Even though they were exercising an option, this violates the bona fide needs rule, correct? Would this have been proper if they issued a new obligation for one month?
No, I do not think you have broken the bona fide need rule. You have two issues to consider.
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1) Did you have FY15 funding when you awarded the option on 1 Nov 2015. You can not use expired funds to award a contract. If the Veteran's Administration has two-year O&M funding (DoD does not have this type of funding), and the money was current in FY15, then you are fine. If you awarded an option in FY15 with expired FY 14 funds, then you are in violation of the Anti-Deficiency Act (ADA). That is a problem you need to fix immediately.
2) You suggest that there may be problem with going over 12 months. Look at FAR 32.703-3 (b), Contract crossing fiscal years. "The head of an executive agency, except NASA, may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year."
Note the "or". The one year restriction is not cumulative of the basic contract and its options. When you exercise the option, the one year clock starts again.