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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 Contracting Officer told ISI on September 12, 2002 it would not exercise the two options.
ISI argued before the GSBCA that the DoC “constructively” exercised the options by requesting ISI to perform work from February through July of 2000. The GSBCA summarily dismissed ISI's argument.
The GSBCA stated that “An option clause does not obligate the Government to exercise an option.” Remember that an option is an event set forth in an offer from the Seller to the Buyer for a specified period of time during which the offer cannot be revoked unilaterally. An option does not impose a binding obligation on the Buyer. The Government, i.e., the Buyer, has the discretion to exercise, or not to exercise, the option. The GSBCA stated that “The clause simply gives the Government the discretion to decide whether to exercise an option…the Government's discretion is nearly complete.”(2)
If, however, the Buyer, i.e., the Government, decides to exercise an option under the rules accorded such a decision in the FAR and standard commercial law, “the Government must exercise the option in exact accord with the terms of the contract.”(3) Moreover, when the Government actually exercises an option, it “must be unqualified, absolute, unconditioned, unequivocal, unambiguous, and strictly according to the terms and conditions of the option.”(4)
ISI stated that DoC “constructively” exercised the option. This type of argument has no basis in any legal authority, and the GSBCA refused to accept their position stating that the “Government can exercise an option by [not] doing something other than strictly complying with the terms of the contract which created the option.” Hence, the GSBCA denied ISI's argument.
So, don't think that options are automatic or that they are guaranteed. The Seller, i.e., the Offreror in a proposal, can set the terms for exercise of an option and can benefit from the contract clauses from the FAR that will be incorporated in the resultant contract. The Seller also takes the majority of the risks. The Buyer, i.e., the Government, must exercise the option in strict compliance with those terms that are in the contract. The option does not bind the buyer to the exercise of the option; the buyer, however, must exercise the option in strict compliance with the terms and conditions of the option. Hence, “constructive” or “substantial” compliance is not effective.
Both the term and the exercise of an option must be clear and unambiguous; So when preparing proposals, be certain that option terms are not vague.
Finally, the option must be exercised timely. The buyer must exercise the option no later than the time specified in the terms of the option. Stated differently, if the buyer fails to exercise the option no later than the time specified in the terms, then the option expires and becomes invalid. In the ISI case, the DoC chose not to exercise the option and allowed it to expire by failing to provide the required notice. Always be sure that a specific date can be attached to the exercise of an option.
By the way, if the Government fails to exercise an option, this is not the same as a stop work order or a termination for the convenience of the Government, although certainly the effect is the same. If the Government fails to invoke their right to timely exercise an option, a contractor does not have a right to file a claim or equitable adjustment merely as a result of not exercising an option.
Tom Petruska, Owner
Contract Unlimited Incorporated
(1) See FAR 52.217-9 implementing FAR Subpart 17.207.
(2) GSBCA quoting Government Systems Advisors, Inc. v. United States, 847 F.2d. 811 (Fed. Cir. 1988)
(3) GSBCA quoting Freightliner Corp. v. Caldera, 225 F.3d 1361,1366 (Fed. Cir. 2000)
(4) GSBCA quoting Civic Plaza National Bank v. First National Bank in Dallas, 401 F.2d 193, 197 (8th Cir. 1968)
Do you need assistance with options in federal contracts or other issues?
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