The Use of Unpriced Options and Other Practices Needs Revision

NSIAD-86-59: Published: Apr 23, 1986. Publicly Released: Apr 23, 1986.

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GAO reviewed the contracting practices that the military services use to award, extend, and renew large multifunction or umbrella contracts for base support services to determine whether: (1) the practices used to extend or review umbrella contracts comply with procurement regulations; and (2) the effectiveness of competition is being restricted by excluding umbrella contract extension or renewal periods from the evaluations for initial contract awards.

GAO found that the military services' use of extensions or renewals for umbrella contracts sometimes does not meet regulatory requirements. In a number of cases, unpriced options were exercised and follow-on contracts were awarded. Although such awards were noncompetitive contracts, contracting officers did not justify their use in writing, as required. As a result, the important benefits that competition is intended to achieve, such as equal opportunity for all to compete, assurance that prices are reasonable, or the increased incentive for improved quality or delivery, were foregone without justification. In addition, GAO found that, in some cases, the military services also restricted the effectiveness of competition obtained on initial awards because they excluded the cost of option or follow-on years from consideration of the initial contracts, thereby lessening the assurance that the government would receive a fair and reasonable price over the life of the contracting cycle.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Defense Acquisition Regulatory Council (DARC) Case 86-42, FAR case 86-52, was established to implement this recommendation. FAC 84-37 revised FAR 17.207(f) to state that an option must be exercised at an amount specified, or reasonably determined.

    Recommendation: To eliminate misconceptions relating to the need to price contract options, and to help ensure that future option provisions are priced, the Secretary of Defense should take actions to have the Federal Acquisition Regulation (FAR) amended to clearly require that all contract options currently covered by procurement regulations be priced at the time the initial or underlying contract is awarded.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DARC Case 86-42, FAR case 86-52, was established to implement this recommendation. FAR 17.206-207 were revised to ensure that exercises of options are in accordance with all regulations regarding competition. The revision is included in FAC 84-37, published in May 1988. The regulations require that the contracting officer make a written determination for the contract file.

    Recommendation: The Secretary of Defense should take actions needed to ensure that, for contracts currently containing unpriced and unexercised options, written noncompetitive justifications have been properly supported and approved before the unpriced options are exercised.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: This recommendation was accomplished by memorandum of the Associate Director, Directorate of Contracting and Manufacturing Policy, Department of the Air Force, dated February 25, 1986.

    Recommendation: The Secretary of the Air Force should not permit the use of preplanned, noncompetitive, follow-on contracts for base support services based on the extended contractual coverage provisions. Instead, the Secretary should require all planned continuation periods for base support service contracts to be included in the initial contracts by means of multiyear contracts and/or priced options. If the scope of work for these continuation periods is so uncertain as to preclude reasonable pricing at the time of initial contract award, such periods should not be included in the contracting cycle, but procurements for such periods should be based upon competitive resolicitation, unless a sole-source award is justified and approved in accordance with legal requirements.

    Agency Affected: Department of Defense: Department of the Air Force

  4. Status: Closed - Implemented

    Comments: DARC Case 86-42, FAR case 86-52, was established to implement this recommendation. FAR 17.206 was revised to state that contracting officers must evaluate options if it has been determined that the government is likely to exercise the options, and it is in the best interest of the government to do so. The change is included in FAC 84-37.

    Recommendation: The Secretary of Defense should take action to have FAR 17.206, or the related provisions of the Department of Defense (DOD) FAR supplement, amended to require that, regardless of the type of contract used, all options which are likely to be exercised to extend any service contract be evaluated as part of the initial award, unless the contracting officer justifies in writing and receives higher level approval that not evaluating the options is more advantageous to the government. If the contracting officer has a reasonable basis for determining that the option is not likely to be exercised, then evaluating it should not normally be considered more advantageous to the government.

    Agency Affected: Department of Defense


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