I've been researching the subject question and need some advice (concerns only DOD competitive RFP's). I don't want to get into discussion concerning the wisdom or folly of using additives, et al on RFP's, vs. Options, etc., yet. I'm going to start a separate thread to cover that topic.

Additives/Deductives/Alternates are only discussed in DFARS at 236.213-70 Additive or Deductive Items. http://farsite.hill.af.mil/VFDFARa.HTM

This guidance only covers IFB's. There is also a
DFARS Clause 252.236-7007 Additive or Deductive Items, again written for use in IFB's.

My question is, if there is no coverage of this topic in FAR for RFP's, if I follow the guiding FAR principle below, can I assume that I could use the concept of Additives/Deductives and Proposal Alternates in a DOD RFP?

(1.102 -- Statement of Guiding Principles for the Federal Acquisition System:
d) The role of each member of the Acquisition Team is to exercise personal initiative and sound business judgment in providing the best value product or service to meet the customer's needs. In exercising initiative, Government members of the Acquisition Team may assume if a specific strategy, practice, policy or procedure is in the best interests of the Government and is not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority.)

Gotta go to bed. Tomorrow, I'll start another thread which discusses questions concerning Options vs, Additives, et al on construction contracts. Thanks for your assistance. happy sails! joel

By Vern Edwards on Thursday, December 13, 2001 - 05:55 am:

Joel:

I think that your guiding principles thinking is sound and that you can use additive items in an RFP. I found four GAO decisions in which DOD agencies used additive items in an RFP:

1. ADT Security Systems, Inc., B-249932, 1993 (Army).

2. Northeast Construction Co., B-234406, 1989 (USAF).

3. Honeywell, Inc., B-225684, 1987 (Army).

4. TEK, J.V. Morrison-Knudsen/Harnischfeger, B-221320; B-221320.2, 1986 (Army).

None of the protests was about the use of additive items, but the decisions state that the agencies did use such items in their RFPs.

By joel hoffman on Thursday, December 13, 2001 - 08:35 am:

thanks, Vern happy sails! joel

By J. Moore on Thursday, December 20, 2001 - 07:08 am:

Joel:

We've had the same discussion here and concluded as you did that the guiding principles would allow us to use additives/deductives in a RFP. We also concluded that it doesn't make much sense to use them though. I'll look for your new thread and encourage those in my office who discussed this to jump in. Who knows we may change our thinking.

By joel hoffman on Thursday, December 20, 2001 - 02:19 pm:

J, I got tied up with travel and a bunch of other stuff, so haven't pursued the thread concerning the appropriateness/advantages and disadvantages of using options or alternates in negotiated procurement.

The reason I was interested in options was because one of my former office's attorneys recently provided some legal guidance, severely restricting their use on construction contracts. I haven't been able to find such restrictions in writing and can't find much regulatory background on option use in construction, unless the option is for a severable extension of time or renewal. I checked FAR/Supplements, the GAO Redbook, what I could decipher in the DFAS 37 Series regulations, all my old sources, like "Briefing Papers", Nash and Cibinic, made a Web search, etc. FAR 17-2 isn't directly applicable to construction contracts, but doesn't prohibit their use, either.

The attorney basically said that all options must be severable (e.g., you can't use an option for an upgrade from a shingle roof to a tile roof), whereas an alternate can certainly be used for an upgrade;

The attorney said that all options are treated like separate contracts, requiring current year funding, not original year funding, etc. (thus cannot be considered in-scope for purposes of using otherwise expired funding. I thought I could find some related guidance under the bonafide needs rules, but was unsuccessful.

Does anyone have any sources which might shed light on this?

I thought one could use options similar to additive/deductive/alternates, with the advantage that the option was available for a specified period after original contract award.

Thanks. happy sails! Joel

NOTE: This is the beginning of a second thread started by Joel.  It is added here to save space.

By joel hoffman on Thursday, December 20, 2001 - 04:12 pm:

An attorney in my former office recently provided them some legal guidance, which severely restricts use of options in construction contracts. I'm interested in any background guidance or regulations concerning what we can use options for in construction contracts, both bid and negotiated.

I haven't been able to find such restrictions in writing and can't find much regulatory background on option use in construction, unless the option is for a severable extension of time or renewal.

I checked FAR/Supplements, the GAO Redbook, what I could decipher in the DFAS 37 Series regulations, all my old sources, like "Briefing Papers", Nash and Cibinic, made a Web search, etc. Please note that FAR 17-2 isn't directly applicable to construction contracts, although it doesn't prohibit their use, either.

The attorney basically said that all options must be severable (e.g., you can't use an option for an upgrade from a shingle roof to a tile roof), whereas an additive alternate can certainly be used for an upgrade.

The attorney said that all options are treated like separate contracts, requiring current year funding, not original year funding, etc. (thus cannot be considered in-scope for purposes of using otherwise expired funding. I thought I could find some related guidance under the bonafide needs rules, but was unsuccessful.

Does anyone have any sources which might shed light on this?

I thought one could use options similar to additive/deductive/alternates, with the advantage that the option was available for a specified period after original contract award.

Thanks. happy sails! Joel

By Vern Edwards on Thursday, December 20, 2001 - 05:26 pm:

Joel:

I cannot, for the life of me, think of any reason why you cannot have options in a construction contract. It may be unusual, but I don't think it is prohibited. For one example of the use of options in a construction contract see: J.B. Steel, Inc., AGBCA No. 83-232-1 (1986). Options might be especially useful with regard to finish work. FAR certainly does not preclude the use of options in a construction contract.

And the business about options having to be severable and and treated as new contracts--I never heard of that before.

By Vern Edwards on Thursday, December 20, 2001 - 05:28 pm:

Joel:

P.S. FAR 17.200 expressly states that the use of options is not precluded in construction contracts.

By joel hoffman on Friday, December 21, 2001 - 11:40 am:

Vern, et al, here are some excerpts from the attorney's written guidance concerning options in supply, services and construction contracts. I didn't copy the portion dealing with use and evaluation of options, because it is simply a repeat of normal guidance. I added the asterisks for discussion purposes. What do y'all think ?

"Exercise of Options.

a. In order for the Government to be able to exercise an option, the material terms of the option must be established at the time the basic contract is awarded. These terms must be clear and definite, and must require no further negotiation. Any change to the material terms of the option results in a material or cardinal change to the contract.

b. Where an essential term is changed, the option can not be awarded until it is justified in the same manner as sole source procurement.

c. Material terms include but are not limited to price, time for exercise of the option, quantity, change in type of work, or performance period (**1).

d. The option, when exercised, is a separate, stand-alone contract (**2). It may not supercede, replace, be in lieu of, or detract in any form or fashion from any of the items in the "Base Bid" nor from any of the other "Optional Bid Items" that are set out in the solicitation (**2).

e. The Option must be funded with funds available in the year that it is exercised (**3). It must comply with the bona fide needs rule, the limits on funding appropriations, and if for construction, must result in a complete and usable product. If for services, it can not be for more than 12 months per option period."

Also, from a "Question and Answer" document (same source):

"Any change in the essential terms of the option results in a material or cardinal change to the contract.

In determining what constitutes a material change, the COMGEN has considered the following factors:

Extent of the change in type of work, performance period, cost between contract as awarded and as modified, as well as whether potential bidders reasonably would have anticipated the modification, and impact on competition (**1)."

Joel's Notes:

**1. Note that the description of material or cardinal changes is different in the two separate discussions. The first is much more restrictive than the reference to COMGEN considerations. The latter says "Extent of the change in...", while the former implies a ban on ANY bilateral change to the period for exercising the option.

I understand that one must consider the potential impact on the original competition, if the parties would try to modify the terms of an option and I understand that the contract's Changes clause is inapplicable when exercising an option, because the Government cannot unilaterally make any changes to the conditions or content of an option, in awarding it (except for certain facets, such as Wage Determinations on option periods).

However, I don't see any impact on original competition, if the Contractor simply agrees to extend the period for exercising the option. It would appear that an extension is done for the benefit of the Government. The benefit to the Contractor is primarily to avoid the hassle of re-proposing and re-negotiating, if the Government wanted to add the work, later. We had this discussion, awhile back, but I don't remember it whether or not it was stated that the Contractor could offer or could agree, upon request, to extend the period. It would certainly seem to me that a Contractor could submit an unsolicited proposal to extend an option period, making the terms more attractive to the Government, similar to the rules for late modifications to bids or proposals.

For that matter, I don't understand why there would be any prohibition against the Contractor submitting an unsolicited proposal to lower the price of an option or otherwise provide more attractive terms to the Government.

**2. I can't find anything which supports the statement that all construction contract options are like stand alone contracts. I can't find anything which supports the position that a construction contract option can't be structured like an alternate bid, as long as all options can be evaluated in accordance with one of the FAR "Evaluation of Options" Clauses. The example of the option for a more desirable roof type (tile) comes to mind. Other examples could be options for more durable finishes, coatings, heavier duty air conditioning equipment, etc.

**3. The current year funding rule would appear to conflict with the appropriation rule that original year O&M funds remain available for in-scope changes to an O&M funded contract.

Those are problems I have with this guidance. happy sails! joel

By joel hoffman on Friday, December 21, 2001 - 11:48 am:

Vern, I forgot to thank you for the AGBCA cite and state that I reviewed it. It dealt with a case where the option description created a patent ambiguity, resulting in a difference of opinion on what was required in the base bid for a cold storage facility.

The attorney agrees that options in construction contracts are allowable; the extent of restrictions on their use is what is at issue.

P.S. Is there any particular reason that the term "exercising an option" is used, in lieu of "awarding an option"? Seems that if each option is a separate contract, "award" would be appropriate. happy sails! joel

By Vern Edwards on Friday, December 21, 2001 - 12:43 pm:

Joel:

I think I understand why your attorney has taken the position in paragraph d. of his opinion. It's because he's worried about how to evaluate option prices during the competition. He's thinking that the GAO requires the evaluation of option prices and if the option is used to modify the base bid item it could result in payment of a higher price than offered by another bidder.

Suppose the base bid item requires installation of plastic pipe and the option provides for changing the material from plastic to copper. On what basis would you decide which bidder is low? If the option is for additional work, then you can just add the option amount to the base bid item. But if the option would supercede, replace, or be in lieu of the base bid, you could have a situation wherein one bidder is low on the base bid and another is low on the option bid. Which one do you choose? If you choose the bidder that's low on the base and then decide to exercise the option, what have you done to the competition?

Most options are for additional quantities or an extension of the period of performance. They are severable from the basic contract and can be evaluated by adding their prices to the basic contract price. But an option that alters the specification is either/or--you go with the base bid or the option bid, but not both.

Make sense?

If that's not his rationale, then I'm stuck.

By joel hoffman on Friday, December 21, 2001 - 01:50 pm:

Vern, From what I'm told, evaluating the options isn't the problem.

In IFB's, they use one of the "Evaluation of Options" clauses, usually the one which provides for evaluation of base plus all options, to determine the lowest bidder.

On RFP's, it is done similarly. Plus, in RFP's, we can also analyze the advantages and disadvantages between offerors (trade-offs).

If one offer isn't the lowest overall, but its combination of base plus desired option(s) falls within available funding, while the overall low offeror's doesn't, this can be considered an advantage in the trade-off analysis, etc.

I'm not aware of those evaluation methods being a problem for them. As far as I know, the root cause is that someone has an extremely conservative outlook on contracting issues.

Thanks for your time. happy sails! joel

By John Ford on Tuesday, December 25, 2001 - 05:58 pm:

Joel, I'm stuck on his rationale as well. As for options being seperate contracts, we have to ask for what purpose or in what context are we speaking. For contracts subject to the SCA, the DOL considers options to be separte contracts. However, from a FAR perspective options are not considered separate contracts, but merely modifications to an existing contract with the option(s)and basic contract forming a single contract. See for example, Penn Enterprises, Inc. ASBCA No. 52234.
Turning to the funding issue, I believe you have misinterpreted what he says. He said you have to use funds current a the time the option is exercised. That is quite different from saying you have to use current year funds. For example, if you have multi year appropriations, you can obligate those funds on an option in any year that they are available for obligation. Thus, if you are using a three year appropriation, you could use FY 2000 funds to fund an option in FY 2002. Also, for O&M funds, at least for DoD, they expire at the end of each fiscal year. Therefore, if you awarded a contract in FY 2001 using FY 2001 O&M funds, I doubt you could use those funds to exercise an option in FY 2002. In this regard, options are treated differently from other modifications where the "relation back" rule is applied to determine the appropriate funds to be used on the mod.

By joel hoffman on Friday, December 28, 2001 - 11:01 am:

Thanks for your input, John. The O&M original year funding is the only funding issue I meant to question. Do you have a source for the interpretation that original year funds would not be available for a non-severable type option (e.g., an option for tile roof, in lieu of basic shingle roof, where only enough funds were available at award for the shingle roof, but a tile roof would match the surrounding buildings)?

I understand that options for additional quantities or for new periods most likely couldn't use original year funds, but some options are for original needs for which funding wasn't available at award. It seems that those should be treated like any other in-scope mod on an O&M or other "expired" funding source contract. What do you think? happy sails! joel

By John Ford on Monday, December 31, 2001 - 10:22 am:

Joel, in the hypothetical you are posing, I wonder if you really have an option or is it just a change with a different label placed on it? If the option is in the nature of a change as you have described it, use of O&M funds would appear to be proper. However, if the option is for additional quantities of work in a later period, I do not think you could use O&M funds once there period for obligation has expired.

By joel hoffman on Monday, December 31, 2001 - 10:45 am:

Thanks, John. I would agree with that scenario. I'd assume that each option has to satisfy the bonafide needs rule for the proposed funding source. I just wondered if you or anyone else has found any reg, covering appropriations or otherwise, which would restrict any and all options to current year funding. Apparently not. happy sails! joel

By joel hoffman on Monday, December 31, 2001 - 12:15 pm:

To clarify, my question concerns an O&M funded contract. I understand the idea of "funds current at the time the option is exercised", regarding multi-year funds, etc. happy sails! joel