There are two different opinions on how to handle this:
1) Issue letter of intent and unilateral modification exercising option. Then issue a new modification making the changes.
2) Letter of intent is issued, so contact contractor and inform them of the changes and agree to a bilateral modification at the same prices as the Option. Issue one modification with all changes.
Open full Question Details
In your question, you state that there are two different ways to handle this situation. In accordance with FAR 17.207 -- Exercise of Options. The FAR states
“(a) When exercising an option, the contracting officer shall provide written notice to the contractor within the time period specified in the contract. Per your statement this was provided 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. Per your statement this is not applicable to this situation.
(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.”
Per your statement/question it appears that (2) The requirement covered by the option fulfills an existing Government need is no longer valid as you state “customer decides that they need to decrease services by a certain number of FTEs and a change in the place of performance.” As the option no longer fulfills the government requirement the option should not be exercised unilaterally. The customer should issue a request for modifications to decrease the services by a certain number of FTEs and a change in the place of performance through a bilateral modification. In doing so, it is recommended that you also adjust the other options if needed so that those options can be issued unilaterally later on in accordance with the terms and conditions of the contract.