First, should they have completed the initial option year modification or was this a violation of the Competition in Contract Act (as mentioned in the DAU post mentioned above)?
Second, would the addition of the 2 new option years be allowable if they were added with an accompanying J&A to justify the sole source?
The information you found on the DAU posting in response to the question dated 9/4/2012 is exactly correct. Adding new option years is in violation of the Competition in Contracting Act (CICA). In your case you have a “scope” issue because any mods outside the scope of an existing contract are subject to the competition requirements of FAR Part 6 (see FAR 6.001(c)) and in your case, the option was not a part of the initial competition.
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Your best and appropriate course of action is to re-solicit your requirement and consider a base plus 4 one-year option periods if your requirement is still valid. It seems that you have a requirement for recurring and continuing services, therefore an option clause should have been included in the initial contract.
Another issue you have is whether or not the option was synopsized IAW FAR Part 5 since it is one of the requirements of exercising an option (see FAR 17.207). In both instances, it seems there has been a violation of FAR Part 5 and 6. As for your second question, it is advised that you consult your legal representative as any “sole source” J&A would have to meet the requirements of FAR 6.302-1 which may not be applicable in your case.