HHS Reference Tool for Contract Funding, Formation and Appropriations Law Compliance
Annual Appropriations — Funding a contract for more than one year
What method will be used to address the portion of the performance period that will exceed one year?
Option means a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract within the existing term of the contract, or may elect to extend the term of the contract. This definition expands on the definition in FAR 2.101. Please also see FAR Subpart 17.2.
Use of options as a unilateral right of the Government requires their identification in the solicitation, evaluation of their terms and pricing as part of the award determination, and their inclusion in the contract award. Because most of the Department’s funding is provided through annual appropriations, base and option periods are typically defined with 1-year terms.
Incremental funding, as addressed in FAR Subpart 32.7 and HHSAR Subpart 332.7, is a method of funding contracts for severable services that obligates funds and sets specific spending limits that are less than the total estimated cost/price of the contract, with the understanding that additional funds are expected to be obligated at a later date. At contract award, the full contract performance period is specified, but the amount obligated provides only an initial increment of funding. Funds are subsequently obligated in periodic installments as work progresses, consistent with the terms of the contract and in observance of the maximum 12-months of performance that may be authorized when the funding source is an annual appropriation.
- When severable services will cover more than one year, it is HHS policy [HHSAR 332.702-70(b)] to structure contracts with a base period (not to exceed 1 year) and annual options. This approach is preferred over the use of incremental funding because the use of options limits the Department’s liability, i.e., ending a contract by not exercising an option would not incur termination costs.
- HHS policy [HHSAR 332.702-70(e)] prohibits the use of incremental funding in contracts for non-severable services.