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When a contractor offers a fixed price for a contract, there is an express (or implied) assumption that a defined quantity of a product with a defined delivery date is included in the price. Implicit within a fixed price contract is the control over production and delivery of the product or service by the contractor. The Government has the justified expectation that it will receive a specified product or service at the required date in the specified quantity while the contractor controls production. Consequently, in the resulting contract, the Government has justified expectations of exactly what it will obtain or receive from the contractor. In other words, the offer by the contractor must be reasonably certain. If one or more terms of an offer–the contractor's proposal–are left open or are ambiguous, it is an indication that the offeror does not intend to be bound by their offer.
Generally, a fixed price contract resulting from a proposal should have an exact meaning and all performances to be rendered should be well–defined.
An essential term of a contract is the price to be paid for the products or services. If the parties are unable to manifest their intent to be bound to a contract because the price is not fixed or agreed, then there is no contract. If an essential term to a contract is so ambiguous or uncertain that doubt is created as to whether such a term has been performed or broken, then there is no contract. When an offeror makes a “contingent” offer in a proposal for a fixed price contract, the final price for the delivered product or service is unknown or at least uncertain at the time of contract formation and, therefore, a defined contract is not created.
For purposes of this paper, a “contingency” is “a possible future event or condition arising from presently known or unknown causes, the outcome of which is undeterminable at the present time.”1
The General Accountability Office (“GAO”) discussed contingent offers in its decision in the matter of: Sun Edison, LLC, File B.–298583, dated October 30, 2006.
The Air Force ("AF") issued a solicitation “for the construction and operation of a photovoltaic array to supply solar power to Nellis Air Force Base (“Nellis”) in Nevada.” The photovoltaic array would produce power for Nellis as well as "renewable energy credits" (“RECs”). The awardee was required to furnish their interconnect agreement with Nevada Power as part of their proposal. The Solicitation required a fixed unit price per kilowatt hour (“KWH”) based on monthly output of the array, operating and maintenance costs, and credits. Sun Edison protested the award of the contract to Power Light Corp. on the grounds that the Source Selection Authority failed to consider that the awardees' price was “contingent upon successful completion of a renewable energy credit purchase agreement with Nevada Power.”2
In an earlier case, the GAO decided that “where a solicitation requests offers on a fixed–price basis, an offer that is conditional and not firm cannot be considered for award.” (Emphasis added.)3 With respect to PowerLight, the GAO stated that the offeror made "its offer conditional upon successful completion of an REC purchase agreement, but further it acknowledged the uncertainty of such an agreement being reached." The GAO continued that "the RFP here requested prices on a fixed-price basis, it was improper for the Air Force to make award to Power Light on the basis of its contingency priced offer."
The protester, Sun Edison, “did not make its pricing contingent on negotiation of an agreement with Nevada Power for sale of RECs at a price that it regarded as acceptable; to the contrary, Sun Edison expressly assumed the risk that the price negotiated with Nevada Power might differ from the price it had used [in the proposal] and guaranteed that the price that it had offered would not be affected by its deal with Nevada Power.
The moral of the story here is two-fold: (1) When a RFP requires the completion of a specified activity as a condition for receipt of a contract, either do what the RFP requires or no-bid; (2) Use your best efforts to not submit a contingent offer to the Government because (a) such an offer lacks “definitiveness” and may not be enforceable in a fixed price prime contract, and (b) the cost of the contingent offer must be excluded from cost estimates but should be disclosed separately to facilitate negotiation of appropriate contractual coverage and may not be allowable. Contingent offers may expose you to significant risk. Even if the government accepts your fixed price offer, you may not have an opportunity to extinguish the contingency at the cost you assumed when you guaranteed the price to the government, thus imperiling your profit from the contract. If you are unable to offer products and services at defined prices and delivery schedules, a no–bid decision may be prudent. If you submit a contingent offer, understand that the Contracting Officer may not agree to your proposal price for the contingent event or may reject the offer due to uncertainty over the details of the resulting contract.
Tom Petruska, Owner
Contract Unlimited Incorporated
Do you need assistance withcontingency bidding or another contracting issues?
Footnotes:
- FAR 31.205-7 (a).
- Sun Edison, LLC, B-298583, October 30, 2006
- See Omega World Travel, Inc.; Sato/Travel Inc, B-288861, Aug. 21, 2002.
The foregoing is not legal advice nor is it a legal opinion. Please contact your attorney for legal advice.
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