead time to do a competition and maintain continuity, thus only the incumbent can provide continuity of support.

I think this would be legal as long as it conformed to the truth of the situation.

Linda,

That's the interesting question. I am not sure that the unilateral offer would always be truely unilateral. Thats the problem.

Eric

By Linda Koone on Tuesday, May 2, 2000 - 10:54 am:

Vern:

I believe the answer to your question might depend on whether or not the option was evaluated at the time of the award.

If the option was not evaluated at the time of award, then you would need to execute a J&A prior to exercising the option. This J&A would give you the authority to re-negotiate the option price (in my opinion).

If the option was evaluated at the time of award, then I agree with the other response provided.

Here's a question, however. Can you accept a voluntary option price reduction from the contractor? What if the contractor decides to voluntarily lower its option price under the contract as an incentive to have the option exercised.

Is there a prohibition against the CO acceptance of the price reduction and subsequent award of the option?

By Vern Edwards on Tuesday, May 2, 2000 - 09:42 am:

Roscoe:

Thanks for the input.

Vern

By Roscoe Price on Tuesday, May 2, 2000 - 09:39 am:

Vern,

The Contracting Officer's discretion can get around all parts of 17.207 and allow him/her to exercise at the option specified rate by determining that even though it isn't the best price available, it is the most advantageous method of fulfilling the need.

But,I think that 17.207(f) implicitly prohibits a contracting officer from re-negotiating the option prices. 17.207(f) states, in part, "To satisfy requirements of 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 . ."

Once the price has been changed, the option is not that which was evaluated and the CO can no longer make the determination.

Additionally, if you negotiate option year prices for the sole purpose of making the prices competitive with other known sources aren't you circumventing competition to the disadvantage of the company with the better price?

Roscoe

By Vern Edwards on Monday, May 1, 2000 - 02:17 pm:

This question was sent to me via private e-mail. I'd like to get your opinions.

Background:
An agency awards a one-year, single-award, competitively-negotiated, fixed-price IDIQ delivery order contract to Company X for a commercial item. The contract includes an option to extend the contract for an additional year.

Prior to exercising the option the contracting officer learns that another agency has awarded a contract for the same kind of item to Company Y at a lower price. Thus, the contracting officer no longer thinks that Company X's price for the item is reasonable.

Question:
Can the contracting officer negotiate with Company X to reduce its price for the option year without conducting a new competition?