A contracting officer issued a solicitation for maintenance dredging with a performance period of a base year and one option year. At award, and on the SF 1442 block 21 the Contracting Officer accepted the line items for the total base year and one option year. The amount in block 22 is for the total base year and option year periods. This was discovered at the post award conference. Legal opinion at the time stated that in fact the entire contract period (the base and option year) were awarded at the same time by virtue of what was written in blocks 21 and 22 SF 1442. The Contractor and the Contract Admin office worked under this assumption.

It has now been requested that the contract be terminated for convenience, as there is no requirement for the second year. Services were only performed during the base year.

My question is "do I really have a period of service to terminate"? Did we legally exercise the option? None of the regulatory requirements of FAR 17.207 were met to exercise the option year?

By Vern Edwards on Monday, February 04, 2002 - 03:20 pm:

Julie:

If all that happened was that the CO cited the line items and amount for both the basic and option periods on the SF1442, then in my opinion he/she did not exercise the option and doesn't have to terminate the option period. However, in order to answer your question with confidence I would have to see the contract and accompanying documentation. I'm assuming that there are no damning facts and that there were no oral or written communications that might be construed as evidence that the Government did, in fact, exercise the option. I'm a little worried by what you say about the contract admin. office and the contractor working under the assumption that the option had been exercised. What does that mean in practical terms?

Generally, contracts with options have clauses that say what the CO must do to exercise an option. Did the contract include the clause at FAR 52.217-9? If so, did the CO give the contractor the required preliminary notice of intent? Did the CO ever communicate by written or oral notice that he/she was, in fact, exercising the option?

Saying that the basic and option periods were "accepted" doesn't necessarily mean that the Government exercised the option. Whenever a CO awards a contract that includes an option he/she "accepts" the option; that's how the Government obtains the right to exercise it. But it doesn't follow that accepting the offer of an option is the same as exercising it.

If you have given us all of the relavent facts, and all the CO did was cite both line items in SF1442 block 21, and insert the total of the basic and option period prices in SF1442 block 22, then I would say that he/she did not exercise the option thereby. I would prepare a unilateral administrative change to the contract changing the amount in block 22 and, if necessary, the accounting and appropriation data in block 23.

Having said all this, you say the CO got a legal opinion that the option has been exercised. If that's so, then you should probably go with it.

By joel hoffman on Monday, February 04, 2002 - 03:59 pm:

Julie, were all the funds obligated with the initial contract award? If so, what type funds were set up for year two - annual or two year?

I don't think CW annual funds can be obligated for future year dredging, can they? If not, the award would be improper and must be voided for year two, correct? happy sails! joel

By Anonymous on Tuesday, February 05, 2002 - 08:22 am:

Julie,

If the contract accepted all the line items and the funding was obligated for base and options was the provision 52.217-4, included in the solicitation? Assuming the funding is non-expiring why would they need the options in the first place? If the provision was not included then where was the contractor's notice of option award.

By julie a. talley on Tuesday, February 05, 2002 - 03:13 pm:

Anonymous - No, the solicitation did not include 52.217-4. The only notice the contractor received was a verbal statement from the Contracting Officer stating that by virture of block 21 and 22 being completed for the full contract amount the option had in fact been exercised at award.

By Vern Edwards on Tuesday, February 05, 2002 - 03:43 pm:

Julie:

Just out of curiosity: In light of the fact that the contracting officer told the contractor that the option had been exercised, why are you raising the question now? Does the contracting officer now wish to renege?

By joel hoffman on Tuesday, February 05, 2002 - 04:53 pm:

Vern, unless the funds cited for the option year dredging were current for the option period, I don't think they can be used, can they? Maintenance dredging contracts are usually set up to handle each year's shoaling requirements. Bonafide Needs rule, similar to options on a janitorial contract, I would think. Anyway, that is a consideration which Julie's COE apprpriations law attorneys should sort out. If the funds were improperly cited, the award of the option may be invalid. happy sails! joel

By Vern Edwards on Tuesday, February 05, 2002 - 06:01 pm:

Joel:

I don't know the answer to the funding question in this case. If the appropriated funds were not available to cover the option period, and the contracting officer exercised the option without funds, wouldn't that be a violation of the Anti-Deficiency Act?

This relates to the thread on IDIQ minimums. The creation of an obligation and the recording of that obligation (which many people refer to as "obligating funds") are different things. Recording an obligation when, in fact, there has not been one, does not give rise to an obligation. And an obligation is an obligation whether properly recorded or not. I think that exercising an option creates an obligation. If the option is exercised without funds, then the CO has violated the Anti-Deficiency Act. Right?

So, if the funds were from an annual appropriation and were available to cover only the basic year, but were recorded to cover both the basic and the option years, then they were improperly recorded, but the exercise of the option created an obligation nonetheless. If there were no funds to cover the obligation, then I think we have an Anti-Deficiency Act.

I think.

Vern

By Vern Edwards on Tuesday, February 05, 2002 - 06:04 pm:

Joel:

P.S. Of course, Eric and John appear to have different ideas about obligations than I do, so maybe they have a thought or two about this.

Vern

By Kennedy How on Wednesday, February 06, 2002 - 12:07 pm:

I read this kinda fast, but it seems to me that the contract was awarded for the entire amount (base plus option year) using the current year funding appropriation (if I understand Joel's comment correct, regarding annual appropriations). So, to me, as long as the current appropriation is funded for the full amount, there shouldn't be any Anti-Deficiency violation here, there is money there behind the obligation.

That's not to say that somebody isn't spending the money correctly, spending this year's money for next year's work. I don't know what the regs say about that, in light of Construction contracts (I also don't have any experience in this arena in the hardware contracting world, we just never did it unless it was a service).

I also don't think that this is Anti-Deficient for the option period since you don't have the option year fund cite to go against; the only way you can be short funding is if the current year appropriation is short. And, it doesn't sound like it is (I know I usually checked the money pot before award, just to make sure the total amount at award is present on the funding document).

Kennedy

By Eric Ottinger on Wednesday, February 06, 2002 - 12:18 pm:

All,

Seems to me that if the option was exercised at time of award, it isn't really an option, it is part of the basic contract.

Do any of our legal brains have an opinion on this point?

Eric

By Vern Edwards on Wednesday, February 06, 2002 - 12:40 pm:

If the option was exercised, then the contract period of performance and tasks include the option work; it is no longer an option. The contractor is obligated to perform accordingly and the government is obligated to pay.

If the appropriation was not available for the option work, then it seems to me that citing it to cover the option was improper. It failed the purpose test(?).

If the option was exercised, and if the exercise constituted an obligation, and if there was no appropriation available for the obligation, then don't we have a violation of the Anti-Deficiency Act?

It seems to me that the question is whether including the option item and price on SF1442 exercised the option. In and of itself, I don't think it did, but the agency's lawyer appears to have counseled differently. Was he/she right? Do any of the legal brains have an opinion on that point?

By joel hoffman on Wednesday, February 06, 2002 - 03:01 pm:

Here are the questions:

My question is "do I really have a period of service to terminate"?

Did we legally exercise the option? None of the regulatory requirements of FAR 17.207 were met to exercise the option year?

In only responding to the second question,
1) Improper funding MIGHT have been cited for a future requirement. Does this VOID the award of the option by operation of law?

2) Options are awarded all the time with the basic contract award. What did the RFP say about this, if anything? Did it say the Government could include the base plus option in the initial award? Did it say that the Government could award anytime prior to XXX date? FAR 17.207 doesn't cover dredging, so failure to follow it probably doesn't negate the legal effect - probably wouldn't negate it even it 17.207 did apply ( most of the same requirements apply to options for dredging- it just isn't covered in FAR!).

happy sails! joel

By Vern Edwards on Wednesday, February 06, 2002 - 03:37 pm:

Joel:

An interesting variation on your analysis is this: What if the contracting officer exercised the option in accordance with the pertinent contract clauses, but failed to follow the internal procedures prescribed in FAR 17.207? Would the contracting officer's failure to comply with the FAR void the otherwise contractually proper exercise of the option? I don't know if there is any case law about this, but my own guess is that a court would not void the exercise of the option just because the CO failed to comply with FAR 17.207. However, I think you could make an argument that a court would or should.

I don't think that the otherwise proper exercise of the option would be void just because funds were not available. If that were the case, then how could there ever be a violation of the Anti-Deficiency Act? The Act clearly contemplates the possibility of obligation in the absence of an appropriation, doesn't it?

By Eric Ottinger on Wednesday, February 06, 2002 - 03:51 pm:

Vern and Joel,

Since the "option" is not really an option and there are no changed conditions to consider, I don't think there is any requirement to comply with FAR 17.207.

Eric

By joel hoffman on Wednesday, February 06, 2002 - 03:56 pm:

Good points.

Many of the points in 17.207 (again, which doesn't apply to dredging) deal with deferred award of options. I presume the regs are to ensure that the requirement is still valid and that the award makes sense, later - falling prices, changing market, changing technology, current wage rates, etc. So, I don't see any problem with awarding an option at base award - except for the funding issues.

Unless Julie's lawyers determine a way to void the award, they will probably have to T4C. If no work was done, there may be little or no cost. What you don't want to do is complicate things and scare the pants off the contractor with all the formal paperwork included in the termination notice and settlement. A no cost settlement is quick and easy to write up and execute.

My advice is to call the contractor, explain what happened and see if they will accept a no cost termination. If so, send the termination notice and no cost settlement mod to the Contractor to sign at the same time - saves the Contractor a lot of trouble and time as well as the Government. It doesn't have to be as complicated as we try to make it. happy sails! joel

By Vern Edwards on Wednesday, February 06, 2002 - 04:09 pm:

Joel and Eric:

I agree that a CO can exercise an option simultaneously with the initial contract award, although I'm not convinced that happened in Julie's case. But I'm a little lost on the business about FAR 17.207 not applying to dredging and about the option not being an option.

Joel, I've never done a dredging contract. Why doesn't FAR 17.207 apply to dredging?

Eric, why do you say that the option is not really an option? Are you saying that since the option was exercised we no longer have to worry about FAR 17.207? If so, I agree, if, in fact, the option was exercised. But I think that Julie's initial question was whether the option had, in fact, been exercised. Based on what she described, I don't think it had. Do you think that the completion of SF1442 as she described constituted the exercise of the option?

Am I off track? Have I missed something?

Vern

By Vern Edwards on Wednesday, February 06, 2002 - 04:22 pm:

Joel:

One last thought:

If the appropriation was not available for the option work, then what funds would they use to settle the termination of that work if the contractor would not agree to a no cost settlement?

Vern

By joel hoffman on Wednesday, February 06, 2002 - 04:32 pm:

"Except as provided in Agency Regulations, this subpart does not apply to contracts for (a) services involving...(including dredging...)" FAR 17.200 "Scope of Subpart"

There are no separate COE "Agency Regulations" covering options for dredging that I'm aware of. Options are discussed in the Army JAG Course materals and other legal references, plus there are DOL requirements for current wage rates when a deferred option is awarded and appropriations law references. Most of the guidance concerns awarding just as stated in teh contract and requirements for deferred awards. There is little or no guidance on awarding options at initial contract award. happy sails! joel

By joel hoffman on Wednesday, February 06, 2002 - 04:37 pm:

Vern, re your last post:

I think they would use current year funding (Hopefully, they are in the option year.) gotta go pick up my daughter at the store!! h.s. joel

By joel hoffman on Wednesday, February 06, 2002 - 04:37 pm:

Vern, re your last post:

I think they would use current year funding (Hopefully, they are in the option year.) gotta go pick up my daughter at the store!! h.s. joel

By Vern Edwards on Wednesday, February 06, 2002 - 04:40 pm:

Thanks, Joel. Some of my students are laughing at me for not checking the scope section.

Vern

By joel hoffman on Wednesday, February 06, 2002 - 05:24 pm:

Vern, don't worry too much. Many people assume that the FAR prescribes procedures for every type contract option. I run into that constantly. I recently finished an 'exhaustive' search (it tired me out!)for guidance on options for construction contracts for an "Ask a Professor" question. My chief counsel even sent a request out to every COE attorney. I tracked over 70 lawyers opening the message, without any response. One of my own, Mr. Steve Feldman, has written a book, which includes some guidance. I'm at home, so don't have access to it. happy sails! joel

By julie.a.talley on Monday, February 11, 2002 - 10:20 am:

Vern,

Hope the follwoing settles some of the Anti-Deficiency issues. The subject contract falls under 52.232-5001 Continuing Contracts, IAW the River and Harbor Act. Therefore the contract does not have to be fully funded. Also O&M non-expriring funds were used.

My my key question is can you exercise an option "year" when you don't have a requirment for that year. Awarding two years at the start for two seperable performance periods does not allow for falling prices, changing markets, changing technology, incorporation of current wage rates, etc. and a determination that we still have a requirement.

At this point we are working on a TforC, but for future acquisitions I would like to see what legal may have to say.

By joel hoffman on Monday, February 11, 2002 - 10:26 am:

Julie, now I am clear on the funding. From your description, I'm pretty sure that you awarded a contract including base and option. A TFC is appropriate, not an admin mod. happy sails! joel

By Vern Edwards on Monday, February 11, 2002 - 10:33 am:

Julie:

Thanks for clearing things up about the funding. Here's what I think about your key question:

Exercising an option is a contractual act. I think that if you exercise an option in accordance with contractual procedures, then you have exercised the option, requirement or not, funds or not. However, if the exercise of the option was not done in accordance with statute or regulations then perhaps there is an issue of whether or not the CO acted within the scope of his/her authority. If the CO acted outside the scope of his/her authority, then maybe the exercise of the option is void ab initio. Who knows?

The thing that I would say about what happened to your agency--based on your description of events--is that I don't think the CO intended to exercise the option at contract award, nor did he/she do so in fact. I don't think that making reference to the option line item and recording an obligation to cover the option dollar amount on SF1442 constituted exercise of the option. It was a mistake. If the mistake had been made clear to the contractor at the outset and promptly corrected, then there would be no issue. But it sounds like the CO accepted the interpretation that he/she was given and interacted with the contractor as if the option had been exercised. Thus, his/her behavior may have sealed your agency's fate.

I hope that you get good advice from your legal office. If you T for C, I hope it doesn't cost your agency too much.

Vern