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Options

ACON 048

DAU GLOSSARY DEFINITION

A contractual clause permitting an increase in the quantity of supplies beyond that originally stipulated or an extension in the time for which services on a time basis may be required.

Alternate Definition

FAR 2.101(b) defines “Option” to mean a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract. If the contract allows for additional quantities of supplies or services through Contract Line Items (CLINS) that were “priced” and evaluated during solicitation and award of the contract, the Government may “exercise” or extend the terms of the contract to include the additional quantities or work effort without further negotiation or further agreement with the contractor. The additional timeframes and additional quantities have already been included in the contract but may not have been funded. The modification to exercise the option may require funding to cover the option period/quantity.

General Information

FAR Subpart 17.2 – Options - does not apply to contracts for:

  1. services involving the construction, alteration, or repair (including dredging, excavating, and painting) of buildings, bridges, roads, or other kinds of real property;
  2. architect-engineer services; and
  3. research and development services.

However, the FAR does not preclude the use of options in those contracts. See agency regulations for further guidance on these types of actions. For DoD, see DFARS subpart 217.2 and PGI 217.202 for guidance on the use of options.

 

USE OF OPTIONS:

 

The contracting officer may include options in contracts when it is in the Government’s interest. When using sealed bidding, the contracting officer shall make a written determination that there is a reasonable likelihood that the options will be exercised before including the provision at FAR 52.217-5, Evaluation of Options, in the solicitation. (See FAR 17.207(f) with regard to the exercise of options.) Inclusion of an option is normally NOT in the Government’s interest when, in the judgment of the contracting officer --

  1. The foreseeable requirements involve --
    1. Minimum economic quantities (i.e., quantities large enough to permit the recovery of startup costs and the production of the required supplies at a reasonable price); and
    2. Delivery requirements far enough into the future to permit competitive acquisition, production, and delivery.
  2. An indefinite quantity or requirements contract would be more appropriate than a contract with options. However, this does not preclude the use of an indefinite quantity contract or requirements contract with options.

The contracting officer shall NOT employ options if --

  1. The contractor will incur undue risks; e.g., the price or availability of necessary materials or labor is not reasonably foreseeable;
  2. Market prices for the supplies or services involved are likely to change substantially; or
  3. The option represents known firm requirements for which funds are available unless--
    1. The basic quantity is a learning or testing quantity and
    2. Competition for the option is impracticable once the initial contract is awarded.

Options can be used in recognition of --

  1. The Government’s need in certain service contracts for continuity of operations and
  2. The potential cost of disrupted support, options may be included in service contracts if there is an anticipated need for a similar service beyond the first contract period.

 

SOLICITATION REQUIREMENTS:

Solicitations for contracts that provide for options:

  • Shall include appropriate option provisions and clauses
  • Shall state the basis of evaluation, either exclusive or inclusive of the option
  • Shall inform offerors that it is anticipated that the Government may exercise the option at time of award. If this is anticipated and if option prices differ from basic requirement, specify the price the Government will use to evaluate the option (highest option price offered or option price for specified requirements).
  • Normally should allow option quantities to be offered without limitation as to price, and there shall be no limitation as to price if the option quantity is to be considered in the evaluation for award (see FAR 17.206).
  • If it is allowable for offerors to offer options at unit prices which differ from the basic requirement the solicitation shall state that “offerors may offer varying prices for options, depending on the quantities actually ordered and the dates when ordered”.

Solicitations may, in unusual circumstances, require that options be offered at prices no higher than those for the initial requirement; e.g., when --

  1. The option cannot be evaluated under FAR 17.206; or
  2. Future competition for the option is impracticable.

When the solicitation requires option prices to be no higher than the initial requirement the contracting officer shall:

  1. Specify that the Government will accept an offer containing an option price higher than the base price only if the acceptance does not prejudice any other offeror; and
  2. Limit option quantities for additional supplies to not more than 50 percent of the initial quantity of the same contract line item. In unusual circumstances, an authorized person at a level above the contracting officer may approve a greater percentage of quantity.

When determining if the acquisition will exceed the World Trade Organization Government Procurement Agreement or Free Trade Agreement thresholds, include the value of options.

CONTRACTS:

The contract shall specify limits on the purchase of additional supplies or services, or the overall duration of the term of the contract, including any extension. The contract shall also state the period within which the option may be exercised. The period shall be set so as to provide the contractor adequate lead time to ensure continuous production. The period may extend beyond the contract completion date for service contracts. This is necessary for situations when exercise of the option would result in the obligation of funds that are not available in the fiscal year in which the contract would otherwise be completed.

Unless otherwise approved in accordance with agency procedures, the total of the basic and option periods shall not exceed 5 years in the case of services, and the total of the basic and option quantities shall not exceed the requirement for 5 years in the case of supplies. These limitations do not apply to information technology contracts. However, statutes applicable to various classes of contracts, for example, the Service Contract Labor Standards statute (see FAR 22.1002-1), may place additional restrictions on the length of contracts.

Contracts may express options for increased quantities of supplies or services in terms of --

  1. Percentage of specific line items,
  2. Increase in specific line items; or
  3. Additional numbered line items identified as the option.

Contracts may express extensions of the term of the contract as an amended completion date or as additional time for performance; e.g., days, weeks, or months. The contracting officer shall include a written justification for the quantities or the term under option, the notification period for exercising the option, and any limitation on option price under FAR 17.203(g) in the contract file (FAR 17.205). The contracting officer shall include any justifications and approvals and any determination and findings required by Part 6, specifying both the basic requirement and the increase permitted by the option, in the contract file. FAR 17.205

 

EVALUATION:

In awarding the basic contract, the contracting officer shall, except as provided in the following paragraph, evaluate offers for any option quantities or periods contained in a solicitation when it has been determined prior to soliciting offers that the Government is likely to exercise the options. (See FAR 17.208.)

The contracting officer need not evaluate offers for any option quantities when it is determined that evaluation would not be in the best interests of the Government and this determination is approved at a level above the contracting officer. An example of a circumstance that may support a determination not to evaluate offers for option quantities is when there is a reasonable certainty that funds will be unavailable to permit exercise of the option.

 

EXERCISE OF OPTIONS:

When exercising an option, the contracting officer shall provide written notice to the contractor within the time period specified in the contract. 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. 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 considered;
    1. The contracting officer, after considering price and other factors, shall make the determination on the basis of one of the following:
      1. A new solicitation fails to produce a better price or a more advantageous offer than that offered by the option. If it is anticipated that the best price available is the option price or that this is the more advantageous offer, the contracting officer should not use this method of testing the market.
      2. An informal analysis of prices or an examination of the market indicates that the option price is better than prices available in the market or that the option is the more advantageous offer.
      3. The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer. The contracting officer shall take into consideration such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services.
    2. The determination of other factors —
      1. Should take into account the Government's need for continuity of operations and potential costs of disrupting operations; and
      2. May consider the effect on small business
  4. The option was synopsized in accordance with Part 5 unless exempted by FAR 5.202(a)(11) or other appropriate exemptions in FAR 5.202, and
  5. The contractor is not listed on the Excluded Parties List System (EPLS) (see FAR 9.405-1).

 

Before exercising an option, the contracting officer shall make a written determination for the contract file that exercise is in accordance with the terms of the option, the requirements of this section, and Part 6. To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and able to be exercised at an amount specified in or reasonably determinable from the terms of the basic contract, e.g. --

  1. A specific dollar amount;
  2. An amount to be determined by applying provisions (or a formula) provided in the basic contract, but not including renegotiation of the price for work in a fixed-price type contract;
  3. In the case of a cost-type contract, if --
    1. The option contains a fixed or maximum fee; or
    2. The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see FAR 16.102(c));
  4. A specific price that is subject to an economic price adjustment provision; or
  5. A specific price that is subject to change as the result of changes to prevailing labor rates provided by the Secretary of Labor.

Remember, the contract modification or other written document which notifies the contractor of the exercise of the option shall cite the option clause as the authority.