Contract Term Limitations

Q. We are preparing to solicit for a fixed route bus service contract that will be partially funded with Federal money. The contract requires the successful proposer to buy replacement parts to maintain the vehicles. Because of this, would this contract be subject to the five-year limitation? A. The five-year contract term limitation is discussed in the Best Practices Procurement Manual (BPPM) section 2.2.1 – Contract Period of Performance Limitation. This section is available online here. The five-year limitation applies to grantee contracts for rolling stock and replacement parts. The limitation arises out of 49 USC 5326(b) which states: (b) Multiyear Rolling Stock. – (1) 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 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. We do not see your contract as being subject to the five-year contract term limitation.

Q. We're in the process of drafting a section to address the 5-year contract period of performance and finding it difficult to write a paragraph that states, in the affirmative, what that limitation actually is. My original draft stayed rather loyal to the language in the 4220.1E footnote (which gives a good description of what it is not, but the Law Dept. is looking for a clearer statement of what it is for better guidance in our manual. 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 create once your order gets to the top of the heap.

Q. I have a client whose current RFP draft for Transit Service Operation includes 3-year base with one three-year option to renew. I have been informed from a colleague that FTA now allows base contracts of FIVE years with two one-year extensions. Which is correct? Could you please provide the FTA circular or guidance reference for this new change? A. FTA's current policy on contract term limitations may be found in the FTA Circular 4220.1E, paragraph 7.m and related footnote. FTA no longer has a five-year contract term limitation on service contracts. The current limitation of five years, which is statutory, applies only to contracts for rolling stock and replacement parts. The current FTA Procurement Circular (with explanatory footnotes) may be accessed online here. FTA now looks to grantees to use sound business judgment in establishing the term of their contracts. The Circular offers guidance as to factors to be considered.

Q. I have read FTA C 4220.1D Paragraph 7(m) contract Term Limitation and I want to confirm that it is appropriate to solicit para-transit and fixed route transportation services for a contract period greater than 5 years. This would be a revenue-generating contract, with monies being generated via the fare box. What I envision is a para-transit, fixed route contract with a contract term of eight to ten years and up to two (2) additional one year options. 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, competition and hopefully a lower operating dollar per hour operating cost, (lower Bid price) submitted by the offers. The longer term would allow the offer a longer depreciation schedule window as well. A. FTA has issued a new procurement FTA Circular 4220.1E that replaces 4220.1D. Section 7.m - Contract Term Limitation, deals with the subject of contract term limits. The only term limits now are those that apply to rolling stock and replacement parts therefor. 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 attracting more competitive interest and thus lowering the operating cost per hour. This is the kind of analysis that FTA is seeking to encourage from grantees as they seek to establish the optimum terms of their contracts.

Q. What is the update to the five-year contract term limitation? A. The five-year contract term limitation for FTA-funded contracts, including "revenue contracts," awarded by grant recipients is hereby rescinded. Revenue contracts are those that utilize FTA-funded real estate, equipment and facilities to generate revenue. With this rescission, grant recipients no longer need to obtain FTA approval for contract terms exceeding five years. Please note, however, that contracts for rolling stock and replacement parts are still limited to not more than five years, as required by statute. (49 United States Code Section 5326(b)) 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. ________________ FTA's Dear Colleague Letter is available on the Internet.

Q. Are rolling stock procurements eligible for the FTA waiver of the five-year limit? A. No. Rolling stock procurements are not eligible for the FTA waiver of the 5-year limit. The limitation is statutory and cannot be waived.

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 rolling stock and replacement part contracts.

Q. What happens to the contract when a city 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). All of this is to say that the city should not assume that FTA would require a termination of this contract, which would in turn precipitate a dispute because the contract was terminated prior to its originally contemplated term. We would also say that the fact that the contract was initially awarded for a term longer than five years would not in our opinion void the contract. When grantees fail to comply with FTA administrative requirements, it does not result in their third-party contracts becoming unenforceable.

Q. We have a contract for transit management services (fixed route). The five-year term of the contract expires on 6-30-03. Is it acceptable to extend the contract since FTA has waived the five-year 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 than the one raised by your situation. 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 recent 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 toward contracts with terms longer than five year does not change the requirements of FTA Circular 4220.1E, paragraph 8.a. for "full and open competition" or the restrictions on "procurement by non-competitive proposals (sole source)" expressed in Paragraph 9.f. of the Circular.

Q. I understand that the FTA recently removed the five-year contract limit for many federally-funded procurements. Can this policy be grandfathered into contracts that were awarded prior to the 2002 Dear Colleague letter? A. Yes. 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. This assumes that contracts previously awarded were in compliance with the five-year term limit as of May 29, 2002.

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. You will not have to obtain FTA approval to extend contracts awarded prior to the Dear Colleague Letter.

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. The previous limitation of five years has been rescinded by the May 29, 2002 Dear Colleague Letter. There remains, however, the requirements in FTA Circular 4220.1E that grantees comply with (1) the principle of "full and open competition," as stated in paragraph 8 - Competition, (2) the requirements of paragraph 9.f - Procurement by Non-competitive Proposals (Sole Source), and (3) the requirements of paragraph 9.g - Options. Regardless of the term of the original services contract, any extensions to that contract must comply with the above paragraphs of the 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 as 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 also contains requirements for "Options" in paragraph 9.g - Options. 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. (This means that unpriced options 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. ____________ * FTA Circular 4220.1E is available on the Internet.

Q. I have heard that the FTA has changed the five-year rule on third party contracts. Where can I find information regarding any changes to that rule regarding contract length? A. We are attaching a soon-to-be published, revised section 2.2.1 - Contract Period of Performance Limitation of the Best Practices Procurement Manual (BPPM) discussing FTA's current policy regarding contract term limits, with suggested criteria for establishing contract performance periods. As you will see, FTA revised its policy on May 29, 2002 in Dear Colleague Letter C-08-02. You may access this Letter as well as the Best Practices Procurement Manual on FTA's web site.