Question: Are there FAR and/or DFARS regulations that this contractor can cite and base their request for the Government to NOT exercise its unilateral right to exercise the next option period?
The contractor has no rights to refuse an option. The option is only to the benefit of the Government.
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FAR 17.207(c) subparagraphs (3), (6), and (7) indicate a need to determine if exercising is in the Government's best interest. From a practical perspective, you must decide what risk the Government will be exposed to by exercising the option of a contract the contractor may not be able to perform. We do not know the details of your original solicitation or the ensuing contract and thus can be no more specific than this. But if you awarded to a JV and the JV does not exist, you may not have had a binding contract; there may have been some opportunity to pursue action with the partner.
Specifically, this is what the FAR requires you to consider (the DFARS does not add any additional pertinent information).
17.207 -- Exercise of Options.
(a) When exercising an option, the contracting officer shall provide written notice to the contractor within the time period specified in the contract.
(b) When the contract provides for economic price adjustment and the contractor requests a revision of the price, the contracting officer shall determine the effect of the adjustment on prices under the option before the option is exercised.
(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;
(3) The exercise of the option is the most advantageous method of fulfilling the Government’s need, price and other factors (see paragraphs (d) and (e) of this section) considered;
(4) The option was synopsized in accordance with Part 5 unless exempted by 5.202(a)(11) or other appropriate exemptions in 5.202,
(5) The contractor is not listed in the System for Award Management Exclusions (see 9.405-1);
(6) The contractor’s past performance evaluations on other contract actions have been considered; and
(7) The contractor’s performance on this contract has been acceptable, e.g., received satisfactory ratings.
(d) The contracting officer, after considering price and other factors, shall make the determination on the basis of one of the following:
(1) A new solicitation fails to produce a better price or a more advantageous offer than that offered by the option. If it is anticipated that the best price available is the option price or that this is the more advantageous offer, the contracting officer should not use this method of testing the market.
(2) An informal analysis of prices or an examination of the market indicates that the option price is better than prices available in the market or that the option is the more advantageous offer.
(3) The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer. The contracting officer shall take into consideration such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services.
(e) The determination of other factors under paragraph (c)(3) of this section—
(1) Should take into account the Government's need for continuity of operations and potential costs of disrupting operations; and
(2) May consider the effect on small business.
(f) Before exercising an option, the contracting officer shall make a written determination for the contract file that exercise is in accordance with the terms of the option, the requirements of this section, and Part 6. To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g. --
(1) A specific dollar amount;
(2) An amount to be determined by applying provisions (or a formula) provided in the basic contract, but not including renegotiation of the price for work in a fixed-price type contract;
(3) In the case of a cost-type contract, if --
(i) The option contains a fixed or maximum fee; or
(ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102(c));
(4) A specific price that is subject to an economic price adjustment provision; or
(5) A specific price that is subject to change as the result of changes to prevailing labor rates provided by the Secretary of Labor.
(g) The contract modification or other written document which notifies the contractor of the exercise of the option shall cite the option clause as authority.
With regard to options the contractor would be required to perform. You will want to seek specific guidance for your situation from your legal counsel.