clause in any contract which may involve the ocean transportation of supplies of the type described in § 1.1402(a) (2) and (3).

EMPLOYMENT OF OCEAN-GOING VESSELS
(JANUARY 1958)

If ocean transportation is required after the date of award of this contract in delivering any of the supplies to be furnished hereunder, the Contractor, promptly after each shipment, shall furnish to the Contracting Officer one copy of the applicable ocean shipping document indicating for each shipment made under this contract the name and nationality of the vessel and the measurement tonnage (40 cubic feet) of dry cargo, or long tons (2,240 pounds) of bulk liquid cargo, shipped on such vessel; provided, that the Contractor need not furnish such a document for any shipment of less than 120 measurement tons of dry cargo or less than 35 long tons of bulk liquid cargo; provided further, if this contract is an indefinite quantity contract or a requirements contract, the Contractor need furnish such documents only in connection with shipments made after the date of any delivery order requiring ocean transportation in delivering supplies thereunder.

Additional provisions concerning the vessels to be used may be inserted in accordance with departmental procedures.

(2) The contract shall include the following clause in lieu of the clause set forth in subparagraph (1) of this paragraph:

(i) When determined by the head of a procuring activity, or his designee, to be necessary to assure proper implementation of the policy expressed in § 1.1402;

or

(ii) When the procuring activity has been instructed that particular supplies of the type described in § 1.1402(a) (2) and (3) are to be carried exclusively in private U.S. vessels:

PREFERENCE FOR UNITED STATES-FLAG VESSELS (DECEMBER 1955)

(a) After the date of award of this contract, the Contractor shall employ privately owned United States-flag commercial vessels, and no others, in the transportation by sea of any supplies to be furnished hereunder: Provided, however, That if such vessels are not available for timely shipment at fair and reasonable rates for such vessels, the Contractor shall so notify the Contracting Officer and request authorization to ship in foreignflag vessels or designation of available United States-flag vessels. If the Contractor is authorized in writing by the Contracting Officer to ship such supplies in foreign-flag vessels, the contract price shall be equitably adjusted to reflect the difference in costs of shipping

such supplies on privately owned United States-flag commercial vessels and foreignflag vessels.

(b) Promptly after each shipment the Contractor shall furnish the Contracting Officer one copy of the applicable shipping document indicating for each shipment made under this contract the name and nationality of the vessel and the measurement tonnage (40 cubic feet) of dry cargo, or long tons (2,240 pounds) of bulk liquid cargo, shipped on such vessels.

[29 F.R. 2821, Feb. 29, 1964, as amended at 31 F.R. 9852, July 21, 1966] § 1.1405

Responsibilities of the contracting officer.

The contracting officer shall forward the applicable shipping document specified in the clauses set forth in § 1.1404(b) (1) and (2) to the Department of the Navy (Commander, Military Sea Transportation Service, Attn: M-5), Washington, D.C. 20390, for shipments made under arrangements by the contractor or by a Government agency other than the Military Sea Transportation Service. [31 F.R. 9852, July 21, 1966]

§ 1.1408 § 1.1409

Construction contracts.

It is the policy of the Department of Defense to require construction contractors, including subcontractors and suppliers, engaged in overseas work to utilize United States-flag vessels to the extent that such vessels are available at 'fair and reasonable rates for United States-flag vessels. This policy is applicable to any supplies, materials, or equipment shipped from the United States for either the performance of the work or for incorporation in the work. To carry out this policy, the following clause shall be included in any construction contract which may involve the ocean transportation of materials: EMPLOYMENT OF OCEAN-GOING VESSELS BY CONSTRUCTION CONTRACTORS (Nov. 1963) (a) If ocean transportation is required after the date of award of its contract to bring any supplies, materials, or equipment, to the construction site from the United States either for use in performance of or for incorporation in the work called for by this contract, United States-flag vessels shall be employed in such transportation to the extent such vessels are available at fair and reasonable rates for United States-flag ves

sels. The Contractor shall not make any shipment exceeding ten measurement tons (400 cubic feet) by other than a United States-flag vessel without notifying the Contracting Officer that United States-flag vessels are not available at fair and reasonable rates for such vessels and obtaining his permission to ship in other vessels. If such permission is granted, the contract price shall be equitably adjusted to reflect the difference in cost.

(b) The Contractor shall include the substance of this clause, including this paragraph (b), in each subcontract or purchase order hereunder which may involve the ocean transportation of construction supplies, materials, or equipment from the United States.

Upon request of the contracting officer, the Commander, MSTS, or his representative, will furnish advice as to the availability of United States-flag vessels for any particular shipment. These requirements shall not apply to Military Assistance Program projects, Agency for International Development projects, or to similar projects under the auspices of the Department of Defense where the recipient nation pays for or furnishes at least fifty percent of the transportation, in which event foreign-flag vessels may be used for not to exceed fifty percent of the gross tonnage for the project. The contracting officer shall comply with § 1.1402 (b) relative to any Government-owned construction materials requiring ocean transportation.

[29 F.R. 2822, Feb. 29, 1964]

§ 1.1410

Nonuse of foreign-flag vessels engaged in Cuban and North Vietnam trade.

(a) Supplies owned by or procured under any contract of a Department of Defense activity (including supplies for military assistance) will not be shipped from any U.S. port on a foreign-flag vessel which has called at a Cuban port on or after January 1, 1963, or a North Vietnam port on or after January 25, 1966, unless the Secretary of Commerce has made an exception applicable to such vessel.

(b) Procuring activities shall include the following clause in any contract which may involve the use of foreign-flag vessels in the ocean transportation from a U.S. port of supplies to be delivered under the contract or to be incorporated in supplies or other end product of the contract:

NONUSE OF FOREIGN-FLAG VESSELS ENGAGED IN CUBAN AND NORTH VIETNAM TRADE (APRIL 1966)

(a) If, after the date of award, any supplies to be furnished or any materials to be incorporated in such supplies or in a construction project will require ocean transportation from the United States in the performance of this contract, the Contractor shall not use any foreign-flag vessel which the Maritime Commission has listed in the FEDERAL REGISTER as having called at a Cuban port on or after January 1, 1963, or a North Vietnam port on or after January 25, 1966, unless an exception has been made by the Secretary of Commerce.

(b) For purposes of this clause, the term "United States" includes the 50 States, Puerto Rico, possessions of the United States, and the District of Columbia.

(c) The Contractor shall include the substance of this clause, including this paragraph (c), in each subcontract or purchase order hereunder which may involve ocean transportation from the United States.

The contracting officer may refer any questions in connection with the above clause to Code M-34, Military Sea Transportation Service, Washington, D.C. 20390.

[31 F.R. 9852, July 21, 1966]

Subpart O-Options

SOURCE: The provisions of this Subpart O appear at 26 F.R. 2601, Mar. 28, 1961, unless otherwise noted.

§ 1.1501 Scope of subpart.

This subpart applies to contracts for supplies and services other than for (a) the construction, alteration, or repair of buildings, bridges, roads, or other kinds of real property and (b) research and development. It does not preclude the use of appropriate option provisions in such construction and research and development contracts.

riod of contract performance may be in the best interest of the Government. Since options require offerors to guarantee prices for definite periods of time with no guarantee that orders will be placed, their improper use could result in prices which are unfair to either the Government or the contractor. Option clauses may require that option quantities be offered at prices no higher than those for the initial quantities or they may allow option quantities to be offered without such limitation as to price. When additional requirements are foreseeable and subsequent competition would be impracticable because of such factors as production lead time and delivery requirements, the use of options which require prices no higher than those for the initial quantities may be preferable to later negotiating a price with the contractor at a time when he is the only practical source. An option normally should not be used where it can reasonably be foreseen that (1) minimum economic production quantities will be procured at some future date, and (2) startup costs, production lead time, and probable delivery requirements would not preclude adequate future competition.

(b) Option provisions and clauses shall not be included in contracts when

(1) The supplies or services being purchased are readily available on the open market;

(2) The contractor would be required to incur undue risks: e.g., the price or availability of necessary materials or labor is not reasonably foreseeable;

(3) An indefinite quantity contract or requirements contract is appropriate except that options for continuing performance may be used in such contracts;

(4) Market prices for the supplies or services involved are, likely to change substantially; or

(5) The option quantities represent known firm requirements for which procurement funds are available unless (i) the basic quantity is a learning or testing quantity and there is some uncertainty as to contractor or equipment performance and hence multiyear procurement is not appropriate, and (ii) realistic competition for the option quantity is impracticable once the initial contract is awarded.

(c) When options are to be evaluated pursuant to § 1.1504(d), 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 requirements for 5 years in the case of supplies.

[29 F.R. 2822, Feb. 29, 1964, as amended at 34 F.R. 17887, Nov. 5, 1969]

§ 1.1504 Procedures.

(a) When a contract is to contain an option clause, the solicitation must contain an appropriate option provision. If the contract is to be negotiated, the determination and findings shall set forth the approximate quantity to be awarded and the extent of the increase to be permitted by the option. The contract shall limit the additional quantities of supplies or services which may be procured, or the duration of the period for which performance of the contract may be extended, under the option and will fix the period within which the option may be exercised. This period shall be set so as to afford the contractor adequate notice of the requirement for performance under the option but with respect to service contracts may extend beyond the contract completion date when exercise of the option would obligate funds not available in the fiscal year in which the contract would otherwise be completed. In fixing the period within which the option may be exercised, consideration shall be given to (1) necessary lead time in order to assure continuous production and (2) the time required for additional funding and other necessary approval action. The period specified for exercising the option shall in all cases be kept to a minimum. When a solicitation contains an option which requires the offering of additional quantities of supplies at unit prices no higher than those for the initial quantities, it shall provide that the option quantities shall not exceed 50 percent of the initial quantity. When unusual circumstances exist, however, the head of the procuring activity or his designee may approve a greater percentage of quantity. The quantities and the period under option and the period during which the option may be exercised shall be justified and documented by the contracting officer in the contract file.

(b) Except as provided in paragraphs (c), (d), and (e) of this section, solicitations containing option provisions shall state that evaluation will be on the basis of the quantity to be awarded exclusive of the option quantity.

(c) When it is anticipated that the Government may exercise the option at time of award, the solicitation shall include an Evaluation of Options provision substantially as follows:

EVALUATION OF OPTIONS

If the Government elects to exercise an option simultaneously with award, bids or proposals will be evaluated for purposes of award on the basis of the total price for the basic quantity and the option quantity exercised with award.

(d) In firm fixed price contracts, the option quantity may be considered in the evaluation for award if, before issuance of the solicitation, it has been determined at a level higher than the Contracting Officer that:

(1) There is a known requirement which exceeds the basic quantity to be awarded, but either (i) the basic quantity is a learning or testing quantity and there is some uncertainty as to contractor or equipment performance, and hence multiyear procurement (§ 1.322) is not appropriate, or (ii) due to the unavailability of funds, the option cannot be exercised at the time of award of the basic quantity: Provided That in this latter case there is reasonable certainty that funds will be available thereafter to permit exercise of the option; and

(2) Realistic competition for the option quantity is impracticable once the initial contract is awarded and hence it is in the best interests of the Government to evaluate options in order to eliminate the possibility of a "buy-in" (§ 1.311). This determination shall be based on factors such as, but not limited to, substantial startup or phase-in costs, superior technical ability resulting from performance of the initial contract, and long preproduction lead time for a new producer.

In such cases, the solicitation shall contain an Evaluation of Options provision substantially as follows:

EVALUATION OF OPTIONS

A. Bids and proposals will be evaluated for purposes of award by adding the total price for all option quantities to the total price for the basic quantity. Evaluation of options will not obligate the Government to exercise the option or options.

B. Any bid or proposal which is materially unbalanced as to prices for basic and option quantities may be rejected as nonresponsive. An unbalanced bid or proposal is one

which is based on prices significantly less than cost for some work and prices which are significantly overstated for other work.

(e) In fixed price incentive contracts, options may be evaluated for award only if the solicitation (1) specifies a costsharing arrangement applicable to all proposals, and (2) specifies that the ceiling price and target profit for the basic and option quantities are to be based on stated percentages of the offeror's target cost. These percentages shall be set forth in the solicitation and shall be applicable to all proposals. In such cases, the Evaluation of Options provision set forth in paragraph (d) of this section shall be inserted in the solicitation except that the following shall be inserted between the first and second sentences of paragraph A:

The offeror's target cost for the basic and option quantities will be deemed to be the price of the basic and option quantities for purposes of evaluation.

(f) Solicitations which allow the offer of option quantities at unit prices which differ from the unit prices for the basic contract quantities shall also state that varying prices may be offered for the option quantities depending on the quantities actually ordered and the date or dates when ordered. However, if the solicitation contains an Evaluation of Options provision pursuant to paragraphs (c) and (d) of this section, it shall also specify the price at which the options will be evaluated (e.g., highest option price offered or option price for specified quantities or dates).

(g) Where exercise of the option would result in increased quantities of supplies, the option may be expressed in terms of (1) percentage of specific contract line items, (2) a number of additional units of specific contract line items, or (3) additional numbered line items identified as the option quantity with the same nomenclature as line items initially included in the contract. Where exercise of the option would result in an increase in the performance of services by the contractor, the option may similarly be expressed in terms of percentages, increase in specific line items, or additional numbered line items, expressed in terms of the units of work initially used in the contract such as man hours, man years, square feet, pounds or tons handled. Where exercise of the option would result in an extension of duration of the contract, the option may

(a) The exercise of an option by the Government requires the contracting officer's written notification to the contractor within the time period specified in the contract.

(b) Where the contract provides for price escalation and the contractor requests revision of price pursuant to such provision, or the provision applies only to the option quantity, the effect of escalation on prices under the option must be ascertained before the option is exercised.

(c) Options should be exercised only if it is determined that:

(1) Funds are available,

(2) The requirement covered by the option fulfills an existing need of the Government, and

(3) The exercise of the option is most advantageous to the Government, price and other factors considered.

(d) Insofar as price is concerned, the determination under paragraph (c) (3, of this section shall be made on the basis of one of the following:

(1) A new formal advertisement, or request for proposals if appropriate, fails to produce a better price than that offered by the option. (Where the contracting officer anticipates that the option price will be the best price available, he should not use this method of testing the market but should use one of the methods in subparagraphs (2), (3), or (4) of this paragraph (see § 1.309)).

(2) An informal investigation of prices, or other examination of the market, indicates clearly that a better price than that offered by the option cannot be obtained.

(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, considering such factors as market stability and a comparison of the time since award with the usual duration of contracts for such supplies and services.

(4) Established prices are readily ascertainable and clearly indicate that formal advertising or informal solicitation can obviously serve no useful purpose.

(e) Insofar as the "other factors" mentioned in paragraph (c)(3) of this section are concerned, the determination should, among other things, take into account the Government's need for continuity of operations and potential costs to the Government of disrupting operations, including the cost of relocating necessary Government-furnished equipment (as, for example, in certain repair and overhaul contracts for aircraft or other complex equipment).

(f) When it has been determined that an option may properly be exercised in accordance with the principles set forth herein, such determination shall be set forth in writing and made a part of the contract file. Written notification to the contractor of the exercise of the option and any contract modification resulting therefrom shall cite the option clause contained in the original contract as authority for the procurement of the option quantity; and no citation under 10 U.S.C. 2304(a) is required. Reporting, however, shall be in accordance with the instructions applicable to DD Form 350 (Individual Procurement Action

Report).

[26 F.R. 2601, Mar. 28, 1961, as amended at 26 F.R. 9634, Oct. 12, 1961]

§ 1.1506 Examples of option clauses.

(a) A clause substantially as follows may be used where the contract expresses the option quantity as a percentage of the basic contract quantity or as an additional quantity of a specific line item.

OPTION FOR INCREASED QUANTITY (JAN. 1961)

The Government may increase the quantity of supplies called for herein by the amount stated in the Schedule and at the unit price specified therein. The Contracting Officer may exercise this option, at any time within the period specified in the Schedule, by giving written notice to the Contractor. Delivery of the items added by the exercise of this option shall continue immediately after, and at the same rate as, delivery of like items called for under this contract unless the parties otherwise agree.

(b) A clause substantially as follows may be used where the contract identifies the option quantity as a separately priced line item having the same nomenclature as a corresponding basic contract line item.

OPTION FOR INCREASED QUANTITY (JAN. 1961)

The Government may increase the quantity of supplies called for herein by requir