Can the period of performance under the base period and option 1 period be extended to expire at the end of Option 2's period of performance?
I assume you are using O&M funds for this service contract. While service contracts can cross fiscal years, the period of performance cannot be greater than 12 months if you are using O&M funding (this is known as the bona fide needs rule which is explained below). This is typically why option years are included in the contract to allow for continuation of the service upon exercise of the option. The following quotes from the FAR provide relevant guidance:
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32.703-3 -- Contracts Crossing Fiscal Years.
(a) A contract that is funded by annual appropriations may not cross fiscal years, except in accordance with statutory authorization (e.g., 41 U.S.C. 11a, 31 U.S.C. 1308, 42 U.S.C. 2459a, 42 U.S.C. 3515, and paragraph (b) of this subsection), or when the contract calls for an end product that cannot feasibly be subdivided for separate performance in each fiscal year (e.g., contracts for expert or consultant services).
(b) The head of an executive agency except NASA, may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year (10 U.S.C. 2410a and 41 U.S.C. 2531). Funds made available for a fiscal year may be obligated for the total amount of an action entered into under this authority.
37.106 -- Funding and Term of Service Contracts.
(a) When contracts for services are funded by annual appropriations, the term of contracts so funded shall not extend beyond the end of the fiscal year of the appropriation except when authorized by law (see paragraph (b) of this section for certain service contracts, 32.703-2 for contracts conditioned upon availability of funds, and 32.703-3 for contracts crossing fiscal years).
(b) The head of an executive agency, except NASA, may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year (10 U.S.C. 2410a and 41 U.S.C. 2531). Funds made available for a fiscal year may be obligated for the total amount of an action entered into under this authority.
(c) Agencies with statutory multiyear authority shall consider the use of this authority to encourage and promote economical business operations when acquiring services.
BONA FIDE NEEDS RULE:
The bona fide needs rule is the rule that governs questions of expenditures as they relate to time. The Government Accountability Office (GAO) in their Appropriations Law Handbook (called the Redbook) covers the bona fide need rule in Section B of Chapter Five (see http://www.gao.gov/special.pubs/3rdeditionvol1.pdf). The Redbook offers the following explanation of the bona fide needs rule:
The bona fide needs rule is one of the fundamental principles of appropriations law: A fiscal year appropriation may be obligated only to meet a legitimate, or bona fide, need arising in, or in some cases arising prior to but continuing to exist in, the fiscal year for which the appropriation was made.
The bona fide needs rule has a statutory basis. As noted in Chapter 1, the first general appropriation act in 1789 made appropriations "for the service of the present year," and this concept continues to this time. This one-year concept is also reflected in 31 U.S.C. § 1502(a), sometimes called the "bona fide needs statute." Originally enacted in 1870 (16 Stat. 251 (July12, 1870)), section 1502(a) provides that the balance of a fixed-term appropriation "is available only for payment of expenses properly incurred during the period of availability or to complete contracts properly made within that period...."
While the rule itself is universally applicable, determination of what constitutes a bona fide need of a particular fiscal year depends largely on the facts and circumstances of the particular case, 70 Comp. Gen. 469, 470 (1991); 44 Comp. Gen. 399, 401 (1965); 37 Comp. Gen. at 159.
The specific application of the bona fide needs rule to services centers on the question of whether the services in question are severable or nonseverable. The GAO Redbook notes that:
A contract that is viewed as "entire" is chargeable to the fiscal year in which it was made, notwithstanding that performance may have extended into the following fiscal year. The determining factor for whether services are severable or entire is whether they represent a single undertaking. Thus, in 23 Comp. Gen. 370, a contract for the cultivation and protection of a tract of rubber-bearing plants, payable on completion of the services, was chargeable against fiscal year funds for the year in which the contract was made. Because the services necessarily covered the entire growing period, which extended into the following fiscal year, the Comptroller General characterized them as a single undertaking, which "although extending over a part of two fiscal years, nevertheless was determinable both as to the services needed and the price to be paid therefor at the time the contract was entered into." Id. at 371. However, where the services are continuing and recurring in nature, the contract is severable. Service contracts that are "severable" may not cross fiscal year lines unless authorized by statute. 71 Comp. Gen. 428 (1992); 58 Comp. Gen. 321, 324 (1979); B-192518, Aug. 9, 1979; B-133001, Mar. 9, 1979; B-187881, Oct. 3, 1977. See also B-287619, July 5, 2001 (TRICARE contractors provide on-going services such as enrolling beneficiaries, adjudicating claims, etc., that are severable into components that independently provide value). Most federal agencies have authority to enter into a 1-year severable service contract, beginning at any time during the fiscal year and extending into the next fiscal year, and to obligate the total amount of the contract to the appropriation current at the time the agency entered into the contract. 10 U.S.C. § 2410a (defense agencies); 41 U.S.C. § 253l (civilian agencies); 41 U.S.C. § 253l-1 (Comptroller General); 41 U.S.C. § 253l-2 (Library of Congress); 41 U.S.C. § 253l-3 (Chief Administrative Officer of the House of Representatives); 41 U.S.C. § 253l-4 (Congressional Budget Office).
For quite some time, the rule was that severable services could not cross a fiscal year line. However, in an attempt to provide more flexibility Congress has allowed severable services to cross fiscal year lines as long as the severable services stay within the duration limits of the funds in question. For instance, severable services funded with operations and maintenance funds (which funds have a period of one year for new obligations) may only be one year in duration. This is found in the Federal Acquisition Regulation (FAR) subpart 37.106 Funding and Term of Service Contracts, (quoted above).