Can we exercise a contract option year early? If so how early? Does this violate appropriation law?
I don't think this has anything to do with appropriation law because you must be using current year dollars. You don't have the money for two years from now. I think you have a Out of Scope issue (you are no longer doing the same work as intended by the parties when you did the source selection) I need to understand alot more about your contract type, services/supplies and what is happening. For example, if you have an ID/IQ contract you can order more effort (both supplies and services) on that contract if the contractor agrees to increase the maximum on the contract. If you have a FFP contract for services, you shouldn't be paying the contractor more unless you modify the contract and add the additional work. Do you have a Cost Reimbursement contract? I'm fairly confident that using the option exercise is not the solution. (I don't know anything about this contract so I'm not sure) The exercise is for a paticuliar period of time and priced for that period of time with inflated costs. The option is probably not a reasonable price for the Gov't to pay.
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Knowing almost nothing, my best advise to you is to start again and write a contract that better reflects the needs of your customer. Don't exercise the option. Do a J&A to the incumbent for a short contract to get you through the time you need to do a souce selection.