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Options and Price Options
The Government, and many commercial firms, will include option clauses in contracts for several reasons. Often options are used to procure additional goods and services, or to extend the period of performance of a contract. If the Government deems options desirable, the Solicitation must contain an option provision that permits an Offeror (here the Optionor) to offer an option to the Government (here the Optionee). If a contract includes an option(s), there must be limits on the additional supplies or services to be acquired or the overall duration of the term of the contract. The Optionor has the right to establish the terms and conditions of the option including,interalia quantities, discounts, timing, quality, prices, and other terms. The period within which an option may be exercised must be stated in the contract and provide adequate lead time to ensure continuous production.
The Government has the unilateral right to exercise an option strictly in accordance with its terms, but is under no obligationto exercise any or all options. The time period for exercising an option may be triggered by an event or by a specific date. The acceptance of an option must be unconditional and in strict accord with the exact terms of the contract being renewed.
Written notification of the decision to exercise an option must be given to the contractor within the time period specified in the contract. Absent a specific time to give notice, the Government has discretion when it has to provide notice. Although the Government has the unilateral right to exercise an option, it does not have the unilateral right to alter or change the terms of an option.
The Subject of options was discussed by the United States Court of Federal Claims (“COFC” or the “Court”) in the opinion of Magnum Opus Technologies, Inc. (“MAGNUM”) v. United States, Nos. 10-106C, 10-127C, published May 28, 2010. The Air Force issued an RFP for health care personnel at its facilities, approximately 58 different locations within the United States. The Air Force ultimately awarded five (5) Indefinite Delivery/Indefinite Quantity (“ID/IQ”) contracts in 2006. After filing two protests, Magnum was awarded an ID/IQ contract with a value between a range of $500,000 minimum value and a maximum of $1,962 Billion over a Base Period and two (2) option periods. The contract had a clause that included not-to-exceed (“NTE”) price caps for the labor categories. The contractors were supposed to bid no more than the NTE caps for task orders but the caps were frequently exceeded.
The Air Force decided to exercise the first option for four (4) of the contractors, but the other two, including Magnum, were told their contracts would be allowed to expire. TheContracting Officer exercised the options before the expiration of the contract. (1)
When the protest by Magnum at the GAO was rejected as a contract administration issue, Magnum filed an action at the Court stating that the Air Force improperly exercised an option that was not priced since the NTE pricing had been eliminated. Magnum objected to the award of the options to the other four contractors alleging that “because the NTE pricing was deleted from the ID/IQ contracts the government could not lawfully exercise the options because their pricing was not reasonably determinable from the contracts as required by FAR.(2)
The FAR requires that “an option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract.(3)” Moreover, a priced option is an exception to the requirement for full and open competition if the option “was evaluated as part of the original competition.(4)” Magnum alleges the exercise of the options was a violation of procurement laws and regulations, i.e. the AF procured services illegally by exercising the options because they did not undergo the required competition thereby depriving Magnum the opportunity to compete for the work.
The Court opined that “while there is flexibility in price evaluation for ID/IQ contracts, there must be some binding price that can be evaluated for purposes of a meaningful comparison of the offeror’s proposals.”
Furthermore, the Court explained that FAR 17.207(f) clarifies “that a proper option must include a price term that is ‘specified in or reasonably determinable from the terms of the basic contract.’” The purpose of the provision is to ensure price competition; therefore, the regulation can be the basis of a CDA claim.
The Court opined that “when an option is included in an ID/IQ contract, the government must comply with applicable laws and regulations in exercising that option.” “The regulations specify that to satisfy the requirements of FAR Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount in or reasonably determinable from the terms of the basic contract.” “The Air Force may not substitute competition at the task order level for compliance with the applicable laws and regulations.”
Although Magnum prevailed, the Court gave the Air Force two years to award a new contract.
The moral of the story is that contractors must ensure they (1) know the terms of options they offer and (2) are vigilant to strictly enforce those terms. Options have rigid rules associated with them and the parties must comply with those rules. The option period or product or service must include prices, so any post-award modifications cannot delete the prices in options if they are to remain legal. Be sure you are vigilant monitoring the actions of the Government so that options remain enforceable.
Tom Petruska
Contracts Unlimited, Inc.
The foregoing is not a legal opinion or legal advice. Consult your attorney for legal assistance.
Footnotes:
1. FAR 17.207
2. FAR 17.207f
3. id
4. FAR6.001 (c)
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