Competition or Contract Administration? GAO Draws Fine Line in Option Period Decision

Some things just go together: Bonnie and Clyde; milk and cereal; and federal contracts and option periods. Alright, that last one may be (a lot) less well known, but you get the idea.

Federal contracts usually use option periods liberally. These options allow the government to prolong a contract for years beyond its base period of performance. Nevertheless, option periods are not a guarantee.

As one contractor recently discovered, the government has discretion when exercising options that can leave contractors out in the cold.

Today’s example of government discretion comes from GAO’s decision in VanderHouwen & Associates, Inc., B-419706 (Comp. Gen. Apr. 15, 2021).

In 2017, the Department of Energy established Blanket Purchase Agreements (“BPAs”) with twelve offerors for staffing services, including VanderHouwen. The BPA awarded to VanderHouwen anticipated a 1-year base period, with nine 1-year option periods.

Roughly two years later, DOE informed the BPA contractors that it would review contractor performance under their respective BPAs. DOE planned to use these evaluations to make decisions about exercising future option periods.

Unfortunately for VanderHouwen, DOE’s impression of its performance was not as favorable as some of its BPA competitors. According to DOE, VanderHouwen had ranked 11^th out of the 12 contractors providing staffing services. In the spring of 2021, VanderHouwen was notified that its upcoming option period would not be exercised.

With its contract facing termination, VanderHouwen sought a way to challenge DOE’s decision.

VanderHouwen filed a protest at GAO arguing that DOE had essentially held a new competition among BPA offerors for future option periods. Running with this assumption, VanderHouwen then argued that DOE had made errors in its past performance evaluation that resulted in DOE not picking up VanderHouwen’s options.

This is a nontraditional approach to option period challenges. By regulation, GAO does not have authority to hear matters of contract administration, such as option period exercises. In fact, GAO’s regulations are pretty explicit on this point: “The administration of an existing contract is within the discretion of the agency. Disputes between a contractor and the agency are resolved pursuant to the disputes clause of the contract and the Contract Disputes Act of 1978.” GAO routinely dismisses protests that challenge these contract administration issues.

Instead, contract administration disputes are generally resolved in accordance with the Contract Disputes Act. If a contractor and contracting officer can’t agree on a resolution, the matter can be appealed to the appropriate Board of Contract Appeals or the Court of Federal Claims.

Despite this limitation on GAO’s jurisdiction, VanderHouwen pushed forward with its protest. Unsurprisingly, DOE argued that exercising an option was a contract administration dispute that GAO could not hear.

GAO agreed with DOE. According to GAO, it “will not question an agency’s exercise of an option under an existing contract unless the protester shows that the agency failed to follow applicable regulations or that the determination to exercise the option, rather than conduct a new procurement, was unreasonable.” Thus, while there is a specific factual circumstance where GAO will consider option protests, the exercise of an option more generally will not be subject to GAO’s review because it is a matter of contract administration.

VanderHouwen’s protest did not challenge DOE’s compliance with regulations or allege that a new BPA competition should have been conducted instead of exercising existing options. Rather, VanderHouwen argued the method DOE used for selecting which offerors had contract options exercised was flawed. According to GAO, this is a matter of contract administration that it could not consider. As such, VanderHouwen’s protest was dismissed.

It’s worth noting that agencies generally have broad discretion when deciding whether to exercise a contract action. To prevail on option period appeal, the contractor must demonstrate that the government acted in bad faith or otherwise abused its discretion.

Bad faith requires egregious government conduct. Among the few cases where ASBCA has found bad faith on the part of the government is Apex International Management Services Inc., ASBCA No. 38087 et al., 94-2 BCA ¶ 26,842. That case involved a naval air station maintenance contract where Navy personnel actively worked to sabotage Apex’s performance by spitefully dumping trash in contractor spaces and cutting telephone lines, among other things. On the first day of contract performance, Navy and Apex personnel met to exchange keys. As the Apex staff approached, the Navy personnel threw the collection of keys onto a nearby roof and walked away. Numerous other instances of deplorable government conduct occurred throughout the contract before it was ultimately terminated for default. ASBCA rightfully found this conduct to be in bad faith.

Quite simply, bad faith is an extremely high bar, and it’s hard to show that the government acted with the requisite bad faith needed to challenge a decision to not exercise an option. Perhaps that’s why VanderHouwen instead tried its hand in a bid protest at GAO.

GAO’s decision in VanderHouwen is an example of the significant unilateral discretion agencies have when evaluating whether to exercise option periods. While options are frequently exercised, there can be no guarantee that any contract will have every option exercised. Unfortunately, when a contract comes to a premature end, there’s little recourse for the contractor.