Contract Term Limitations
Q. We are preparing to solicit for a fixed route bus service contract that will be partially funded by FTA. The contract requires the successful offeror to buy replacement parts to maintain the vehicles. Because of this requirement, would this contract be subject to the five-year limitation of 49 U.S.C. § 5325(e)(1)?
A. The five-year limitation applies to grantee contracts for rolling stock and rolling stock replacement parts. The limitation arises out of 49 USC 5325(e)(1) which states:
"(e) Multiyear Rolling Stock. – (1) CONTRACTS. - A recipient procuring rolling stock with Government financial assistance under this chapter may make a multiyear contract to buy the rolling stock and replacement parts under which the recipient has an option to buy additional rolling stock or replacement parts for not more than 5 years after the date of the original contract."
Your contract is not one to acquire rolling stock or rolling stock replacement parts. It is for operational transit services. Although the contractor must maintain the vehicles and acquire replacement parts as necessary during the course of the contract, the primary objective is to operate the vehicles, not supply replacement parts. Thus, we do not see your contract as being subject to the five-year contract term limitation. (Revised: September 1, 2009)
Q. We are in the process of drafting a provision to address the 5-year contract period of performance and are finding it difficult to write a paragraph that states, in the affirmative, what that limitation actually is. Below is the language that the Law Dept. provided me with. Would you please take a moment to review and confirm whether the statements are correct?
"Under the five-year 'period of performance' rule, any and all requirements under the contract need to arise within five years after award. A requirement is considered to arise during the five-year period of performance, if the contractor/vendor must commence performance within that period. While such a contract must be limited to five years of requirements, neither the overall term of the contract, nor the design, fabrication, delivery or acceptance of any product, need necessarily be completed within the five-year period of performance. Under no circumstances may a new order be placed after expiration of the five year period."
A. The only part that is incorrect is: "the contractor/vendor must commence performance within that period." There are some situations where a long lead-time item has to be ordered in advance not because it takes so long to make it but because the industry is backlogged. There are some steel products that must be ordered many months in advance but take only a few days to manufacture once your order gets to the top of the production schedule. (Revised September 1, 2009)
Q. I want to confirm that it is appropriate to solicit for a para-transit, fixed route contract with a contract term of eight to ten years and up to two (2) additional one year options. This would be a revenue-generating contract, with monies being generated via the fare box. By issuing a revenue-generating contract for a period greater than five years, the value of the contract will be greater, and I hope this will help attract more competitive offers, improve competition and hopefully result in a lower dollar per hour operating cost. The longer term would allow the offer a longer depreciation schedule window as well.
A. The only contract term limits now in effect are those that apply to rolling stock and rolling stock replacement parts. In all other cases FTA requires grantees to exercise "sound business judgment," and "to establish contract terms no longer than necessary to accomplish the purpose of the contract." It would appear you are carefully considering the economic benefits to the agency (and the riding public) of a longer contract term by attempting to attract more competition and thus lowering the operating cost per hour. This is the kind of analysis that FTA encourages grantees to perform as they seek to establish the optimum terms of their contracts. (Revised: September 1, 2009)
Q. What is the update to FTA's five-year contract term limitation?
A. The long-standing five-year contract term limitation for FTA-funded contracts, including "revenue contracts," awarded by grant recipients was rescinded in 2002 by a Dear Colleague Letter. With this policy change, grant recipients no longer need to obtain FTA approval for contract terms exceeding five years. Grantees are expected to continue to be judicious in establishing and extending their contract terms. Good procurement practice dictates that grantees enter into contract terms no longer than minimally necessary to accomplish the purpose of the contract.
Please note, however, that contracts for rolling stock and rolling stock replacement parts are still limited to not more than five years, pursuant to 49 U.S.C. § 5325(e)(1). (Revised: September 1, 2009)
Q. Can you confirm that we no longer need FTA approval to exercise options on a contract that will give that contract a total period of more than five years?
A. On May 29, 2002 FTA issued Dear Colleague Letter, C-08-02 which rescinded the five-year contract term limit rule for all contracts except those for rolling stock and rolling stock replacement parts. (Revised September 1, 2009)
Q. What happens to the contract when a grantee enters into a contract for advertising on buses that violates FTA Circular 4220.1E because it is an eight year contract and was entered into after the Circular was issued but before that provision was waived?
A. We would advise the city to discuss the matter with their regional FTA representative before they terminate the contract. In its Dear Colleague Letter (C-08-02) dated May 29, 2002, FTA rescinded its policy of requiring approval for contract terms longer than five years. Prior to this rescission, FTA had also clarified its policy for revenue contracts' periods of performance, allowing longer periods under specified circumstances. (See Dear Colleague Letter C-08-01 dated June 15, 2001). Therefore, the grantee should not assume that FTA would require a termination of this contract. The fact that the contract was initially awarded for a term longer than five years would not void the contract. When grantees fail to comply with FTA administrative requirements, it does not result in their third-party contracts becoming unenforceable, rather it makes them ineligible for FTA funding. (Revised September 1, 2009)
Q. We have a contract for transit management services (fixed route). The five-year term of the contract expires soon. Is it acceptable to extend the contract since FTA has rescinded its five-year contract term limitation? My concern is that the original RFP was for five years and any extension would amount to a non-competitive procurement.
A. FTA's rescission of the approval requirement to award contracts with terms longer than five years is a separate issue from the one raised by your question. If you competed this service contract with a five-year term, you cannot simply extend the term of the contract on a non-competitive basis because of the FTA term limit approval rescission. You will have to process any extension to this contract as a sole source action through the appropriate management officials with authority to approve non-competitive contract awards. FTA's rescission of the approval requirement for contracts with terms longer than five year does not change the requirements of FTA Circular 4220.1F, Ch. V for "full and open competition" or the restrictions on "procurement by non-competitive proposals (sole source)". (Answer revised September 1, 2009)
Q. How does rescission of the five-year contract term limitation apply to contracts that were executed before the rule change? Do such contracts require FTA approval before they can be extended beyond five years?
A. The requirement to obtain FTA approval for contract terms longer than five years was rescinded by the FTA Dear Colleague Letter C-08-02 dated May 29, 2002. From that time on, no contracts, including existing contracts, require FTA approval if their terms exceed five years. Please note, however, that contracts for rolling stock and rolling stock replacement parts are still limited to not more than five years, pursuant to 49 U.S.C. § 5325(e)(1). (Revised September 1, 2009)
Q. The FTA rescinded the five-year limitation on contract terms by a "Dear Colleague" letter dated May 29, 2002. What limitations now apply to a grantee's authority to amend a services contract, awarded prior to that rescission and currently being administered, to extend the term of the contract beyond five years?
A. There are now no FTA administrative limitations on the number of years that service contracts may be awarded for, nor for the period of any extensions. There remain, however, the requirements in FTA Circular 4220.1F that grantees comply with (1) the principle of "full and open competition," as required by 49 U.S.C. § 5325(a), (2) the requirement to justify any sole source procurement, and (3) the requirements regarding the exercise of options. Regardless of the term of the original services contract, any extensions to that contract must comply with the above Circular. This means, for example, that if the extended period was not included in the original competition (i.e., priced by the competitors and considered in the original contract award decision), it cannot be considered a part of the original competitive award. It must be processed as a sole source (non-competitive) action, which means the grantee's management official responsible for approving non-competitive contracts must review the rationale and approve the award.
Extending the term of a services contract can be compared to adding additional quantities to a supply contract. In both cases the action is beyond the scope of the contract. It does not qualify as a "contract change" within the scope of the contract. The Best Practices Procurement Manual in Section 9.2.1 - Contract Scope and Cardinal Changes, gives guidance on the criteria to be considered in deciding if a contemplated action is within the scope of the contract, and those principles would apply equally to services contracts and to supply contracts. For example, was the additional work (additional quantities or additional services) within the scope of the original competition? Were all offerors advised to include this extended period in their cost proposals and were those prices evaluated as part of the original contract award?
The FTA Circular 4220.F also contains requirements for "Options" in Chapter V. If this extended period is included in the present contract as an option, then the grantee must comply with the provisions of 9.g. These require that the optional quantities or optional services have been included in the original contract award evaluation decision (i.e., priced by the competitors and considered in the original contract award decision). If the optional quantities or periods were not so priced and evaluated initially, then they cannot be exercised under the authority of the original competition. Such actions can only be awarded as sole source contract extensions or add-ons. This will require adequate rationale/justification for a non-competitive procurement and the grantee's management approval. All of the above presupposes a services contract for a period of time and not for delivery of a defined end product in the contract. If the contract were for technical services to deliver a report that was, for example, to research and solve a technical problem, and the time required to complete that research and furnish the report was extended by unforeseen problems, then a contract extension would in fact be within the scope of the contract. That scenario actually defines a contract for a deliverable item and not for services per se. (Revised September 1, 2009)
Q. How do you determine the calculation for the total amount of rolling stock to ask for in the contract under options that are over and above your projected amount needed in 5 years? In writing a procurement it looks as though it is acceptable to include up to 100% over what your projected need is.
A. The FTA procurement Circular 4220.1F, Chapter IV, Paragraph 2.e. (10) limits the purchase of rolling stock and replacement parts to the grantee’s expected needs for a five-year period. This means that the basic contract and all options can only procure five-years of rolling stock needs and any options must be exercised within five years of the original contract award. Following is the text of the Circular:
(1) Five-Year Limitation. A recipient may enter into a multi-year contract to buy rolling stock, with an option not exceeding five (5) years to buy additional rolling stock or replacement parts, 49 U.S.C. Section 5325(e)(1). The recipient may not exercise that option later than five (5) years after the date of its original contract.
FTA interprets this five-year period as covering the recipient’s “material requirements” for rolling stock and replacement needs from the first day when the contract becomes effective to its “material requirements” at the end of the fifth year. In the case of rolling stock, which frequently cannot be delivered expeditiously, FTA recognizes that a recipient’s “material requirements” for rolling stock will necessarily precede its actual need to put that rolling stock to use in public transportation service. This means that the contract may not have options for more rolling stock and replacement parts than a recipient’s material requirements for a five-year period. The five-year rule does not mean the recipient must obtain delivery, acceptance, or even fabrication in five years. Instead it means only that FTA limits a contract to purchasing no more than the recipient’s material requirements for rolling stock or replacement parts for five years based on the effective date of the contract. (Posted: October, 2010)
Q. Is there a term limit for non-rolling stock contracts?
A. The only contract term limits now in effect are those that apply to rolling stock and rolling stock replacement parts. In all other cases FTA requires grantees to exercise "sound business judgment," and "to establish contract terms no longer than necessary to accomplish the purpose of the contract."
(Posted: July, 2011)
Q. I would like to verify that the 5 year rule on contract
length only applies to rolling stock. Would we be ok if our contract
for Disaster Recovery for our computer system went over five years?
Are there any other rules about contract length I should know about?
A. The only procurements having FTA term limits are rolling stock and replacement parts. You are free to construct contract term limits using your best business judgment to obtain best pricing, best quality product, etc., without unduly long terms that would preclude full and open competition. For example, don't construct repetitive service contracts for periods like 10 years at a time. I would suggest keeping a five - year policy except when a longer period is necessary for the contractor to recover a significant investment. (Posted: January, 2012)
Q. In our recent Triennial Review of our Sub-Grantees, it was indicated that contracts cannot exceed five years and that our maintenance contracts will have to go out for solicitation. The only part of 4220.1F that refers to the five-year limitation is when buying rolling stock and replacement parts. I was wondering if I could be pointed into the right direction where this five-year limitation applies to all FTA funded contracts and just not rolling stock and replacement parts.
A. The long-standing five-year contract term limitation for FTA-funded contracts, including "revenue contracts," awarded by grant recipients was rescinded in 2002 by a Dear Colleague Letter. With this policy change, grant recipients no longer need to obtain FTA approval for contract terms exceeding five years. Grantees are expected to continue to be judicious in establishing and extending their contract terms. Good procurement practice dictates that grantees enter into contract terms no longer than minimally necessary to accomplish the purpose of the contract. Please note, however, that contracts for rolling stock and rolling stock replacement parts are still limited to not more than five years, pursuant to 49 U.S.C. § 5325(e)(1). (Posted: January, 2012)