Options in Federal Government Contracts

The majority of contractors awarded a contract by the Federal Government will “book” the entire life cycle value of the contract immediately in their accounting system, or at least include the entire life cycle revenue in their revenue (sales) forecasts. In either case, the contractor expects the Government to exercise all the options, if any, in the contract for additional quantities of supplies or services or extend the period of performance. This expectation is not entirely unreasonable, but it assumes that the contractor will properly and successfully perform the work to the satisfaction of the customer and that some extrinsic circumstance will not arise that will cause the Government to terminate the contract for its convenience.

Most contractors never give a second thought to whether an option will be exercised, and they probably give no thought at all to the rules regarding the proper exercise of an option. You should be aware of several very strict and rigid rules regarding the use and exercise of options in Government contracts.

In its decision, the General Services Board of Contract Appeals (GSBCA) explored the subject of options in response to a Motion for Summary Relief, No. 16321-COM, dated May 16, 2005, in the case of Integral Systems, Inc. v. Department of Commerce.

The Department of Commerce (DoC) awarded a contract to Integral Systems, Inc. (ISI) on March 19, 1998. The contract included Contract Line Item Number (CLIN) 29 and 30. CLIN 29 was for one option year and CLIN 30 was for a second option year. The other line items were effective during the initial contract term.

The contract also included the contract clause from the Federal Acquisition Regulations (FAR) entitled “Option to Extend the Term of the Contract.”¹ Contractors frequently ignore this contract clause because they assume an option will be automatically implemented. The clause requires the Government to give preliminary written notice of its intent to extend the contract at least 60 days before the contract expires. Here the DoC...

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