Government Contracts Monitor

Don’t Bank on Option Exercise – You May Be Very Disappointed

July 3, 2014

A recent decision by the Civilian Board of Contract Appeals reminds us how most options work in government contracts. In JRS Management, CBCA No. 3288, May 28, 2014, the Board denied a contractor’s claim that by failing to exercise the renewal option, the agency acted in bad faith and committed an arbitrary and capricious abuse of discretion, stating: “Regarding the contractor’s claim relating to the non-exercise of the option, the contract specified that the agency’s notification of intent to exercise an option would not bind the agency to exercise the option. The agency did not exercise the option; it was not obligated to exercise the option.”

JRS was awarded a firm fixed-price contract for culinary arts instructors. The contract was for one base year, with four option years. As with most government options, the options here were to be exercised unilaterally by the agency, with the agency not obligated to exercise any of the option years. In addition, under the Option To Extend the Terms of the Contract clause (Mar 2000), FAR 52.217-9 (2011), the agency could extend the initial one-year term of the contract only if the agency provided a preliminary written notice of its intent to extend the term of the contract (in this case, no later than June 8, 2012). What apparently confused JRS – or what JRS overlooked – was that this clause specified that issuance of the preliminary notice of intent to extend did not commit the agency to extend the contract (i.e., to exercise an option).

Thus, when on May 31, 2012, the agency provided written notification of its preliminary intent to exercise the first-year option, JRS apparently mistook this as a commitment, despite the fact that the notice letter expressly stated it was not an actual extension. Ultimately the agency did not exercise the option. This claim followed (on this ground among others).

Not surprisingly, the Board was able to dispose of this count of JRS’ claim simply by noting that the contract specified that the agency’s notification of intent to exercise an option would not bind the agency to exercise the option. Apparently the record, and the contractor’s assertions, did not reveal any other facts that would alter the basic manner of proceeding with this option and, therefore, the agency’s initial notice of intent to exercise the option did not commit the agency to exercise the option. “Because the agency was not obligated to exercise the option, the failure to do so cannot be equated to a lack of good faith or fair dealing.”

It is worth noting that here, in addition to the fact that the agency was free to exercise or not exercise the option – at its sole discretion – the contractor failed to achieve complaint performance with the contract requirements for several months after receipt of the task order. Given this basic failure by the contractor, “the agency’s failure to exercise the option represents neither bad faith nor an abuse of discretion.”

The moral of the story is twofold: first, make sure you understand the terms of any options in your award and, second, make sure you adequately perform if you want to be considered for option year work.

Lindsay Simmons is the attorney responsible for the content of this article.

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Lindsay Simmons