FAR 52.217-3, 52.217-4 & FAR 52.217-5 Evaluation of Options

Applicability:  As stated at FAR 17.208(a) thru (c), the provisions at FAR 52.217-3, 52.217-4, and 52.217-5 are included in solicitations as follows:

(a) Insert FAR 52.217-3 when the solicitation includes an option clause and does not include one of the provisions prescribed in paragraph (b) or (c) below.

(b) Insert FAR 52.217-4 when the solicitation includes an option clause, the contracting officer has determined that there is a reasonable likelihood that the option will be exercised, and the option may be exercised at the time of contract award.

(c) Insert FAR 52.217-5 when:

(1) The solicitation contains an option clause;

(2) An option is not to be exercised at the time of contract award;

(3) A firm-fixed-price contract, a fixed-price contract with economic price adjustment, or other type of contract approved under agency procedures is contemplated; and

(4) The contracting officer has determined that there is a reasonable likelihood that the option will be exercised.

Key Requirements: The purpose of these solicitation provisions is to notify all offerors whether the price of options will be included in the evaluation.  In summary, the provision at FAR 52.217-3 states that options will not be included in the evaluation for award purposes, while the provisions at FAR 52.217-4 and FAR 52.217-5 state that options will be included in the evaluation for award purposes.  The provisions essentially read as follows:

52.217-3 Evaluation Exclusive of Options. The Government will evaluate offers for award purposes by including only the price for the basic requirement; i.e., options will not be included in the evaluation for award purposes.

52.217-4 Evaluation of Options Exercised at Time of Contract Award.  Except when it is determined in accordance with FAR 17.206(b) not to be in the Government’s best interests The Government will evaluate the total price for the basic requirement together with any option(s) exercised at the time of award.

52.217-5 Evaluation of Options. Except when it is determined in accordance with FAR 17.206(b) not to be in the Government’s best interests, the Government will evaluate offers for award purposes by adding the total price for all options to the total price for the basic requirement. Evaluation of options will not obligate the Government to exercise the option(s).

Compliance Verification: Unlike most contract clauses or solicitations, the compliance verification for this solicitation is done to assure that the Government has complied with its solicitation provision (most clauses/solicitations require Government verification of offeror/contractor compliance).  As a result, compliance verification is performed by the individual offerors during the de-briefing and/or protest phase, by verifying that option prices were or were not included in accordance with the solicitation provision in the contract.

 

Remedies: In those cases where the Government fails to follow their specified provision (e.g., the provision says that option prices will not be evaluated for purposes of award, but in the end they are included in the evaluation), a contractor can protest the award and will most likely prevail.

 

Other Key Information:  It is interesting to note that the provisions at 52.217-4 and 52.217-5 both contain a caveat at the beginning of the provision, stating “Except when it is determined in accordance with FAR 17.206(b) (or (c)) not to be in the Government’s best interests… However, the provisions at FAR 17.206(b) and (c) do not include any language discussing when it would not be in the best interests of the Government to not include options in the evaluation.

FAR 52.217-4 and 52.217-5 also raise an additional issue. Although these provisions state that options will be included in the evaluation, they also assume that the entire price of all options will be included. This is where the contracting officer may be able to utilize the reference to FAR 17.206(b) or (c) to adjust for a more realistic evaluation. Unless the contracting officer is very confident that the option(s) would all be exercised, a more realistic price evaluation results if the solicitation specifies a percentage for which options would be included in the evaluation. This assures that all contractor prices for all years are properly considered in the price evaluation. For example, if a contracting officer believes there is a 75 percent chance that the option will be exercised (based on past history, input from the program/requiring office, or other available data), then it does not make sense to include the entire option price in the evaluation. An example of how this concept would work is shown below:

Assume the solicitation provides for a base contract year with two one-year options.  Also assume that the contracting officer, based on information gathered during his/her market research, determines that there is an 80 percent likelihood that Option Year 1 will be exercised, and a 50 percent likelihood that Option Year 2 will be exercised.  As a result, the solicitation states that the lowest evaluated price will be determined based on the following formula:

Base Contract Year x 100%

Option Year 1 x 80%

Option Year 2 x 50%

The following offers were received:

Offeror

Base Year

Option Year 1

Option Year 2

Total

1

$900,000

$900,000

$900,000

$2,700,000

2

$800,000

$900,000

$1,000,000

$2,700,000

3

$1,000,000

$800,000

$900,000

$2,700,000

Based on the information above, the price evaluation results in the following:

Offeror

Base Year

(100% of offer)

Option Year 1 (90% of offer)

Option Year 2 (80% of offer)

Evaluated Price

1

$900,000

$720,000

($900,000 * .8)

$450,000

($900,000 * .5)

$2, 070,000

2

$800,000

$720,000

($900,000 * .8)

$500,000 ($1,000,000 *.5)

$2,020,000

3

$1,000,000

$640,000

($800,000 * .8)

$450,000  (900,000 * .5)

$2,090,000

Based on the above, the lowest evaluated price would be for Offeror 2, based on the probability of exercising the two option years.

 

Final Thoughts: 

In addition to providing a more realistic/fairer price evaluation, weighing the option periods also can mitigate or even eliminate the need for including a provision against “unbalanced pricing”. Determining what constitutes “unbalanced pricing” is almost always a purely subjective determination by the contracting officer. Conversely, weighing the option periods is an almost purely objective evaluation (the only subjective part is the weight the contracting officer puts on each option period, and that is determined in advance and provided to each contractor prior to proposal submission).

Ideally, the FAR Council would either modify the existing provisions or add a new provision that would allow the contracting officer to insert specific percentages for each option year. Without such a provision, contracting officers are likely to simply use an “all or none” approach, i.e., either the option price is included at 100 percent or not included at all. In many cases, neither of these approaches provides the most realistic price evaluation for contractor proposals that include option years.

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