HHS Reference Tool for Contract Funding, Formation and Appropriations Law Compliance
Case Study - Use of Options to Acquire Non-Severable Services at the Conclusion of a Multi-Year Contract
The National Institutes of Health (NIH) has a requirement to study the metabolic and pharmacologic effects of a new drug on a test population over a 5-year period. The contractor will be required to complete a final report documenting research results. The Project Officer (PO) has budgeted and planned this effort as a multi-year procurement. In discussing this requirement with the PO, the Contracting Officer learns that the PO also wants to contract for a 3-year follow-up study of research participants, which will result in a separate report.
- Both the initial study and the follow-up study are entire in nature, i.e., they offer nothing of value to NIH until submission of the respective final reports. Thus, the services in both instances are non-severable in nature.
- The RFP could be structured to include two contract line items: contract line item (CLIN) 0001 can cover the initial requirement for the 5-year drug study, funded as required by HHSAR 317.1, with the final report as the deliverable. CLIN 0002 can be an option covering the 3-year follow-up study. When structuring the option, the services it includes must clearly stand alone and provide independent merit and value to the Department, i.e., if the option is not exercised, the report from the 5-year study can stand on its own. If properly structured, use of an option for related non-severable services will not violate the 5-year limit on multi-year contracts in FAR 17.104(a). If, however, all 8 years (i.e., both the initial drug trials and the follow-up study) represent one integrated activity, they cannot be artificially divided. An integrated activity only benefits the Department upon final completion of all related work.
- The way in which the anticipated contract will be funded must be communicated as part of the solicitation covering both CLINs. The option can be either: (1) funded in full, or (2) structured as a separate multi-year requirement with its own cancellation ceiling and funded accordingly. The option cannot be incrementally funded.
- If funding for the full cost of the option will be available at the time the option will be exercised, then the RFP must solicit proposals seeking the total cost of services covered by the option.
- If full funding will not be available, then the RFP must treat the option as a separate multi-year requirement. Like CLIN 0001 (5-year drug study), the RFP must require offerors to propose annual program costs and an estimate and basis for a separate cancellation ceiling for CLIN 0002.
- In either case, all option terms and costs (including the negotiation of the cancellation ceiling if pursued as a multi-year requirement) must be evaluated as part of the original contract award decision.