(f) avoid the need to define quality control techniques and procedures for a new contractor each year. Under this agreement, the government would not be required to continue the rent beyond the year in which it completed a successful fiscal year, unless an order is made that expressly extends that rent in the following fiscal year. Indeed, the company offers a one-year lease with the possibility of renewal. In addition, under this proposal, the rent would not exceed the lowest rent that [the contractor] would otherwise have received for an exercise. We have no legal objection to this type of ADP equipment rental plan. Any debate on multi-year contracts must inevitably combine the rule of good needs with subjects from Chapter 6 on the Anti-Edence Act and Chapter 7 on Obligations. I have a delivery contract of several years, with options. It contains 52.232-7 – 52.232-9 and I am asked to exercise the option? I would like to know how you take that into account, as well as your references. If you are looking for a simple way to remember it, try to do so: if a contract meets the definition of a multi-year contract at FAR 17.103, it is a multi-year contract. If the duration of a contract is longer than one year but does not meet the definition of a multi-year contract, it is a multi-year contract. You may even have a supplier that requires a multi-year contract from the beginning. This is usually the case when the supplier offers preliminary investments, such as in a co-manufacturing situation. Suppliers want a guarantee that there is a long-term relationship to offset upfront start-up costs and ensure that they see some of the benefits of their investments.
In a one-year contract with renewal options, the contractor can never be sure that the renewal options are exercised, thus preventing the contractor from depreciating the initial investment costs. In order to protect themselves from this possibility, contractors occasionally apply for a contract termination penalty equal to the unprepreciated balance of the initial investment costs if the government does not renew the contract for one fiscal year. The Comptroller General found, however, that these provisions are contrary to the rule of good needs: multi-year contracts, like most things in life, have advantages and disadvantages. Some of the potential benefits are:23 However, the situation is not one-sided. The multi-year contracting authority also has potential drawbacks:24 attempts to impose penalties for early termination (sometimes referred to as separate charges) have occurred in a number of cases related to automated data processing contracts (ADPs). In one case, a competitor proposed, for a 65-month ADP acquisition contract, to include a provision under which the government would receive a sanction if it did not exercise its annual extension options. Comptroller General found that the penalty was clearly intended to recapitalize the contractor for its investments on the basis of the full life of the system if the government no longer used the equipment.