Here is a Q&A from DOD's Ask A Professor:

"What is Award Amount on SF1442 when have unawarded options?

Posted to Pre-Award Procurement and Contracting on 9/26/2002 by A. Ross

The Scenario

We have a construction IFB with a base bid item and an option. We are not exercising the option. We will be awarding on the SF1442. The FAR does not provide any instructions on how the Award part of the form is to be completed. One theory is that the SF 1442 should include the unexercised option price in the award amount with a notation in an attachment sheet that its funding is not obligated. Another view is that only the amount of the base bid which is actually being awarded should be the amount.

The Question

In completing the SF 1442, should Block 22, Amount, include the base bid and the option which is not being exercised or only the base bid price.

The Answer

The answer to your question lies within the SF 1442. Note that Block 21 requires the entry for the Items Accepted, which according to your background information is for the base bid only. For future reference you may want to review FAR 36.213-4 and DFARS 236.213-70,which address awards as well as additive and deductive items."

Do any Wifconers have any thoughts on the professor's answer to the question? Are options and additive bid items one and the same? Is an option "accepted" even when it has not been exercised? What answer would you have given the questioner? What is the proper award amount?

By Linda Koone on Tuesday, October 15, 2002 - 10:29 am:

Vern:

I've never used an SF 1442 or awarded a construction contract, so that certainly limits my understanding of the issue. I would have to say that the "Professor" appears to be confusing issues here. From a quick reading of additive and deductive items, these do not appear to be the same as options so I don't know why the answer even mentions them. The question is asking strictly about options. Perhaps the questioner and the Professor had some exchanges outside of the posted question and answer that would explain why the answer addresses this issue.
Who knows?

I believe the answer to the direct question as to the amount that should be entered into Block 22 is correct. You certainly wouldn't include the amount for the unexercised option. But I do think you should include the option CLIN in Block 21 when you list the items accepted.

By formerfed on Tuesday, October 15, 2002 - 10:40 am:

I agree with Linda. The Professor seems to confuse the two issues.

As a side point, many automated systems pick up the award obligation amount from blocks on the actual award. I know the basic system behind SPS for example, would post an obligation of funds for more than intended if the option was included in block 22.

By anonymous1 on Tuesday, October 15, 2002 - 06:38 pm:

I believe that the Professor was partly correct. The Block 21 would not address an option, not accepted at contract award. An option is not "accepted" until the Government properly exercises a valid option to accept it (I assume that the contract in question provides for some continuing period to accept the option).

The Professor included a reference to additive and deductive bid items, which are distinct from "options". I didn't read any information germaine to the question concerning options or whether or not to describe an unawarded option in the SF 1442 in the DFARS 236.213-70 reference.

I also didn't understand the applicability of the reference to FAR 36.213-4, "Notice of Award", to the question.

Sorry, but I need to remain anonymous, here.

By Vern Edwards on Tuesday, October 15, 2002 - 07:28 pm:

anonymous1:

You say the option is not "accepted" until the government exercises it. Thus, for you, accepting is the same as exercising. But the bid includes the offer of an option. If you don't include the option item in block 21, doesn't that mean that you haven't accepted the offer of the option? And how can you exercise the option if you have not accepted the offer of the option?

By anonymous 2 on Tuesday, October 15, 2002 - 08:32 pm:

In my organization, the mechanism for the Government to unilaterally "exercise its option" to award the option within the acceptance period is a term of the contract. Our construction contracts clearly describe this unilateral right in the description of the option in the CLIN schedule. Why would one need to separately acknowledge that right on the SF 1442, in such a case?

Perhaps other organizations don't make this a contract term?

By anonymous1 on Tuesday, October 15, 2002 - 08:37 pm:

Vern, the SF 1442 should clearly state which of the RFP documents are part of the contract. OOPS, the above message is from me (Anonymous1) Did I answer all your questions?

By Vern Edwards on Wednesday, October 16, 2002 - 09:40 am:

anonymous1:

I'm confused. Are you also anonymous 2?

You did not answer my questions. Suppose that the solicitation included two bid/contract items: Item No. 1, the base bid item, and Item No. 2, the option. Question 1: If you don't enter Item No. 2 in SF1442, block 21, Items Accepted, then how can you say that you accepted the bidder's offer with regard to the option? Question 2: If you have not accepted the offer with regard to the option, then how can you exercise the option later?

Here's another question: Suppose that the base bid item price is $100 and the option price is $50 and that you have accepted the option, but do not intend to exercise it at the time of award. What amount should you enter in SF1442, block 22?

By Anonymous on Wednesday, October 16, 2002 - 04:33 pm:

I always looked at options as a mechanism for extending the validity of an offer. The option (offer) is not accepted until it is exercised. Before exercising an option, doesn't a PCO have to prepare a sole source justification? If the option was accepted at the time the initial contract was let, why would this be necessary?

By Vern Edwards on Wednesday, October 16, 2002 - 06:49 pm:

If an option is merely an offer, then it could be withdrawn at any time prior to acceptance. But we know that's not the case. An option is binding on the option giver. So, an option must be some kind of contract. Right?

By anonymous1 on Wednesday, October 16, 2002 - 08:23 pm:

Vern, Yes, it is a term of the contract, as I stated.

Anonymous, there are different types of options. In a construction contract, an option is usually for additional work. Generally, the contract states that the Government may exercise the option within X days of contract award or within X days of NTP. That type option does not require any additional justification.

Service contracts often use options to extend the period of services. That's a different animal.

By Vern Edwards on Wednesday, October 16, 2002 - 08:57 pm:

Anonymous and anonymous1:

A contracting officer does not have to prepare a sole source justification in order to exercise an option if: (1) the option is priced and (2) the price was evaluated during the competition that led to the award of the contract. See FAR § 17.207, especially paragraph (f). Options in supply, construction and services contracts are no different in that regard.

By anonymous1 on Wednesday, October 16, 2002 - 09:56 pm:

Vern, I agree with your statement(but remember that FAR 17.207 restrictions are not applicable to construction contracts).

By anonconorig on Wednesday, October 16, 2002 - 10:21 pm:

Vern: in answer to your question "an option must be some sort of a contract, right?" I don't think so. I think it's part of an element of forming a contract, but to my way of thinking-an option is no more than a lingering offer, the acceptance might not occur. There are several elements that might preclude the Feds from exercising an acceptance, i.e., unavailable funds, late in giving a preliminary notice, changing market conditions (material). I have seen contracts whereby there has been separate CLINS within the base that are additive. Different animal, I think, than an option. By the Feds not exercising an option they are not in breach. Not following through on CLINS within the base, might, I think. For those reasons, I think the form should only reflect the base-not the options.

By joel hoffman on Thursday, October 17, 2002 - 05:55 am:

Vern, I believe that there is no need to separately describe an optional bid item (not exercised at contract award) in the construction contract SF 1442, anymore than something like a contingency bid item for say, rock excavation.

Here, I'm comparing an option CLIN in a construction contract to a unit-priced CLIN for rock excavation. As a line item in the bid schedule, the parties have agreed to a unit price for rock excavation, should rock be encountered during excavation. The price is pre-agreed, but is only applicable in the event that rock is encountered. Municipal, state, private and federal underground utility construction contracts typically contain such bid items. Building construction contracts in areas where rock may be encountered often contain similar provisions.

Similarly, with an option, the bidder/offeror proposes a price for an optional CLIN. Upon contract formation, the parties agree, within the terms of the contract, that the price is applicable if the owner properly exercises the option. The Government has contracted for the right to exercise the option.

I think it is simple. happy sails! joel hoffman

By Vern Edwards on Thursday, October 17, 2002 - 10:10 am:

anonconorig:

If the government awards a contract that includes an option, and the contractor repudiates the option before the government exercises it, is the contractor's repudiation a breach of contract? If so, then an option is contractual in nature and not just an offer. If not, then an option has no contractual value prior to its exercise. Do you think I'm wrong about that? Can a contractor send a CO a letter withdrawing an option prior to its exercise?

Joel:

SF1442 does not come with any instructions, so I frankly don't know what you're supposed to put in block 21 at the time of award. I'm trying to arrive at an answer through reasoning.

Block 21 is entitled, "Items Accepted." I assume that means, "Items of the Offeror's Offer That Are Accepted." Do you think it means something different? If so, what?

Now, if the solicitation has two line items, one for the base bid and one for the option, and if the CO doesn't accept the offer of the option, then how can the CO claim the right to exercise the option? Don't refer to an option clause, because an option clause pertains only to an option item that has been accepted.

Some of the people responding to my questions think that an option is merely an offer that is accepted at the time the option is exercised. Thus, they think there is no need to enter the option item number in block 21, because the option is not accepted until it is exercised. But it is clear that a contractor is contractually bound to an option and cannot repudiate it before it is exercised. (I could cite all kinds of case law about this, but at this point I'd rather just work the question through reasoning.) Thus, an option must have originated with an offer of its terms that are binding because they were accepted by a CO. Do you think I'm wrong about this?

It seems to me that SF 1442 block 2b2 should include only the price of the base bid item, since I think the purpose of block 22 is to record the funds obligated by the award and no funds are obligated for the option until the option is exercised. However, maybe the purpose of block 22 is just to express the overall "dollar value" of the contract, as that term is used in FAR § 1.108(c). If so, then I guess it should include both the base bid item price and the option price. As I said, SF1442 does not come with any instructions. What do you think?

By Anonymous Researcher on Thursday, October 17, 2002 - 10:45 am:

Uniq Computer Corp. for Benefit of U.S. Leasing Corp. v. United States, 20 Cl.Ct. 222 (1990):

"[A] noted text writer explains that an option contract is an agreement to keep an offer open for a prescribed period of time during which that offer is irrevocable. 1 S. Williston, A Treatise on the Law of Contracts § 61A (3d ed. 1957). An option is 'a unilateral contract whereby the optionor for valuable consideration grants the optionee a right to make a contract of purchase but does not bind the optionee to do so; the optionor is bound during the life of the option, but the optionee is not.' Id. The power conferred on the option holder is called the power of acceptance, who therefore has the legal authority to consummate the contemplated transaction by merely exercising that contractual right. The option giver, on the other hand, is bound to execute the exchange for the duration of the agreement. 1A A. Corbin, Corbin on Contracts, A Comprehensive Treatise on the Working Rules of Contract Law § 259 (1963)."

Kelley v. United States, 19 Cl.Ct. 155 (1989):

"An 'option to purchase,' is a contract by which the owner of property agrees with another person that the latter shall have the right, power, or privilege to buy the former's property at a fixed price within a certain or specified time, or within a reasonable time in the future, and on agreed terms and conditions. 91 C.J.S. Vendor and Purchaser § 2 (1955). See generally Aerojet General Corp. v. Kirk, 318 F.Supp. 55 (N.D.Fla.1970), aff'd, 453 F.2d 819 (5th Cir.1971), cert. denied, 409 U.S. 892, 93 S.Ct. 110, 34 L.Ed.2d 149 (1972). Since an option is a contract, it must contain all the incidents and essentials of a contract. To be legally enforceable, it must be clear, certain, specific, and unambiguous, its terms must be clear and definite and free from all ambiguity; in order that a valid option exist, it is necessary that all material terms of the agreement be definitely settled and not left indefinite subject to future agreement."

By anonconorig on Thursday, October 17, 2002 - 11:15 am:

Vern:

In answer to your last sentence response to me,in what I term a "standard" base with options,the answer ,I believe is no. However, contracting being so diverse, which I sometimes like, there can be circumstances whereby the contractor can repudiate. Not receiving preliminary notice in accordance with stated period of time is one. Another might be an issue of impracticability to perform. For instance, we recently negotiated with a Federal agency a base and option year contract with a clause whereby we could notify the agency, within a certain period of time, that we would not be able to perform an option if the instrument that we used to perform the work was sold, destroyed, or became economically impracticable by our definition. Might be unusual, granted, but was done.

The ability to unilaterally act is unique in public contracting, I think, as opposed to commercial contracting (barring a clause that allows the buyer to unilaterally act)That's what makes this interesting. I still believe that the option is not accepted until if and when it is accepted. Another thought, could we tie the value in the block to the Anti-Deficiency Act?

By Vern Edwards on Thursday, October 17, 2002 - 11:33 am:

anonconorig:

A couple of thoughts in response to your last comments:

1. If the government fails to provide a required notice of intent to exercise, or notice of exercise, the contractor is released from its contractual obligation to perform in accordance with the terms of the option. In such a case, I would not call the contractor's refusal to perform the option "repudiation," since the contractor is no longer obligated to perform.

2. There are legal excuses for nonperformance of a contract and such excuses apply to options in the same way that they do to other contracts.

3. I don't agree that the ability to act unilaterally is unique to public contracting. Many commercial contracts include changes clauses, cancellation (termination) clauses, and options.

4. The courts appear to take the position that an option is a contractual obligation to keep an offer available for some specified period of time and under specified conditions. The offer of the option must be accepted by the CO in order for the option to be binding on the contractor; later exercise of the option is acceptance of the offer which the option has kept open.

This brings us back to SF1442, block 21. I believe that a CO must enter the option item number to show that he or she has accepted the offer of the option. However, the CO must issue the required contract modification in order to accept the offer proferred in the option. Make sense?

By Anonymous on Thursday, October 17, 2002 - 11:39 am:

If you knew you were not going to exercise the option you should have amended the solicitation. It would have guarenteed that you do not make award to the wrong bidder.

By Vern Edwards on Thursday, October 17, 2002 - 12:07 pm:

Anonymous of 11:39am:

Who are you talking to and what are you talking about?

By anonconorig on Thursday, October 17, 2002 - 12:50 pm:

Vern:

Repudiation was the wrong word in these circumstances, mea culpa. Actually the Government loses the right to unilaterally exercise the option unless the contractor waives.

Number 2, yep that's a way out of the option but is applicable to other contracts.

Number 3, I meant the act to exercise the option unilaterally is "particularly unique" to the public arena. In most commercial contracts, I would certainly suggest to our company, depending on the circumstances, not to accept a unilateral exercise, if ever detrimental to the company's position in future years. Except for the opt outs mentioned above, your action under the Federal Regs are limited.

Number 4, No argument there which is where I think I was headed.

I still think that the base is the only amount that should be placed in the block barring any instructions. I will say, Vern, however, this is based on many of my contracts involving the SF 33 form. Consistently, we have seen the base amount placed in block 20 but with the accompanying Schedule listing the priced options. Then, of course, elsewhere in the contract are the provisions on how the options are exercised.

By joel hoffman on Thursday, October 17, 2002 - 05:35 pm:

Vern, I'd accept the proposal (or bid), dated XXXX in block 21. That includes the bid or CLIN schedule, including the option. I'd identify the work which has been awarded in the block where it says something to the effect that "the contractor shall provide or perform the following..." I'm out of town on a slow connection, without the form in front of me. I'd state the awarded contract amount in the block 22.

anonconorig, I've often seen options to purchase real estate in both private and public contracts. For some type consideration, usually a payment, the owner agrees to allow the prospective buyer an option for a stated period to purchase the real estate. That is common. happy sails! joel

By anonconorig on Thursday, October 17, 2002 - 06:53 pm:

Joel, I know that, in fact I once purchased a house under that lease option. One I didn't but I had to give up the $5000.00 deposit. I didn't breach however. The option under the Federal scenario if you don't follow through (on the contractors side) can be far reaching and severe, usually.

By JRL on Friday, October 18, 2002 - 08:03 am:

Both 15.504 and 14.408-1 state "When an award is made to an offer for less than all of the items that may be awarded and additional items are being withheld for subsequent award, each notice shall state that the Government may make subsequent awards on those additional items within the proposal acceptance period.

In a construction contract that includes an option you should clearly identify the acceptance period for each option. Then in block 21 you should make a statement similar to "Item 1 is hereby accepted. The government reserves the right to award any option within the specified acceptance period. Then in block 22 you insert the amount for the item(s) that were accepted.

By Vern Edwards on Friday, October 18, 2002 - 09:05 am:

It sounds like JLR has hit on an answer, which is similar to Joel's.

By joelhoffman on Friday, October 18, 2002 - 02:06 pm: