Thursday, December 26, 2013

Contract Options

Contract options allow the Government, for a specified time and at a specified price, to purchase additional supplies and services called for in a contract. Options seem like a pretty good deal - contractors increase their sales when the Government exercises options - but they are not without some risk. Sometimes its very difficult to predict prices three to five years in the future. A lot of contractors got hit hard when fuel price increased substantially in the late 90s. Its sometimes difficult to predict the availability of the type of labor needed for a particular project. If there's a local building boom going on, the wage scales and availability of construction workers is impacted. 

Generally, the contract period including all options may not exceed five years. This is not to be confused with delivery period which may exceed the five year limitation. 

Options are not automatic. The Government has a little homework to do before exercising options. The contracting officer must
  • ensure that funds are available
  • the requirement fills an existing need
  • the exercise of the option is the most advantageous method of fulfilling the Government's need, price and other factors considered. This includes determinations that
    • a new solicitation fails to produce a better price or more advantageous offer or 
    • an informal analysis of the market indicates the option is more advantageous
    • the time between contract award and exercise of the option is so short that the option is most advantageous
The decision to exercise options is the sole discretion of the Government. Decisions not to exercise are not typically protestable. So, contractors cannot count on the Government's exercising options to support plant expansions or long term labor contracts. There's no guarantees when it comes to options.

When proposing and negotiating option prices, contractor's need to ensure that there is sufficient provisions in the option prices to cover known and unknown market conditions. If the Government sees a bargain price, its going to take it as opposed to opening up the bidding process again. And, a bargain price for the Government is likely to hurt the contractor.

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