Is the remaining Option Periods "dead" once the Extension of Services on Option Period 1 was let? If so, what is the governing FAR reference and is there any legal way to bring Option 2 back into effective? (say a bi-lateral modification to exercise the option period)
The answer rests on whether there remains a valid period of time to exercise the option. FAR 17.204(b) requires a contract to “state the period within which an option may be exercised .” Carefully examine the exercising periods in your contract. If a valid period of time to exercise the option remains, the option can be exercised. This would easily solve your problem. If not, read on:
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Typically, the period of time for exercising an option is based either on a firm date (“the option may be exercised no later than Oct 1, 2013”) or calculated from a performance or delivery date (“the option may be exercised within 6 months prior to the date of contract completion”). If your exercising period is of the latter type, try calculating the exercising period from the date resulting from the FAR 52.217-8 extension (rather than the contract award date or the last date of the first exercised option). If not otherwise prohibited, this should extend the exercising period by 6 months. In this case, the contractor would have to agree, at no cost, to the recalculation. Once (if) a valid exercising period can be determined, the option can be exercised after FAR subpart 17.2 and specifically 17.207 required determinations are made and funding is available. Remember that the contract cannot exceed five years.
A bilateral modification to extend the period of performance (due to revised requirements) might be possible under FAR 52.243-2 Alternate I or II, but I would not recommend it except to continue services for a short period of time while issuing a new solicitation.