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Tuesday, June 9, 2015

Exercising Option Years under USAID Contracts

This blog post is about the rights of both, the contractor and USAID, in dealing with the Government’s right to exercise options under any particular contract.  

What is an option?

Per FAR 2.101, an option is a “unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract.”

Just because USAID requests, evaluates and includes an option in a contract, it does not mean USAID is required to exercise such option (s). All it means is that USAID can at its sole discretion purchase additional quantities of supplies or services or to extend the contract performance period.

Options offer USAID flexibility to require continued contract performance when a contractor is performing well and the services/good continue to be needed.  Although the decision to exercise is a unilateral decision, before being able to exercise an option, USAID’s CO is required to determine that the exercise of the option is “the most advantageous method of fulfilling the [USAID]’s need, price and other factors…considered.”

For example, if USAID believes it can obtain better pricing or other terms more favorable than those applicable under the option, it can elect not to exercise the option and instead conduct a new procurement. On the other hand, it can elect not to procure the items or services at all.

There are also very important restrictions that affect the contractors under this USAID’s right to exercise its option to continue with the contract.  As discussed further below, an option must be exercised strictly in accordance with its terms, as evaluated during the proposal and award stage, and,  as included in the contract, including price, terms etc. 

Any change to the terms or conditions of the option upon exercise by USAID renders the attempted exercise a counteroffer that may then be accepted or rejected by the contractor.

We will deal with services contracts as part of this blog post.



There are two standard clauses for services contracts which allow the Government: FAR 52.217-8, Option to Extend Services (NOV 1999) and FAR 52.217-9, Option to Extend the Term of the Contract. I

In addition, there is FAR 52.237-3, Continuity of Services (JAN 1991), which requires a contractor to provide phase-in training and best efforts to “effect an orderly and efficient transition to a successor. We will not be discussing this particular clause as it is rare and specific to the types of essential services, like security etc.

FAR Subpart 17.2 describes two standard service contract options: (1) the so-called -8 option, named after its standard clause, FAR 52.217-8, which provides for short term extensions of up to six months, originally intended for use when award of a new contract is delayed, and (2) the so-called -9 option, named after its clause, FAR 52.217-9, which is the common additional option periods clause, often known to USAID contractors as “Option Years”. Thus, if a contract is awarded with one base year and four one-year options, the CO would need to exercise each of the four one-year option periods by following the requirements in FAR 52.217-9.


Notice of Intent to Exercise Options

FAR 52.217-8 and 52.217-9 include blanks for the CO to fill in with the required notice period to exercise the option, and, in the case of FAR 52.217-9, the time by which the CO must give preliminary notice to the contractor of its intent to exercise the option.

Which Option to Choose?


When more than one FAR clause applies to the exercise of an option, the CO can choose which clause to use. The clause chosen by the CO can have differing effects on contract pricing.

If the CO extends a contract under FAR 52.217-8, “Option To Extend Services”, the same terms of the contract as awarded for the “base period” or the “option period” (whichever is being extended) govern performance and payment during the up to 6 month extension.  The approved budget, if any, is tracked as a total for the base plus 1-6 month extension or an option period plus 1-6 month extension, depending when this clause is exercised. .   Example:  The contract is for one year plus 4 year options.  The 8 clause is exercised for 6 months after the first year, so the total budget/ceiling of the base is now 18 months (12+6).  If the 8 clause is exercised for 6 months after USAID has already exercised one of the option years, the total budget/ceiling of the option year is now 18 months (12+6).

The extension under this clause does not have to be exercised for the total of 6 months, but cannot be exercised in less than one month increments up to 6 months.  Under this option, the contractor may be required to perform up to six additional months at the current rates under which it is performing at the time the contract expires.

When a CO exercises an option under FAR 52.217-9, “Option To Extend the Term of the Contract,” the contract’s schedule determines contract pricing, i.e., the Option Year as evaluated and included in the contract must be exercised at the same price and under the same terms as evaluated and included in the contract.

When a CO extends services during a transition period under FAR 52.237-3, “Continuity of Services,” the contractor is entitled to be compensated its actual costs plus a reasonable profit.

As long as the option is properly exercised, the CO generally may decide which clause to use.

If both 52.217-8 and 52.217-9 clauses are included, they both can be used.  This means that if the contract is for 12 months base with 4 12-month option periods and includes both the 8 and the 9 clauses, the CO can extend the contract for the total of 4 years and six months.


Option Must be Exercised in Strict Compliance

When it comes to exercising a contract option under FAR 52.217-9 (i.e., accepting the option offer), it is well established in Government contracting case law that an option must be exercised “in exact accord” with the terms of the contract, in accordance with FAR 17.207.  “The acceptance of an option, to be effectual, must be unqualified, absolute, unconditional, unequivocal, unambiguous, positive, without reservation, and according to the terms or conditions of the option.…An acceptance of an option must be such a compliance with the conditions as to bind both parties, and if it fails to do so it binds neither” (Eighth Circuit)

Danger for Contractors: If a contracting officer fails to comply with FAR 17.207 in exercising the option under exact terms and conditions as evaluated and included in the contract, the Government can declare the exercise of the option to be invalid on the ground that the CO exceeded his or her authority. Thus, if the CO exercises an unpriced and unevaluated option without complying with FAR Part 6 (see FAR 17.207(f)), the Government could retract the exercise of option without breaching the contract.

But if the exercise was in accordance with the exact terms of the contract (i.e. in strict compliance with the option as stated in the contract and evaluated during proposal), failure by the CO to otherwise comply with FAR 17.207 (i.e. make written determinations etc.) will not be grounds for the contractor to successfully argue that the exercise of the option was invalid.

Any attempt to alter the terms or conditions of the option, including pricing, rates, fees etc., renders the attempted exercise ineffective. The altered terms render the attempted option exercise a counteroffer that must then be accepted by the contractor before becoming effective. The contractor can agree to or reject the counteroffer. However, if the contract agrees to accept the counteroffer, the CO will have conducted a sole source negotiation, which must be justified by the CO and approved in accordance with FAR Part 6.

If a contractor believes that an option has been improperly exercised, it must notify USAID of the improprieties in the attempted exercise and can continue to perform the contract “under protest”. Performance under protest brings performance under the contract’s “Disputes” clause, which requires continued performance through resolution of a dispute. If the contractor prevails on its challenge to the invalid option exercise, the contractor will be entitled to an equitable adjustment for a constructive change under the “Changes” clause in the contract. This will allow the contractor to receive compensation for all actual costs incurred in performing the invalid option plus a reasonable profit.

However, the contractor must notify the Government when it believes the option was improperly exercised and it is performing under protest. If the contractor continues performance in silence after an ineffective option, it may be deemed to waive its request for a price adjustment under the Changes clause.

For example, if the Option was evaluated at $10MIL with a fixed fee of $2MIL for 12 months and listed in the contract as such, any attempt by the CO to exercise the option for less than the stipulated 12 months or at lower price or fee would violate the common law of contracts and constitute a cardinal change - a breach of contract - which would entitle the contractor to refuse to perform or which would be handled as a constructive change entitling the contractor to an equitable adjustment.   The contractor may then respond to the USAID’s counter-offer of less than 12 months with the new proposal and the parties can negotiate new option terms. However, as mentioned above, the CO would have then conducted a sole source procurement which will need to be justified in accordance with FAR Part 6.



If USAID decides after the base period, that the option included in the contract may not be needed in its entirety, instead of negotiating and justifying under the FAR Part 6 rule, the easier solution may be to exercise the 12-month option and then terminate the contract for convenience, if the requiring activity later decides that it does not need 12 months of services.

5 comments:

  1. What would happen if USAID notifies a contractor that it intends to exercise its option and the contractor -- sick of years of abuse -- wants to politely decline?

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    Replies
    1. By agreeing to option years in your contract, you agree to perform under those terms. There are other remedies available for "years of abuse" :-) How are you, John?

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    2. I'm deep into recovery from the abuse! Glad to see you're looking into some of those remedies. Rooting for you!

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  2. This comment has been removed by a blog administrator.

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  3. Hello,
    Thank you for sharing such an amazing and informative post .Really enjoyed reading it. :)

    Thanks

    Apu

    Cost Management Services

    ReplyDelete