Options

Q. We are preparing to send out an IFB seeking a General Contractor for the renovation of an historic building into an intermodal transportation center. The project has a $6.5 million budget of FTA funds. Will we be in compliance with FTA's Procurement Guidelines if we follow South Carolina Procurement Law regarding alternates in the bid process? Does the South Carolina Procurement procedures dealing with establishing the lowest most responsive bidder for construction projects conflict with FTA guidelines for the same subject? Does the FTA have guidelines dealing with alternates in a construction IFB?

A. We would characterize the additional work in your IFB more as "options" than "alternates." The term "alternates" is generally used to describe work that is "either/or." For example, the city of Phoenix now has a large commuter rail project under construction and their RFP asked offerors to propose on two alternate design approaches to a highway intersection: one approach being a flyover, the other being a tunnel. The city evaluated the alternative designs and selected the tunnel. Your situation is different in that the work described in the "alternates" is actually additional/optional work that you may want done if future funding permits and you intend to include these additional items in the contract as priced options that you may exercise at some future date.

FTA's policy on "options" is stated in the FTA Circular 4220.1F, Chapter V, paragraph 7.a. (1). It is in fact the same as the South Carolina Procurement Code in that option prices must be evaluated and taken into account in determining the low bid if they are to be exercised later as part of the initial competitive award. If the options are not evaluated in determining the low bid, then they cannot be exercised later unless they are justified as a sole source award. In conclusion, we see no conflict between the SC Code and the FTA policy as far as evaluating the "alternates" (i.e. options) in determining the low bidder. (Revised: September 8, 2009)

Q. Should cost savings achieved due to price reductions by a supplier be passed onto transit agencies either in a contract with a Bus OEM or acquiring options off of another transit agency? Also, if delivery costs increase due to the location of a transit agency interested in acquiring another's options, can the additional costs be added to the contract price?

A major component priced at the time of the original competitive tender has recently had a price reduction to reflect a new market price. The procurement had assignable options and another transit property is interested in acquiring a quantity of available options.

A. We see no problem in your offering a price reduction on the optional buses due to changes in market conditions. We would suggest that you execute a bilateral modification to the contract reflecting a lower pricing before the options are assigned.

With respect to the increased cost to make delivery to different destinations, this would be a valid basis for price adjustment.

Q. Is it true that to be Federally compliant when we award a contract for a term of one year (with four additional (option) years possible upon mutual acceptance), that we must have the proposer also provide pricing for the "possible" additional option years, and therefore evaluate this "possible future" pricing along with the current year's price when determining award?

So if we do not obtain the future possible pricing and the first term ends, if we mutually agree to extend the contract term for an additional year, is this a Sole Source Procurement? Is this so even if the prices are not increased but carried over to the new term?

A. FTA Circular 4220.1F, Chapter V, paragraph 7.a. (1) requires grantees on competitive procurements to obtain option prices and evaluate them as part of the original contract award decision if they want to later treat the exercise of the options as part of the original competitive award. If options are unpriced or otherwise not evaluated, then the extension of the contract will be a sole source action requiring agency approvals, even though the prices for the option periods remain unchanged from the base period. The reason is that no one had the opportunity to offer you a price under competitive conditions for the option periods, and you cannot assume that prices would not have improved had you given the other offerors an opportunity to bid these prices with the understanding that the prices would influence the award decision. (Reviewed: September 8, 2009)

Q. Is it the case that an agency may not option more vehicles under a single contract than it originally purchases under the same contract?

A. The subject of contract options is discussed in the BPPM, Section 8.2.2, "an Options." There is no prohibition per se regarding the inclusion of options that exceed the contract’s base number of units. However, there are considerations for choosing another approach, as the BPPM suggests. One factor to be considered is that FTA Circular 4220.1F, Chapter V, paragraph 7.a. (1) requires the optional quantities be evaluated as part of the award. If they are not evaluated as part of the award, they can only be exercised as a "sole source" action with the requisite approvals by the grantee’s agency management. This means that the contract award must be made on the total price of all items, both base and option, even if the base items’ prices being offered by the overall low bidder are higher than those offered by another bidder. Thus you may be paying more for your immediate needs, and if the options are never exercised, you will have paid more than necessary for the base units.

A second consideration is the Circular requirement in Chapter V, paragraph 7.a. (1)(b) that the grantee determine before exercise of the option that the option prices are better than the prices available in the market at the time the option is exercised. This will require you to do a market survey or new solicitation to determine that the option prices are still the best attainable or that the option is the more advantageous offer at the time the option is exercised. As an alternative you may wish to consider the BPPM’s suggestion to use a "requirements" or "indefinite delivery contract." Orders placed under these types of contracts are not treated as sole-source procurements and do not have to be evaluated like option orders from a price standpoint before being placed.

For a more complete discussion, see the BPPM Section 8.2.2 "Options" and Section 2.4.5 "Indefinite Delivery Contracts."  (Reviewed: September 8, 2009)

Q. When exercising an option from a contract already awarded, should the option be exercised by a contract between the two relevant agencies, a letter assigning the option or by some other method?

A. Before exercising an option on this contract, be sure to review the guidance and the FTA requirements in the Best Practices Procurement Manual, Section 6.3.3 entitled "Joint Procurements of Rolling Stock and Piggybacking." It is essential that there be an existing assignment clause in the contract. If there is an assignment clause in the contract, then the original agency would make the assignment of the contract options, together with all the terms and conditions of the contract, to your agency. The preferred method would be a contract modification between the original contracting parties (i.e., the vendor and the awarding agency). Once this was done, your agency would then issue a contract modification exercising the option. (Reviewed: September 8, 2009)

Q. Is there any FTA requirement that prohibits extending the time limit to exercise an option in a contract? Is there a specific time limit or length of time that a contract cannot exceed?

A. The long-standing five-year contract term limitation for FTA-funded 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). With regard to rolling stock, grantees may award rolling stock contracts for five years' requirements.  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. However, 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.

However, the recipient may not exercise that option later than five (5) years after the date of its original contract.  (Answer revised September 8, 2009)

Q. Does FTA still impose a limitation on option quantities? I believe that there is no longer a 50% limitation on option quantities for solicitations. Where is the citation that allows for a 100% option quantity?

A. The answer to your question is that FTA no longer imposes a limitation on option quantities. The FTA's limit of 50% of the basic contract quantities was abolished in 1996. The current Circular 4220.1F does not have a citation regarding option quantities; however, you should consider the requirement in Chapter V, paragraph 7.a. (1) that option quantities be evaluated in order to determine the basic contract award if they are to be exercised later as elements of the original competitive procurement. If you do not evaluate the option quantities together with the base quantities as your basis for contract award, then you cannot exercise the options later except as a sole source procurement action requiring approval of your agency's sole source approving officials. Having option quantities of this magnitude (100%) could cause a problem with respect to the basic contract award if the low bidder for the base quantities is different than the low bidder for all quantities, both base and option. If you have a situation where the option quantities are so substantial relative to the base quantities for which you presently have funding, and which you have reasonable expectation of needing, you may want to consider an "indefinite delivery" type of contract. These contract types are discussed in the Best Practices Procurement Manual (BPPM), Section 2.4.5, Indefinite Delivery Contracts, and there are several alternative approaches to consider, such as "Requirements Contracts" or "Indefinite-quantity Contracts". (Reviewed: September 8, 2009)

Q. Our contract was awarded with a term of five years, and grantee would like to extend the contract for a year or two, until such time as a reorganization of the transit provider occurs. There is no option clause, but an indefinite extension clause exists in the contract. Can the contract be extended, or is it sole source?

A. The contract in question was awarded with a term of five years and a provision that it could be extended with the mutual agreement of the parties through negotiation. The extended period was not priced in the original proposal.

FTA Circular 4220.1F, Chapter V, paragraph 7.a, requires grantees to evaluate option quantities or periods contained in the contractor's bid or proposal as part of the initial contract award determination. When options have not been evaluated as part of the award, the exercise of such options will be considered sole source procurement. In this case the contractor did not price the optional period, nor did the grantee evaluate a price for the optional period as part of the original award decision. Therefore, the extension of this contract beyond the term that was competed (five years) must be processed as a sole source action.

The grantee will not be required to obtain FTA approval for exceeding the five-year term because FTA rescinded the five-year term limit in its Dear Colleague Letter C-02-08 dated May 29, 2002.* Also, the grantee has the authority to process this action as a sole source procurement through its agency management and need not submit the contract extension for FTA's approval. (Reviewed: September 8, 2009)

Q. Is there a single comprehensive source that identifies the current contract terms and conditions that must be included in third party contracts?

A. The best sources would be the Best Practices Procurement Manual (BPPM), Appendix A.1, and the appendices to Circular 4220.1F.  (Revised: September 8, 2009)

Q.  We have published an RFP for Articulated Modern Streetcars. We are buying 7 cars, estimated to cost around $21–$28 million. We have included an Option in our RFP for the maintenance (i.e., providing preventative maintenance, providing the employees to run the shop, etc.) of the cars. Offerors are not required to submit on the Option (we are making this nonmandatory since not all will be able to offer it). The requirements for the Maintenance Option are defined at a high level; we do not offer defined/detailed requirements. The Maintenance Option would be an agreement for no less than 5 years and we estimate that 5-year costs could range from $5–$10 million.   Offerors are asked to propose a Maintenance plan to us if they so desire. We are not providing evaluation criteria for the Maintenance Option; we are not scoring the Maintenance Option. The way the RFP is set up is that we will evaluate/score the streetcars. When our final rankings are established, if the top-ranked offeror has responded to the Maintenance Option, we will consider the Option. If we are interested in acquiring it, we will negotiate it (along with the car purchase) with the top-ranked offeror.

On the funding for the Maintenance Option: There is no current request to FTA to fund Maintenance. We could, though, possibly use Federal monies for maintenance costs in the future but none are requested at this time.

A. As we understand the facts, your solicitation for 7 streetcars, at an approximate cost of $21 million will base the contract award solely on the streetcars themselves and will not include any considerations for potential maintenance, which may cost about $1 million per year for 5 years. You will allow offerors to propose maintenance as an option but you will not base the award on the maintenance phase if so proposed. However, you may negotiate the maintenance option into the contract.

FTA Circular 4220.1F, Chapter V. paragraph 7.a., deals with options and requires that options be included in the evaluation of initial proposals for the contract award decision if the options are to be considered as part of a competitive action when they are exercised. If the options are not part of the original contract award decision, then they can only be exercised as "sole source" awards, and this requires the documentation of the agency's sole source rationale and approval by agency management. There is always a risk of a protest by a competing company that is not allowed the opportunity to submit a proposal.

You also raised the question about whether FTA rules apply if FTA funding is not used for the maintenance phase. If there are no Federal funds for the maintenance phase and the maintenance phase is accomplished with local funds only, then the FTA Circular requirements do not apply to that portion of the contract. You will have to determine if your agency is receiving "operating assistance" from FTA, in which case the maintenance phase will be subject to the Circular since all operating contracts must comply with the Circular. (Revised: September 8, 2009)

Q.  I would like to be sure that we will be in compliance if we can document the file that exercise of options for which funds have not been appropriated, does not require evaluation at the time of original award. In awarding the contract that will include options, the following standards apply:

  1. Evaluation Required. In general, FTA expects the recipient to evaluate bids or offers for any option quantities or periods contained in a solicitation if it intends to exercise those options after the contract is awarded.
  2. Evaluation Not Required. The recipient need not evaluate bids or offers for any option quantities when the recipient determines that evaluation would not be in its best interests. An example of a circumstance that may support a determination not to evaluate bids or offers for option quantities is when the recipient is reasonably certain that funds will not be available to permit it to exercise the option.

A. If a grantee has included options in a solicitation believing that funds will later be available to exercise them, and subsequently determines, prior to award and during the proposal evaluation process, that future funding for the options is unlikely, then the options need not be evaluated (and perhaps should not be evaluated) as part of the award decision.  However, if those options are not evaluated, then they may not be exercised later as part of the original competitive process. See FTA Circular 4220.1F, V 7. a. (c) 1.  They could only be exercised as a sole source contract action. In fact, one would assume that the unlikelihood of funding for the options, and the decision not to evaluate them, would mean that the options would not normally be included in the basic contract. (Posted: May 2010)

Q. Is an amendment to a contract (originally issued as a Sole Source and approved by our City Commission) to add the option of purchasing additional units considered acceptable and in-scope?  What documentation (besides completing another Sole Source) would be needed? If not acceptable, should we issue a separate contract for the purchase of units as needed?  Or, should we terminate the existing contract and issue a new contract incorporating the continuing software services from the first contract with the purchase of additional units as needed?

Background Information: We have a Technology License and Product Purchase Agreement effective 9/2/10 which included the purchase of 18-20 APC units and the software.  We purchased the 20 units within a month of the contract effective date.  Now, the department has received more funds and has decided to purchase 10 more units.  I think that an amendment to the existing contract to allow for the purchase of additional units, as needed, is allowable and within the scope of the contract.  The vendor is agreeable to the amendment but we haven't discussed the termination/issuance of a new contract incorporating the original.

A.  It appears that your existing contract scope is limited to 20 units and any units beyond that amount would require either a sole source justification or a new competitive procurement.  A change order to increase the requirements by 50% would be an impermissible cardinal change. We would see no purpose in terminating the existing contract and awarding a new contract since the existing contract has not been completed.  If you process a sole source justification for the additional units you could add those units to the existing contract by means of a contract modification.  Your authority for this modification would be the approved sole source justification based on a need for standardization with existing hardware and software, not the Changes Clause. (Posted: July, 2011)


Q. We have a contract for transit services and are preparing to exercise the contract option. The option and its price were evaluated as part of the procurement process prior to award. The agency is interested in negotiating a lower option price with the vendor (for cost savings) prior to exercising the option. My understanding is that an option of this type cannot be opened for negotiation and that the agency must decide to exercise the option at the evaluated price or not exercise the option. This is in contrast to options for equipment where cost savings may occur due to market conditions and price changes of the actual piece of equipment. Is my understanding of this situation correct? Background Information: 4220.1F makes it clear that you cannot negotiate price when exercising an option held by another grantee but is not so explicit in this area about options for a grantee’s own contract. I believe that the same standard applies but I am being questioned on this.

A. We would recommend that you exercise the option first and then begin negotiations with the contractor to explore ways to reduce the cost of operations and thus the price of the contract. This avoids the general FTA policy problem with renegotiating option prices but also accomplishes your goal of reducing operational costs where possible. Of course the changes in operational methods, service levels, etc. will require a change order to the contract and a negotiated equitable price adjustment to the contract after the option is exercised. (Posted: December, 2011)


Q. Once we have selected our highest qualified firm and we are ready to negotiate pricing, do we have to obtain firm fixed pricing for the full term of the contract? Some agencies ask for the base contract pricing only and negotiate pricing for out-years once task requests are issued. How can I do a cost analysis then if I don't have final pricing for the full term, including option years? I thought one had to evaluate option pricing when awarding or is this requirement waived for A/E contracts.

A. FTA requires grantees to evaluate the price of options contained in the solicitation if they intend to award the options after the contract is awarded. This requirement is stated in FTA Circular 4220.1F, page VI-22. The FTA Circular is available online: http://www.fta.dot.gov/laws/circulars/leg_reg_8641.html

The FTA requirement to evaluate option prices is seeking to establish the lowest price offer based on the total of basic and option quantity pricing. Then when options are exercised, the grantee can say with validity that the option item pricing is based on competition, and the action of exercising the options is a competitive one. If the options were not considered/evaluated in order to determine the low price offer, then the grantee cannot exercise those options later and consider the action as "competitive," but must process the action with a sole source (non-competitive) justification.

The situation of A&E procurements differs from non- A&E procurements because price is not a factor for selecting the contractor. The only factors considered for award are technical qualifications. Thus the grantee may advertise a long-term project based on the A&E firms' qualifications to complete the entire project, and inform the proposers in the solicitation that it is the intent to select a firm for the entire project, but to negotiate prices for completion of the project in phases as the work becomes better defined over time. The fact that the later phases were not and could not be priced initially does not mean the later negotiated phases are sole source. In fact the A&E firm was selected competitively to perform the entire project and prices could not be considered by law during the selection process (in accordance with the FTA Circular 4220.1F, Page VI-12).

As far as cost analysis is concerned, all cost proposals from the A&E contractor will require a cost analysis when they are submitted - for the basic contract work and then for subsequent phases as they are defined and priced. You cannot be expected to evaluate costs for the later phases as part of the initial contract award when those phases are undefined and there is no cost proposal for them. (Posted: January, 2012)

Q.
Is a new Independent Cost Estimate required to exercise an option that was evaluated as part of the solicitation and award?##Background Information: I have a 5 year (2 year + 3 one year options) contract that was approved by the Board of Directors. I'm trying to establish if an ICE is required to exercise the option years.

A. There no need to establish another ICE. However, the Contracting Officer, after considering price and other factors, should make a determination based on one of the following:

• A new solicitation fails to produce a better price or a more advantageous price than that offered by the option. If it is anticipated that the best price available is the option price or that this the more advantageous offer, the CO should not use this method (new solicitation) of testing the market.

• An information analysis of prices or an examination of the market indicates that the option price is better than prices available in the market or that the option is the more advantageous offer.

• The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer. The CO shall take into consideration such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services.

The CO should document the fact that he/she checked market conditions before exercising the option. (Posted: August, 2013)