Overview
FAR Subpart 17.2 prescribes the policies and procedures for including and exercising options for additional supplies or services in government contracts. It ensures that options are used only when in the Government's best interest and provides a framework to maintain competition and price reasonableness throughout the life of a contract.
Key Rules
- Applicability: Generally does not apply to construction, architect-engineer (A-E), or research and development (R&D) services, though agencies are not precluded from using options in these sectors.
- Five-Year Limitation: For most service and supply contracts, the total of the basic and option periods shall not exceed five years (excluding Information Technology contracts and specific statutory exceptions).
- Written Determinations: The Contracting Officer (KO) must justify in writing the quantities or terms under option and ensure the option was evaluated as part of the initial competition to satisfy "Full and Open Competition" requirements.
- Evaluation Requirements: KOs must evaluate option prices during the initial award process unless a determination is made (and approved at a level above the KO) that evaluation is not in the Government’s best interest.
- Exercise Criteria: An option can only be exercised if:
- Funds are available.
- The requirement fulfills an existing need.
- The exercise is the most advantageous method of fulfillment (considering price and other factors).
- The contractor is not barred (SAM exclusion) and has performed satisfactorily.
- Pricing: Options should typically be offered without price limitations, but in "unusual circumstances," a solicitation may require option prices to be no higher than the initial requirement.
Responsibilities
- Contracting Officer (KO):
- Makes the written determination to include options in a solicitation.
- Justifies option quantities, terms, and notification periods in the contract file.
- Verifies that the contractor has an active SAM registration and no exclusions before exercising an option.
- Provides written notice of intent to exercise the option within the contractually specified timeframe.
- Conducts market research or informal price analysis to ensure the option price remains advantageous.
- Approving Authority (Level Above the KO):
- Approves determinations not to evaluate options at the time of award.
- Approves option quantities for additional supplies that exceed 50% of the initial quantity in unusual circumstances.
- Contractor:
- Must maintain "satisfactory" or better performance to remain eligible for option exercises.
- Must adhere to the lead times and notification windows established in the contract.
Practical Implications
- Continuity of Operations: In service contracts, options are a critical tool to prevent gaps in performance, especially for essential mission support where a disruption would be costly.
- Market Stability Risks: FAR 17.202(c) warns against using options if market prices are likely to change substantially. In a high-inflation environment, KOs must be cautious, as locking in a fixed-price option could lead to contractor default if labor or material costs spike beyond the contractor's "undue risk" threshold.
- Administrative Efficiency: Using options allows the government to fulfill recurring needs without the administrative burden of a full new competition every year, provided the initial contract was structured correctly to include evaluated options.
- "Use it or Lose it": If a KO fails to provide written notice within the specific window defined in the contract (e.g., 30 or 60 days prior to expiration), the government may lose its unilateral right to exercise the option at the stated price, potentially forcing a more expensive bridge contract or a new procurement.