Linda:

Thanks for sharing the details that led to the original discussion on re-negotiating options.

The pressure from competition between agencies for sales can really test the integrity of the contracting offices involved. Presuming both agencies are bound by the same regulations, if one agency can re-negotiate an option, then logically, the second agency should be able to do the same.

The integrity issues surface when the first agency's actions can't be supported by regulation.

Very interesting. . . I hope you find the answer that you need.

By Joel Hoffman on Thursday, May 25, 2000 - 07:23 am:

In my last post, I meant to refer to a volunteered price "reduction", not a volunteered price "increase" . To clarify, I was referring to Linda Koone, not Linda Magazu.

I thought that Linda K. split this thread off an earlier one. The other thread had focused on discussion concerning other than the idea of a "voluntary" price reduction offered on an unexercised option.

As it turns out the case Vern alluded to, at the beginning of the other, original thread, never dealt with a purely voluntary act by a contractor.

Linda Magazu and Vern, your case wouldn't fit within the criteria I discussed in my analysis in this thread,so my comments aren't germaine to your frame of reference. Happy Sails!

This isn't a case concerning a "voluntary price increase." I thought Linda originally split this thread off the earlier one specifically to distinguish between a volunteered price increase and a pressured or requested price reduction. If that isn't the case, I apologize.

My comments only apply to volunteered price reductions.

Happy Sails!

By Linda Magazu on Wednesday, May 24, 2000 - 07:53 am:

What a great exchange of ideas/opinions and thankyou to each and every one of you who participated (constructively that is) in this discussion. Mr. Hoffman, you may need to go back to another forum topic "Can a contracting officer renegotiate option prices without a new competition" to understand where this all began. It's not as simple as you make it out to be. Linda K, the original question did not get lost by your posing another question, it just took a slightly different direction which also relates to the original topic.

I am the contracting officer who first went to Vern Edwards because I value his opinions and knowledge of contracting issues. Vern decided to post my question to generate some discussion. Here's some background as to what kicked this off: The contracts are for supplies & firm fixed price indefinite quantity types. You have two agencies (1 DoD/1 non-DoD) buying like requirements where an agreement required both agencies to combine their buying power when entering into contractual arrangements. Some of the current initiatives overlap each other (i.e, original requirement was not joint and the contract is still active) so the other agency may go out on their own to acquire the same item in that instance.

The options involved are to extend the term of the contract not to purchase additional quantities (i.e., base year plus four additional one-year option periods). The option prices are evaluated prior to award and determined to be fair and reasonable. For the sake of example two offerors compete, one has an on-going contract with the one agency (non-DoD) but loses to the other (DoD). The contract with the non-DoD agency is coming up for renewal, who is aware of the price awarded by the DoD agency and pulls in their contractor and demands a lower price than what the DoD agency received from the competitor or they won't exercise the option (bargaining).

I had wondered if it was a violation of CICA to renegotiate a price with a contractor after the ground rules (low price) were set forth during the initial acquisition. The other agency has put pressure on the other to reevaluate the situation and reconsider whether to exercise the option when a lower price is available, but it's how that price was obtained (back to the negotiation table) that bothers me. DoD facilities are under tight budget constraints so why not just go with the other agency if the price is lower (we lose a customer and sales). All of you gave me some very interesting ideas and I'm going to look at the Magnavox case and especially into Exception 7 since according to the figures presented, DoD is the highest user.

I hope you continue to keep the discussions through ARNET going, they really do help stimulate the thought process. Pay no attention to worthless comments such as "Joe Blow's". Eric you responded to that reply very eloquently but I think "Joe" just needed to vent. I'm sure he learned something from the discussion as well, he just won't admit it! Thanks again, I value your input.

Mr. Hoffman,

You said it, brother! No wonder the government can't get anything done.

By joel hoffman on Thursday, May 11, 2000 - 07:06 pm:

I'm sorry, folks. I can't believe how y'all have taken what does not appear to be overly complicated and convoluted it into an in-depth analysis of exceptions to competition.

Is there guidance out there other than a GAO admonishment to compete where it appears that the Government can be better served by competition?

Are you saying that procurement professionals, supplemented by subject matter experts can't conduct some market analysis, combined with analysis of cost to compete and delivery requirements, to determine whether or not the public would best be served by competition?

Is your frame of reference supply contracts for something that has widely varying prices on the market? Maybe I missed something. But you seemed to have dismissed any room for discetionary judgement and automatically assumed that you must justify not publicly competing against a voluntary price reduction offer. Happy Sails! Joel

By Kennedy How on Thursday, May 11, 2000 - 12:40 pm:

Gee, I was off sick for a couple days since I last posted, and look what happens! What a good discussion!

I think the reason why we're all discussing this subject back and forth is that we all, deep down, want to accept what, to everybody else, is a good sense decision. Namely, there is a possibility that we can get something for a lower price, and we desperately want to take advantage of that, because we're entrusted with the public funds. But yet, we hesitate, because we're afraid we'd violate some rule or regulation. And, absent clear permission, we won't do that. And, when it gets out that we didn't take advantage of this, we get pilloried, from the press all the way to Congress, who put us in this position in the first place.

Anyway, back to the topic: For an option, I would have problems using Exception 1, only one source, especially if the original contract was full and open competition. As our activity is conservative by nature (management), we'd not be able to really tailor this exception, to something like "Only this source can give us this price". In my example, the price reduction is over the entire base + option quantity. Nobody else can do this except for the current contractor. I could recompete, but I'd only recompete the option quantity, and I seriously doubt I could get a price equal or better than the current contractor's price (after reduction), for the reasons cited.

Exception 7, Public Interest, appears to me to be more appropriate. If I'm entrusted with the public funds, and the contractor is volunteering something in the public's favor, I don't think I'd be overly happy if I couldn't see my way clear to accept on behalf of the public.

We're supposed to make good BUSINESS decisions. If the decision to be made doesn't fit under any of the other 6 Exceptions, then the catch-all is the last resort; it gets us past that hurdle.

(oops, real work is interrupting!)

Kennedy

By bob antonio on Wednesday, May 10, 2000 - 01:44 pm:

Vern:

Here is the answer to who used Exception 7, 688 times during FY 1999.

FY 1999

DoD..........491
NASA.........108
DOE...........27
USDA..........25
DOI...........23
DVA...........10
DOT............2
HHS............1
DOC............1

By Linda Koone on Wednesday, May 10, 2000 - 01:06 pm:

Vern:

That doesn't surprise me, at least not from our perspective.

But remember, exception 1 applies for DoD, NASA and the Coast Guard when the requirement can be satisfied by one or a limited number of sources.

It's not unusual for us to have competition and use exception 1. It's just limited competition.

I'll watch for more information from you.

By Vern Edwards on Wednesday, May 10, 2000 - 12:51 pm:

Linda:

At this time I don't know who is using the exception. I have ordered a report and will let you know the answer when I get it, probably next week. DOE is probably one of the sources, but it would not account for 688 actions.

Another interesting statistic is that about 22 percent of reported FY99 obligations were procured without any competition under Exception 1 (only one source).

By bob antonio on Wednesday, May 10, 2000 - 12:40 pm:

Linda:

At most, there are a handful of management and operating contracts ending each year. I do not think they are included in the FPDS in regard to CICA. If they are, I would assume that they are classified as one of the first 6 exceptions. However, the Secretary of Energy does approve every sole-source management and operating contract procurement. The signature may not be on the J&A itself but it is in the package.

By Linda Koone on Wednesday, May 10, 2000 - 12:00 pm:

Vern:

They are interesting (and surprising) statistics.

Are the exception 7 contracts coming from DOE as Bob suggests? If not, what agency is using this exception?

By bob antonio on Wednesday, May 10, 2000 - 08:04 am:

Vern:

Several years ago, DOE changed its philosophy for competing its facility management contracts generally referred to as managment and operating contracts. It now uses a combination of the DOE and CICA process. However, these are DEAR contracts and not FAR contracts. Authority for them is included in DOE's authorizing legislation and FAR 17.6. Below is the excerpt from the DEAR.

If I remember correctly, the DOE J&A is processed according to DOE policy but looks much like the FAR J&A. Regardless of the exception selected to support a sole-source procurement or extension, the Secretary of Energy will sign the J&A. The data on obligations for these contracts makes its way to the FPDS but I do not know how or if the use of exceptions is recorded since they are not really CICA contracts. These contracts, under their various monickers, receive annual obligations in the $13 billion range. A new 5-year procurement or extension could be valued from about $1 to $6 billion. Some are smaller. Since they are all signed by the Secretary, they could be considered to be exception 7 J&As regardless of any other designation.

"917.602 Policy.

(a) It is the policy of the Department of Energy to provide for full and open competition in the award of management and operating contracts, including performance-based management contracts.

(b) A management and operating contract may be awarded or extended at the completion of its term without providing for full and open competition only when such award or extension is justified under one of the statutory authorities identified in FAR 6.302 and only when authorized by the Head of the Agency. Documentation and processing requirements for justifications for the use of other that full and open competition shall be accomplished in accordance with internal agency procedures."

By Vern Edwards on Tuesday, May 9, 2000 - 07:47 pm:

Bob and Linda:

Some interesting statistics:

According to FPDS, in FY99 agencies used the public interest exception to CICA (Exception 7) 688 times for procurement actions worth $2.9 billion. Agencies used the only one source exception (Exception 1) 46,363 times for actions worth $39.8 billion.

The average dollar value of an Exception 7 procurement was $4,226,890, while the average dollar value of an Exception 1 procurement was only $859,315.

Exception 7 ranked fifth in usage among the seven CICA exceptions when ranked by dollars obligated, ahead of the national security (Exception 6) and international agreement (Exception 4) exceptions; it ranked sixth when measured by actions, ahead of only the international agreement exception. The second most frequently-used exception was authorized or required by statute (Exception 5), which was used 39,005 times for actions worth $8.3 billion, which averaged $212,648.

By bob antonio on Tuesday, May 9, 2000 - 03:22 pm:

Linda:

When I taught second-guessers (auditors in this case), I always talked about exception 7 a bit. It is the only exception that provides the opportunity for a politician to stick his/her neck out and then squeal on himself/herself to other politicians. That is at least one reason it is rarely used.

In the 1980s, I remember doing an extensive legislative history of CICA. The first 6 exceptions come right out of the Comptroller General's bid protest playbook. You should find congressional reports stating that. However, the reason for exception 7 is vague, if not blank. I remember trying to find a clear explanation for it and I could not. If I remember correctly, exception 7 was added in a House and Senate conference and little was noted in the conference report. However, you can imagine exception 7's birth in a give-and-take environment. It probably went something like this.

Do the first 6 exceptions cover everything? I don't know. Well, what if we missed something? We need a 7th as a catch-all. What do we call it? How about "public exigency." (I believe that was an exception to formal advertising prior to CICA) What does "public exigency" mean? I don't know. How about "public interest?" What does that mean? I don't know but it sounds better. If it is easy to use, the contracting officers will start using that one instead of "only one." ("only one" was the most-used exception to formal advertising.) If the head of the agency has to sign it, it will not be abused. Make sure the authority cannot be delegated. Good idea. How about a special reporting provision when it is used. Good idea. There you have it. It is designed to be used; designed not to be abused; and almost impossible to use. A mongrel's mongrel.

I will respond to your other questions later.

By Linda Koone on Tuesday, May 9, 2000 - 02:11 pm:

Enjoyable comments from all! I'd like to clarify that my scenario is purely hypothetical, but at the same, well within the realm of possibility.

Some responses to some specific questions:

Vern: Couldn't I consider exercising the option to be a form of consideration? I have other options - I'm not obligated to use the option to fulfill my requirement using the option.

As for stepladder pricing based on quantities and periods of time, we sometimes do include these. Often the responses we get to the stepladders are so crazy that you'd rather pull your hair out than weed through the mess! Some folks just don't get it. Others don't want to put the effort into various pricing schemes, knowing that we are as likely to issue a partial (or full) termination as we are to exercise the option. But, in theory, I agree that this is a good idea.

Bob: You're sounding like an auditor! Actually you've made good points.

I'll give you the benefit of the doubt that your suggestion to use exception 7 was meant to make us all refresh our memory on what this exception is and who approves it. (Wouldn't it be fun to explain to the Secretary why we're taking up his time to pursue a new procurement instead of using the option simply because the contractor wants to give us a better price for the option quantity?)

I take it you would not endorse using the option, even if supported by a J&A, to procure the new requirement for 97 units. I still believe that an argument could be made that the J&A gives you the authority to negotiate, whether it be the option price or a new procurement. Using the option relieves the need for synopsis providing that the synopsis for the original solicitation included the option.

Also, I believe an argument could be made that testing the market would be unnecessary since the time between the award of the contract and the exercise of the option was short enough to determine that the option price is the lowest price obtainable or the more advantageous offer. Do you agree?

Eric: Good analysis of "Joe's" comments!

(I guess it's a good idea to permit people to participate in this forum anonymously, but I have to admit, it's a bit like receiving an unsigned letter--somewhat annoying)

But "Joe" is right. It really shouldn't be that difficult to accept a reduced price!

By Eric Ottinger on Tuesday, May 9, 2000 - 01:13 pm:

Joe,

I'm not sure how you got into this highly select, immensely well trained, extremely intellectual discussion group.

However-- Stop by often. We need you.

Thanks,

Eric

Oh, for pity's sake! Linda, just take the *&@!!! price reduction, mod the K, and get on with life. I bet you got hundreds of PRs to process. By the time you go through all those exception and memos you'll have spent the money you save. What are they gonna do? Shoot you for saving money?

What's the matter with you people?

By bob antonio on Tuesday, May 9, 2000 - 12:04 pm:

Eric:

Thank you. I think you see what I see in exception 1. There is some room to work.

In the very remote event that I may have to look at this contract sometime in the future, I am necessarily vague.

By Eric Ottinger on Tuesday, May 9, 2000 - 11:32 am:

Bob,

Excellent analysis.

I would go straight to Exception 1. The only thing that I would consider viable would be: “(ii) Supplies may be deemed to be available only from the original source in the case of a follow-on contract for the continued development or production of a major system or highly specialized equipment, including major components thereof, when it is likely that award to any other source would result in (A) substantial duplication of cost to the Government that is not expected to be recovered through competition, or (B) unacceptable delays in fulfilling the agency's requirements. (See 10 U.S.C. 2304(d)(1)(B) or 41 U.S.C. 253 (d)(1)(B).)”

To make a dumb point, this will only work if it is the truth. In Linda’s situation where the contractor has the production line set up and she is adding 97 units to the production run, it is probable that award to anyone else would result in a very substantial “duplication of costs.”

Eric

By bob antonio on Tuesday, May 9, 2000 - 08:53 am:

The Magnavox case is 1988.

By bob antonio on Tuesday, May 9, 2000 - 08:47 am:

Linda:

Kennedy, this should answer your question too. If I came acrosss your example after it happened, this is what I would do. My viewpoint is to see that fairness and integrity are maintained in the procurement process. A bid protest may result in the same or a different conclusion.

In your option, you have an agreed upon option quantity and price. The option terms were part of the original competition. There are several scenarios that I can think of now.

You have the requirement for 97 items and your option allows you to acquire 100 items at the agreed upon price and quantity. You believe you can obtain a better price than the option price from the option contractor. You now go through the process of exercising the option. There are clear procedures you must follow. Part of those is to check to see if the market conditions have changed. I would look in your contract file documentation to see how you checked the market. I would check to see if you contacted the competitors to the original competition. If you did and it was for clarification that the market conditions are the same, I would see no problem. I am trying to determine if the original competition remains intact. From the losing offerors on the original procurement, you were told that market conditions remain the same. However, the option contractor tells you that the additional quantity will affect its costs and your price. You ask if they will be submitting a new offer to reflect the changed conditions. They say yes and they submit a new offer for the 97 units. In my view, the option is no longer an issue to deal with for the 97 units. You have a new procurement.

You have a choice--a new competitive procurement or a sole-source negotiation. You go sole sole-source and use exception 7. Somehow you get the signature you need and the J&A is completed correctly with the exact conditions noted. The J&A shows that this price change was unsolicited and occurred during your informal analysis of the market in anticipation of exercising the option. The original competitors to the competition were contacted and they said there were no changes. I read Magnavox Electronic Systems Company, B-231795, November 2, 1998. Your price analysis for the item is flawless. You award the 97 items to the option contractor and modify the contract for administrative convenience. The option is still intact and available for future use. What am I going to do with a properly signed J&A for an exception 7 under conditions that make sense? I walk away. However, I take note.

OK, the above remains the same but you cannot get the signature for an exception 7. None of the other exceptions fit quite right. You go with exception 1. In the J&A, you make a good argument why its use makes sense. It is a stretch but a good story. The required synopsis was published and there was no response. You now modify the contract for the 97 items for administrative convenience and the option is still available for the future. Now I look at your exception 1 and I realize it does not fit perfectly. Your J&A states that you contacted the original competitors and their situation has not changed. I read Magnavox Electronic Systems Company, B-231795, November 2, 1998. Your price anlaysis is flawless. What have you left me? An opportunity to nit-pic your use of Exception 1. I talk with you for a few moments to make sure that I understand exactly what happened. I tell you my concerns with exception 1 but I consider your actions to be reasonable and I walk away.

However, I review more contracts to see if this situation occurrs repeatedly. If it does, I look for problems with your activity's use of options or something else that is related to the conditions.

On the other hand, if you start negotiating with the option contractor before you go through the exercise route I may reach a different conclusion.

I think this covers all the issues.

By Vern Edwards on Monday, May 8, 2000 - 04:40 pm:

Linda:

I understand now.

A couple of thoughts:

First, a voluntary price reduction raises the issue of consideration to make the reduction contractually binding. What would you give the contractor to seal the bargain? You cannot give him an additional quantity, since an increase in quantity under a supply contract is generally considered a change in scope.

Second, I don't know what I would do in your most recent scenario, but I know what I would do the next time I negotiated such a contract. I would negotiate step reductions in unit prices for options exercised before a specified date or number of days after contract award.

By Eric Ottinger on Monday, May 8, 2000 - 03:51 pm:

Linda,

Actually, I like Vern's idea better. If you only gave up one priced option, it might be the way to go. However, if you gave up three or four priced options, it wouldn't be such a good idea.

Re the J&A, if you have a requirement with a short fuse, the other offerors may not be able to deliver as quickly as you need the units, or come anywhere near the price with a short production run.

Re Varian, although my logic sounded good to me, it sounded a bit like the logic that GAO rejected in Varian.

For whatever it is worth, I think these were step ladder pricing competitions. The low cost bidder at one quantity might be the high cost bidder at a different quantity. I think the GAO was particularly irate because the agency was playing stupid when it had current prices in hand from a very recent competition.

Eric

By Linda Koone on Monday, May 8, 2000 - 03:29 pm:

Eric: What authority would you use on the J&A? Also, I'm not sure I follow your reference to Varian. As I recall, that involved an offer of a lower price from a company that was not the successful offeror.

Vern: We're still operating in the FFP, system stock replenishment mode in many cases. We include options in our contracts to reduce leadtimes in case other requirements emerge within the option period. But we can't predict with any degree of certainty whether another requirement will emerge. We've had more than a few options expire without ever being exercised.

In the scenario that I painted, the 97 units would represent the option quantity, not be in addition to it.

By Vern Edwards on Monday, May 8, 2000 - 02:57 pm:

Linda:

Perhaps the right thing to do would be to obtain new competition for the option quantity and the additional 97 units instead of exercising the option or adding the 97 units to the contract.

Increasing the quantity under the contract would be an increase in the scope of the contract that would require new competition. On what basis would you justify a sole source procurement for the 97 units?

Vern

By Eric Ottinger on Monday, May 8, 2000 - 02:47 pm:

Linda,

I'm thinking that I might distinguish the "new" quantity from the "option" quantity, assuming that the agency will still need the option quantity after 180 days. I would write a J&A for the new quantity and negotiate a lower price based on the extended production run.

However, I should note that this sounds a whole lot like Varian or Magnavox. The GAO might not be so flexible.

It was my observation when I worked for the Navy that if I didn't get the requirement negotiated very quickly, the quantities would change and I would have to redo all of the paperwork. Your scenario sounds very credible to me.

The Navy had a very firm policy against "unpriced" options, as does the FAR. I assume that you have ceiling prices for the options.

Good discussion.

Eric

By Linda Koone on Monday, May 8, 2000 - 02:23 pm:

Eric:

I understand what you're saying and presume that your comments apply to situations when you've evaluated the option prior to award. And I agree that we shouldn't shake hands with our fingers crossed behind our back.

Just curious, however. . .what would you say to this scenario--

Let's say I awarded a FFP contract for 100 widgets to the company who submitted the lowest priced technically acceptable offer. Delivery will be made in 270 days. The contract has an option that may be exercised up to 100% within 180 days. Thirty days after the award, I get a new requirement for 97 additional widgets. Price history indicates that pricing for this widget is quantity sensitive, and I'm pretty confident that doubling the quantity would have a substantial effect on price. If I compete the new requirement, I'll miss the opportunity to tie the two production quantities together. Nobody else is in production, so competitive pricing will probably come in around the current option price.

Would your advice be to bite the bullet and award at the option price-- or would you inquire as to whether doubling the quantity so close to the award date would result in a better option price?

Joel:

I sole source negotiated procurements, we rarely negotiate the option price at the time of award-it's often hard enough to reach agreement on a definite requirement. The uncertainties (when or if another requirement will arise and for what quantity)surrounding the option create too much work. It's easier to negotiate the option when the requirement arises. The J&A already covers the option quantity for purposes of negotiation authority.

By Joel Hoffman on Friday, May 5, 2000 - 04:19 pm:

The scenario, originally presented, was a Contractor initiating a purely voluntary price reduction. The question was, "Can the Government accept a voluntary price reduction for an option offered by the Contractor?"

In my opinion, it depends upon the circumstances. Assuming that the reason for the revised offer is that the Government won't otherwise exercise its unilateral right to accept or reject the option, one must look at the Government's reasoning.

This also assumes that the option was initially evaluated in the overall selection process for award of the contract. I honestly never dealt with any other evaluation scheme because I think its better to include the option prices in the overall price evaluation. There may be circumstances where that is appropriate.

This also assumes that the option acceptance period is still open.

In the situation where the Government doesn't have enough funds to award at the original price, the KO needs to evaluate whether the Government would be better served by a new, separate solicitation. Factors to consider are such things as the type of procurement (supply, services, construction, simple or complex, simplified or complex acquisition methods) trade- offs between cost to recompete, time available to meet the Government's reasonable needs, probable market price obtained by re-competing and the Contractor's PURELY VOLUNTARY (i.e., not suggested or requested) price reduction. I ought to be be fairly consistent with my original pricing basis for award (e.g., was lowest price the primary consideration or where there other trade-offs).

If such a careful analysis - under the appropriate circumstances - concludes that it is in the Government's best interests, I'd probably accept the offer. Nothing in FAR prohibits it; the language in FAR 52.215-1 states that the Government can accept a better offer from the otherwise successful offeror, implying that it is good public policy; I believe I would have satisfied the GAO in its admonition concerning looking out for the Government's overall best interest.

Now, if the reason for not exercising the option is that I originally considered the option price to be unreasonable, I'd have to take much more into consideration. Depends on the original basis of award - Trade-off or lowest overall price, price vs. quality considerations, whether or not the sucessful contractor's price for the option was the lowest, what the current market price is, etc. Get's a bit more complicated.

More complicated yet if the original price was reasonable but in the ensuing period (option price is still valid) the market is significantly dropping, etc.......
Happy Sails! Joel

By Kennedy How on Friday, May 5, 2000 - 10:19 am:

Linda,

I kinda added to the voluntary reduction issue as well, so it's not all your fault!

Your comment regarding an audit finding is a good one, and I don't doubt that something like that happened to somebody at least once over the years. We usually get either activity audit, or AAA. Sometimes, it's Materiel Command that gets it started, but just for it's MSCs. It's kind of interesting, because if it's determined that the informal inquiry is considered to be "renegotiation", then an audit finding telling us to do that may be contrary to FAR/FAR Supplement. This kind of situation would beg for a Bob Antonio point of view.

As far as "negotiations" are concerned, I would say that the simple inquiry wouldn't fall into that category; I would say it's a part of the informal analysis. This is a personal view, because we aren't formally declaring we're doing something. The option exercise is Unilateral, we're either going to do it, or we're not going to do it. Plus, I think there is enough guidance out there which sets out just what is considered "negotiation" (no specifics, just a feeling based on experience). I think because it has to do with price, the contracting community tends to be conservative in their thinking, because for so long, price was the driving factor, and we went through (and still do, I guess), a lot of grief when doing something that has to do with price.

At any rate, as long as we ask, but accept the reply of the contractor at face value (without further discussions), I don't think it's negotiating.

If somebody said that if you're going to do this, then we should recompete, I can make a solid case that this is a total waste of time and money, and helps nobody anywhere, and you're not going to get the result you think you're going to get.

Kennedy

By Eric Ottinger on Thursday, May 4, 2000 - 05:48 pm:

Linda,

I guess I would say that there is a very fundamental principle involved. Both sides negotiate as hard as they can for the best deal they can get. At some point there is a handshake. After the handshake there should be no more negotiation. The contractor may lose money or the contractor may make a bit of a windfall profit. This doesn’t mean the deal was unfair. It just means that neither party has 20/20 foresight.

We can’t do business efficiently if we are constantly going back reopening our negotiations looking for a better price. If market conditions have changed so much that it makes more sense to do another competition, we should do so. Otherwise, we should exercise the option in accordance with its terms.

The exception would be certain markets where the technology or other conditions change radically or rapidly. In these instances we need some flexibility. But these mechanisms are intended to adapt the original handshake deal to rapidly changing conditions.

Now, hypothetically, there may be cases where the contractor finds that he is making so much profit that it would really be prudent to give some of it back. Maybe the contractor values the customer’s long term goodwill more than he values the short term profits. Maybe he wants to avoid bad publicity. Of course he wants to give the excess profits back without reopening competition.

That’s an interesting question.

Eric

By Linda Koone on Wednesday, May 3, 2000 - 01:30 pm:

This is an attempt to move the discussion on 'voluntary' contractor option pricing reductions to a new thread (if there's any more to be said). Vern's concern was valid. His original question is getting lost with the discussion that I created with my question "Can you accept a voluntary contractor option price reduction?" My apologies, again.

I agree with Eric on his revised sentence:

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

I would prdict that 'Voluntary' reductions are not as typical as the scenario described by Kennedy, in which the CO contacts the contractor prior to exercising the option to see if a better price is available for the option quantity. Like Kennedy, we primarily award FFP supply contracts; however, most of ours are sole source/limited competitive. I think the practice is similar here in that the CO often 'inquires' about the option price before exercising it (i.e., informal analysis). And I tend to believe that this practice may have started as a result of an audit or some other report that claimed we should be getting better pricing on follow-on option quantities due to efficiencies in production and possible reduced material costs/unit. Does anybody remember a report of this nature?

I also agree with Joel's point that you are permitted to accept a more favorable modification to an otherwise successful offer prior to award, so, why not after award?

In my mind, a CO would be hard pressed to find a reason not to accept a purely voluntary option price reduction, whether the contract was awarded under competitive or non-competitive conditions. I suppose the difficulty is in defining the term negotiation. Is a simple inquiry considered a negotiation?