(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

ing the delivery of the numbered line item identified in the Schedule as an option item, in the quantity and at the price set forth 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.

(c) A clause substantially as follows may be used where it is intended to extend the services described in the Schedule.

OPTION TO EXTEND SERVICES (JAN. 1961)

The Government may require the Contractor to continue to perform any or all items of services under this contract within the limits stated in the Schedule. The Contracting Officer may exercise this option, at any time within the period specified in the Schedule, by giving written notice to the Contractor. The rates set forth in the Schedule shall apply to any extension made pursuant to this option provision.

(d) A clause substantially as follows may be used to provide for continuing performance of the contract beyond its original term.

OPTION TO EXTEND THE TERM OF THE
CONTRACT (JAN. 1961)

This contract is renewable, at the option of the Government, by the Contracting Officer giving written notice of renewal to the Contractor within the period specified in the Schedule; provided, that the Contracting Officer shall have given preliminary notice of the Government's intention to renew at least sixty (60) days before this contract is to expire. (Such a preliminary notice will not be deemed to commit the Government to renewal). If the Government exercises this option for renewal, the contract as renewed shall be deemed to include this option provision. However, the total duration of this contract, including the exercise of any options under this clause, shall not exceed

maintainability, reliability, or interchangeability. Specifically, value engineering as contemplated by this part constitutes a systematic and creative effort, not required by any other provision of the contract, directed toward analyzing each contract item or task to ensure that its essential function is provided at the lowest over-all cost. Over-all cost may include, but need not be limited to, the costs of acquiring, operating, and logistically supporting an item or system. (b) In order to realize fully the cost reduction potential of value engineering, provisions which encourage or require value engineering shall be incorporated in all contracts, including letter contracts, of sufficient size and duration to offer reasonable likelihood for cost reduction. All such provisions shall offer the contractor a share in cost reductions ensuing from change proposals he submits under such contracts. While most proposals will result from the contractor's value engineering efforts, any proposal submitted by the contractor which meets the documentation and other requirements of the value engineering clauses may be rewardable. In addition, the value engineering provisions are intended to induce major prime contractors to encourage subcontractors to utilize value engineering techniques. Finally, to realize the cost reduction potential of value engineering, it is imperative that value engineering change proposals be processed by all parties as expenditiously as possible.

(c) In addition to the value engineering potential noted above (cost reductions resulting from contract change proposals), it is recognized that a contractor may develop a cost reduction proposal with regard to a weapon system or end item for which he does not have a current contract, e.g., where the contractor originally developed and produced a weapon system, it is now operational, and the contractor no longer has a production or other contract therefor. In such a case, the proposal would not come within the provisions of this subpart. Nevertheless, it is desirable that the potential cost reductions resulting from unsolicited proposals not within the scope of value engineering clauses under current contracts be realized by the Government. Accordingly, nothing in this subpart shall be construed to preclude the purchase of unsolicited proposals on a case-by-case basis or other

special contractual arrangements, pursuant to Subpart B, Part 9 of this chapter, or 10 U.S.C. 2386, which are necessary to induce contractors to develop such proposals and make them available to the Government.

[32 F.R. 12088, Aug. 23, 1967, as amended at 34 F.R. 13838, Aug. 29, 1967]

§ 1.1702 Types of value engineering provisions.

§ 1.1702-1 Incentives.

(a) A Value Engineering Incentive clause permits the contractor to share in cost reductions that ensue from change proposals he submits. Many types of contracts, when properly used, provide the contractor with an incentive to control and reduce costs while performing within the specifications and other contract requirements. However, the practice of reducing the contract price (or fee in the case of cost-reimbursement type contracts) under the Changes clause tends to discourage contractors from submitting cost reduction proposals requiring a change to the specifications or other contract requirements even though such proposals could be beneficial to the Government. The objective of a value engineering incentive provision is to encourage the contractor to submit such cost reduction proposals. To be acceptable, a value engineering change proposal must involve some change in the contract specifications, purchase description, or statement of work; this may include the elimination or modification of any requirements found to be in excess of actual needs in the areas of, for example, design, components, materials, material processes, tolerances, packaging requirements, technical data requirements, or testing procedures and requirements, and consequent reduction in the contract cost. Furthermore, even when the contract cost may be increased, the incentive provisions encourage contractors to submit value engineering change proposals that are likely to lead to overall savings resulting from significant net reductions in collateral costs of Government-furnished property, operational requirements or logistic support requirements.

(b) Value engineering proposals which satisfy the above requirements shall not be rejected on the ground that they also involve a termination, in whole or in part, of contract line items; moreover, the cost savings resulting from such quantitative reductions shall be shared

with the contractor. On the other hand, contractor proposals which concern the quantitative requirements of the Government but do not satisfy the above criteria are not within the intent of the value engineering provisions, and the contractor will not share under this subpart in savings resulting solely from such quantitative proposals.

(c) In all cases, the contractor's share in overall cost savings resulting from the Government's acceptance of a cost reduction proposal shall be determined as provided in the Value Engineering Incentive clause.

§ 1.1702-2 Program requirement.

A Value Engineering Program Requirement clause obligates the contractor to engage in value engineering of the scope and at the level of effort required by the Government as an item of work in the contract schedule. In addition, the clause contains value engineering incentive features which provide for the contractor share in savings resulting from the acceptance of any value engineering change proposals (as described in § 1.1702-1), whether or not such proposals result from the value engineering program requirement (except when the contract also includes the Incentive clause in accordance with § 1.1702-3(d)). The principal reason for requiring a value engineering program is to get early results (i.e., in the initial stages of design, development, or production), so that specifications, drawings, and production methods will reflect the full benefit of value engineering. The value engineering program requirement, which shall be set forth in the contract schedule as a line item and separately priced, may apply to all or selected phases of contract performance and should be tailored to the particular contract situation. § 1.1702-3 Use of incentive and program clauses.

(a) Except as provided in subparagraphs (1) through (6) of this paragraph, a Value Engineering Incentive clause in accordance with § 1.1707 shall be included in all contracts in excess of $100,000, and may in the discretion of the contracting officer be included in contracts not in excess of $100,000:

(1) In cost-reimbursement type contracts other than cost-plus-incentive-fee contracts;

(2) Where this would be inconsistent with a value engineering program re

quirement included in accordance with paragraph (b) of this section;

(3) Where the design and cost of the item or class of items being procured are primarily controlled by the commercial market;

(4) When the Head of the Procuring Activity has determined that value engineering offers no potential for cost reduction;

(5) In (i) time and material or labor hour contracts, (ii) contracts for architect-engineering, engineering services, research, or exploratory development, (iii) contracts containing provisions for product or component improvement, or (iv) contracts for the production of items with respect to which there is a concurrent contract for product or component improvement-unless, in any of these cases, the contracting officer affirmatively determines that the contract has a clear potential for value engineering cost reductions and that a Value Engineering Incentive clause will provide an effective stimulus to the contractor;

(6) In contracts for the concept formulation, preliminary design, and contract or system definition phases of a weapon system development program.

(b) (1) Except as provided in subparagraph (2) of this paragraph, a Value Engineering Program Requirement clause in accordance with § 1.1707 shall be included in the following types of contracts if they are in excess of $1 million-and may be included in these types of contracts if they are not in excess of $1 million-unless the Head of a Procuring Activity has determined with respect to a particular contract or class of contracts that the potential for cost reduction does not justify the effort involved in the establishment of a special value engineering program:

(i) Cost-plus-a-fixed-fee contracts; (ii) Cost-plus-incentive-fee and negotiated fixed-price type contracts for the concept formulation, preliminary design, and contract definition or system definition phases of a weapon system development program-if the contracting officer determines that the contract has a clear potential for value engineering that will be realized only by inclusion of a program requirement;

(iii) In place of the value engineering incentive clause in cost-plus incentivefee and negotiated fixed-price type contracts with respect to which the contracting officer determines that the lack

of firm specifications, of a precise purchase description, or of a detailed statement of work would be likely to render a value engineering incentive provision incapable of realizing the contract's potential for value engineering cost reduction.

(2) A Value Engineering Program Requirement clause shall not be included in the following types of contracts:

(i) Contracts for architect-engineering, construction, basic research, or exploratory development-unless the contracting officer affirmatively determines that the contract has a clear potential for value engineering cost reductions;

(ii) Contracts containing provisions for product or component improvement or contracts for the production of items with respect to which there is a concurrent contract for product or component improvement-unless the program is restricted to areas not covered by the product or component improvement provisions or contract;

(iii) Contracts for the concept formulation, preliminary design, and contract definition or system definition phases of a weapon system development program-unless the contracting officer determines that the contract has a clear potential for value engineering that will be realized only by inclusion of a program requirement; or

(iv) Formally advertised contracts, or negotiated contracts where award will be made solely on the basis of price competition.

(c) With respect to product or component improvement, if the Head of a Procuring Activity affirmatively determines with respect to a particular contract or class of contracts (e.g., engine production contracts) that a value engineering effort offers greater potential benefits to the Government than product or component improvement effort, a value engineering incentive or program requirement clause shall be included (if authorized by paragraph (a) or (b) of this section) in place of any product or component improvement provisions and instead of any separate contracts for product or component improvement.

(d) When a Value Engineering Program Requirement clause is to be included in the contract and the program requirement is restricted to clearly defined phases of the contract work, a Value Engineering Incentive clause shall also be included in the contract if other