(2) In order to accomplish its mission, the awarding agency must exercise considerable direction and control over the manner of performance or timing of the work.

(b) Grants. The grant is the appropriate instrument for providing support to an activity of the applicant which is in furtherance of a statutory purpose of the awarding agency when:

(1) There is no expectation of a specific service or end product to be furnished to the Government as a quid pro quo for Federal funds; or

(2) The awarding agency does not need to exercise considerable direction and control over the manner of performance or timing of the work, and therefore extensive freedom of approach in carrying out the purpose of the award is to be reserved to the recipient.

§ 3-1.5303-2 Secondary selection criteria.

When the basic criteria in § 3-1.53031 do not resolve questions on the choice of instrument, the following secondary criteria shall be considered:

(a) Contracts are preferred when the initiative for undertaking the activity primarily originates within the Government. Conversely, grants are preferred when the initiative primarily originates with the applicant for support. However, this is not intended to limit or prohibit either the stimulation of grant applications by awarding agencies, or the award of contracts pursuant to unsolicited proposals in appropriate circumstances (see Subpart 3-4.52 of this chapter).

(b) Grants are the preferred instrument for support of basic research projects. (Applied research may be supported by either contracts grants, in accordance with other criteria in this regulation.)

§ 3-1.5304 Mandatory use of contracts.

or

Notwithstanding the provisions set forth in § 3-1.5303, selection of contracts is mandatory whenever:

(a) An award is to be made to a commercial (i.e., profit-making) organization; or

(b) Material having a security classification is involved; or

(c) Payment of an amount in excess of actual costs (i.e., profit or fee) is intended.

Subpart 3-1.54-Options

SOURCE: 40 FR 54569, Nov. 25, 1975, unless otherwise noted.

§ 3-1.5400 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;

(b) Research and development; or

(c) Contracts to be awarded on a cost-reimbursement basis. However, it does not preclude the use of appropriate option provisions in such contracts. Where options are used in costreimbursement contracts, examples of suggested language are included in § 31.5406.

§ 3-1.5401 Definition of options.

(a) As used in this subpart, an option is a provision in a contract under which, for a specified time, the Government may elect to purchase at an established price or at a price that can be established by reference to some specific method of calculation which will make the price certain, additional quantities of the supplies or services called for by the contract, or may elect to extend the period of performance of the contract. An option may call for delivery of the option quantity within the initial contract period or may call for delivery of the option quantity subsequent to the initial contract period. In this latter case, the option shall call for the option quantity and extend the initial contract period.

(b) An option must: (1) Identify the supplies or services as a discrete option quantity in addition to the basic quantity of supplies or services to be delivered under the initial contract award; (2) establish a price or specify a method of calculation which will make the price certain; (3) be agreed to and included in the initial contract award; (4) permit the Government the right to exercise the option unilaterally.

(c) Contract provisions which provide the Government the right to buy additional requirements, subject to the

written agreement of the contractor, do not meet the requirement of paragraph (b)(4) of this section, and are not authorized. Further, any contract provision which extends the initial contract period without requiring delivery of additional supplies or services is not an option but only an extension of the basic requirement.

§ 3-1.5402 Applicability.

(a) Option clauses which require delivery of the option quantity within the initial contract period may be included in contracts only where requirements within the period of initial contract performance are foreseeable. Option clauses which both extend the initial contract period and require delivery of the option quantity during the extended period may be used only when it can be determined, with a high degree of certainty prior to contract award, that there will be a need for additional requirements. 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 at prices different than the price for the initial quantity. 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 (in lieu of exercising such an option) 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) supplies will have to be procured at some future date in such a quantity that would constitute an economic production run, 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, except that in the case of services, option clauses may be included for foreseeable requirements if the use of such option is considered to be in the best interest of the Government;

(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;

(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 (ii) realistic competition for the option quantity is impracticable once the initial contract is awarded; or

(6) The contract is for ADPE, software, or maintenance services except as provided for in FPMR § 101-32.4085.

(c) Option provisions which provide for the option quantity to be delivered subsequent to the initial contract period shall not be used to avoid competition, to fund an overrun or excuse a delay in timely performance or delivery, to provide continuing support of a general nature to the contractor, or to provide for requirements which may be only possibly required.

(d) When options are to be evaluated pursuant to § 3-1.5403(d), the total of the basic and option period shall not exceed five years in the case of services, and the total of the basic and option quantities shall not exceed the requirements for two years in the case of supplies.

§ 3-1.5403 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 funds to pay for services called for in the option are 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 performance and (2) the time required for additional funding and other necessary procurement 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 of 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 or 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) and (d) 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) If options are to be evaluated but not exercised at time of award, it must be determined before the issuance of a solicitation, at a level higher than a 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, 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 interest of the Government to evaluate options in order to eliminate the possibility of a buy-in. This determination shall be based on factors such as, but not limited to, substantial start-up 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

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.

Any bid or proposal which is materially unbalanced as to prices for basic and option quantities will 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) 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 for specified quantities or dates). (f) Where exercise of the option would result in increasing 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 manhours, 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 be expressed in terms of an extended terminal date or of an additional time period, such as days, weeks, or months.

§ 3-1.5404 Exercise of options.

(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 requirements covered by the option fulfill 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 solicitation fails to produce a better price than that offered by the option. When the contracting officer anticipates the option price will be the best price available, he should use one of the methods stated in paragraphs (d) (2), (3), and (4), of this section to test the market before resoliciting bids or proposals.

(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.

(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 41 U.S.C. 252(c) is required.

§ 3-1.5405 Examples of option articles for fixed-price type contracts.

(a) An article 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, without separate pricing of the option quantity.

OPTION FOR INCREASED QUANTITY

The Government may increase the quantity of supplies called for herein by any amount of units up to (specify a quantity or a percentage of the basic quantity) at the unit price specified in the contract. The Contracting Officer may exercise this option by giving written notice of the Government's exercise of the option to the Contractor not later than (specify a date certain or a number of days before the last delivery date under the basic contract). 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 (this sentence may be appropriately modified to reflect agreement of the parties on delivery terms).

(b) An article 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-LINE ITEM

The Government may increase the quantity of supplies called for herein by requiring the delivery of the numbered line item identified in the Schedule or specified in ARTICLE of the Special Provisions as an option item in the quantity and at the price set forth therein. The Contracting Officer may exercise this option by giving written notice of the Government's exercise of such option to the Contractor not later than (specify a date certain or a number of days before the last delivery date under the basic contract). 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 (this sentence may be appropriately modified to reflect agreement of the parties on delivery terms).

(c) An article 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

This contract may be extended for a period of (days, months, years) at the option of the Government, by the Contracting Officer giving written notice of the Government's exercise of such option to the Contractor not later than the last day of the term of the contract; Provided, That such notice shall have no effect if given less than 60 days prior to the last day of the term of the contract unless the Contracting Officer has given preliminary written notice of an intent to exercise such option at least sixty (60) days prior to the last day of the term of the contract (such preliminary notice shall not be construed as an exercise of the option, and will not bind the Government to exercise the option). If the Government exercises such option, the contract as extended shall be deemed to include this option provision; Provided, however, That the total duration of this contract, including the exercise of any options under this clause, shall not exceed months.

(State terms for pricing of performance under the option, e.g., by inclusion of same price as basic quantity, an escalation provision, definitive option price set forth elsewhere in this contract.)

§ 3-1.5406 Examples of option articles for cost reimbursement contracts.

(a) The following may be used as the article which defines an option, when the contract is a Cost Only Term Form, not involving the use of task orders. This article may be used, with appropriate modifications, when the contract involves payment of fee.

OPTION TO EXTEND THE TERM OF THE
CONTRACT

1. At the option of the Government, this contract may be extended, by the Contracting Officer giving written notice of extension to the Contractor prior to the expiration date of this contract. The option may be exercised only if the Contracting Officer gives preliminary notice to the Contractor, not less than sixty (60) days prior to the last day of the term of this contract, of the Government's intention to exercise the option. Such preliminary notice shall not be construed as an exercise of the option, and will not bind the Government to exercise the option. If the Government exercises such option, the contract as extended shall be deemed to include this option provision;