Overview
FAR 17.106 prescribes the administrative framework for multi-year contracting, detailing how the government establishes cancellation ceilings, structures solicitations, and manages financial obligations across multiple program years. It ensures that while the government gains the benefit of long-term pricing, the contractor is protected against the loss of unamortized nonrecurring costs if subsequent years are not funded.
Key Rules
- Method and Type: Multi-year procedures are compatible with sealed bidding and negotiation; however, due to the long performance period, the use of fixed-price contracts with economic price adjustment (EPA) or incentive terms is encouraged.
- Cancellation Ceilings: The Contracting Officer (CO) must establish a cancellation ceiling for every program year except the first. These ceilings are designed to cover nonrecurring costs (e.g., startup costs, special tooling, labor learning) that would normally be amortized over the life of the contract.
- Payment Obligations: The government’s liability is strictly limited to the amount currently available for contract performance. The CO must modify the contract annually to specify the funds available for that program year.
- Solicitation Evaluation: Solicitations must generally require offerors to submit prices for both the first program year and the total multi-year requirement. This allows the government to compare the costs and determine if a multi-year approach provides the best value.
- Level Unit Pricing: Contracts typically require identical unit prices across all program years (amortizing costs evenly), unless the Head of the Contracting Activity (HCA) authorizes variable unit pricing.
- DoD/NASA/Coast Guard Specifics: For these agencies, contracts must be firm-fixed-price, fixed-price with EPA, or fixed-price incentive. Including recurring costs in a cancellation ceiling is prohibited without Agency Head approval.
Practical Implications
- Risk Mitigation: Contractors must accurately identify and document nonrecurring costs during the proposal phase, as these figures are critical for negotiating the cancellation ceilings that protect their investment if the program is cancelled.
- Administrative Burden: The requirement for "dual proposals" (annual vs. multi-year) increases the workload for both industry and the government, though it provides the necessary data to justify the multi-year savings.
- Funding Contingency: Because all years after the first are subject to the availability of funds, contractors must manage their specialized workforce and supply chain with the understanding that the government’s obligation is capped by the annual funding and the negotiated cancellation ceiling.