Can the government deduct the minimum guarantee based on the contractor not receiving the option extension?
Legally the Government should always look at the minimum guarantee of an IDIQ contract as a right of the contractor. That is why we are required to obligate the minimum amount. But that statement represents only half of the equation because a contract generates both rights and obligations. An accurate answer for your specific case can only be generated by discussing both rights and obligations with your legal counsel. Here are two scenarios to help frame that discussion with legal:
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Scenario 1) The minimum guarantee on a multiple award IDIQ contract is satisfied by performance on a "seed" task order issued at the time of award. By adequately performing that "seed" task order and receiving payment at or above the minimum guarantee level, the contractor's rights under both the IDIQ contract and task order are fulfilled. If the contractor is subsequently deemed "not responsible" and they become ineligible for future task orders, you may question whether the contractor fulfilled all their obligations under the IDIQ contract. But, the Government can't recover any of the minimum guarantee because it now represents payment for work performed.
Scenario 2) The minimum guarantee on a multiple award IDIQ contract is initially obligated by a task order with a SOW that is TBD. The contractor fails to win any early task orders. Subsequently, the contractor is deemed "not responsible" due to performance issues on other contracts and becomes ineligible for future task orders. So, the initial task order is never modified/executed and the contractor doesn't receive the minimum guarantee. How do we assess their rights and obligations under in this situation? Maxima Corp. v. U.S., 847 F.2d 1549 would suggest that a contractor has an obligation of maintaining their capability to perform during the IDIQ ordering period. Thomas E. White vs. Delta Construction International, Inc. from the United States Court of Appeals for the Federal Circuit (01-1253) dated 12 March 2002, suggests that the guaranteed amount should be greatly reduced (at a minimum). It is understood that the minimum guarantee represents both cost and profit associated with performing a requirement. So, this decision establishes that receiving the entire guaranteed amount would unduly compensate a contractor that didn't incur cost in performing any work.
The Contracting Officer was correct to not exercise the option for this contractor. FAR 17.207(c)(6) requires a Contracting Officer to consider contractor performance on other contracts and review of SAM's exclusion list prior to awarding an option. Task orders off of an IDIQ contract are themselves contracts. FAR 9.104-1(c) requires that a prospective contractor have a satisfactory performance record. So, under almost every circumstance, it would also not be appropriate to award future task orders to this contractor.