Would it be proper to modify the contract and increase the quantities for the option period or prepare to solicit for a new contract with new estimated quantities?
You present a very interesting question that illustrates the interaction among risk allocation, contract type, options and competition. FAR Subpart 16.503(a) essentially states that a requirements contract provides for filling ALL actual purchase requirements for supplies or services during a specified contract period from one contractor. According to FAR Subpart 16.503(a)(1) the government is required to provide a realistic estimate of the requirements based on the most current information available. Finally, FAR Subpart 17.207 gives the Government the unilateral right to exercise options.
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Given those provisions, it would appear that the contractor has assumed the risk of extraordinarily high requirements and would be contractually bound to provide the required supplies. However, the harshness of those provisions has most likely been mitigated in your contract.
FAR Subpart 16.503(2) directs that the contract specify maximum or minimum quantities, where feasible, to limit the contractor’s obligation to deliver and the Government’s obligation to order. That direction is clarified in the prescriptive language of FAR Subpart 16.506 and the series of order limitation clauses. It appears one or more of those clauses are in your contract.
While the order limitation clauses reduce the potential risk to the contractor, they create new problems when, as in your circumstance, the Government wants to exceed the maximum. When the clauses are present, the contractor can legally decline to exceed the maximum. But when the clauses are present and the contractor and the Government mutually desire to exceed the maximum via an option, then competition and business judgment considerations arise. For example, a contracting officer is required to determine that exercising an option is the most advantageous method of fulfilling the Government’s need, price and other factors considered. Continuity of operations and potential costs of disrupting operations are factors worthy of consideration. See FAR Subparts 17.207(c) and (e)(1) and (f).
In short, the contracting officer should reach those determinations through the independent exercise of their business judgment after soliciting inputs from the customer, the contractor and their servicing legal office.