1. The FAR and DFARS references quoted below in pertinent part are applicable to this response.
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FAR 2.101 – Definitions
“Option” means a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract.
FAR 16.401 – General [pertaining to Incentive Contracts]
(e) Award-fee contracts are a type of incentive contract.
(4) Rollover of unearned award fee. The use of rollover of unearned award fee is prohibited.
FAR 17.207 -- Exercise of Options
(c) The contracting officer may exercise options only after determining that --
(1) Funds are available;
(2) The requirement covered by the option fulfills an existing Government need;
(7) The contractor’s performance on this contract has been acceptable, e.g., received satisfactory ratings
DFARS 216.405-2 -- Cost-plus-award-fee contracts
(1) Award-fee pool. The award-fee pool is the total available award fee for each evaluation period for the life of the contract. The contracting officer shall perform an analysis of appropriate fee distribution to ensure at least 40 per cent of the award fee is available for the final evaluation so that the award fee is appropriately distributed over all evaluation periods to incentivize the contractor throughout performance of the contract.
3. As indicated in FAR 2.101, an “option” represents a unilateral right by which the Government may, or may not, extend the term of the contract. For example, the Contracting Officer would not be able to exercise the option if the essential requirements of FAR 17.207(c), a few of which are noted above, are not satisfied. Furthermore, because FAR 16.401(e)(4) prohibits the rollover of unearned award fee, redistributing the total award fee pool to future periods as each option is exercised increases the risk of violating this requirement. Based on the foregoing, we would conclude that the $2.1 million award fee amounts separately associated with the base year and with each option year must also be separated allotted to the performance periods of the base year and each option year and may not be combined.
4. Based on the above, and pursuant to DFARS 216.405-2 (1), at least 40% of each $2.1 million award fee amount allotted for the base year and for each option year must be allocated to the third (and final) 4-month performance period of the base year and of each option year. Regarding the separate 6-month bridge contract, the award fee could be allocated to two 3-month performance periods (i.e., 50/50), or the entire award fee amount could be available at the end of the bridge contract’s performance period (i.e., only one award fee period).