FAR 17.106-1—General.
Plain-English Summary
FAR 17.106-1 explains the basic rules for using multi-year contracting and how contracting officers should structure, price, and administer those acquisitions. It covers the method of contracting, type of contract considerations, cancellation procedures and cancellation ceilings, how to estimate nonrecurring costs, setting cancellation dates, revising ceilings and dates after solicitation, payment of cancellation charges, use of presolicitation or pre-bid conferences, limiting the Government’s payment obligation to available funds, and the effect of a termination for convenience. In practice, this section is about balancing the benefits of multi-year buying—such as better pricing, production stability, and reduced administrative burden—against the Government’s need to protect itself if later-year requirements are canceled or funding is not available. It tells contracting officers how to calculate and document cancellation risk, how to communicate the structure to industry, and how to ensure the contract does not obligate the Government beyond what is legally available. For contractors, it signals that later program years are not guaranteed and that pricing, financing, and risk assumptions must account for possible cancellation and funding limits. The section is especially important in long-lead, production, and other multi-year acquisitions where startup costs, learning curves, and amortization of nonrecurring costs materially affect price.
Key Rules
Method follows requirement
The nature of the requirement governs the contracting method. Multi-year contracting may be used with sealed bidding, including two-step sealed bidding, or with negotiation, so the acquisition strategy should fit the requirement rather than the other way around.
Price for longer performance
Because multi-year contracts run longer, fixed-price contracts should consider economic price adjustment clauses where appropriate. Profit objectives should also reflect contractor risk and financing arrangements over the longer performance period.
Only later years are cancellable
All program years except the first are subject to cancellation. For each cancellable year, the contracting officer must establish a cancellation ceiling, and the ceiling must exclude amounts already included in prior program years.
Reduce ceilings by remaining work
Cancellation ceilings must be reduced for each program year in direct proportion to the remaining requirements subject to cancellation. The regulation provides an example showing how the ceiling percentage declines as the remaining cancellable work declines over time.
Estimate nonrecurring costs carefully
Cancellation ceilings must be based on reasonable estimates of preproduction, startup, learning, and other nonrecurring costs that an average prime contractor or subcontractor would incur and amortize over the multi-year effort. These estimates should be supported by in-house engineering cost analysis and should exclude recurring labor, materials, and other costs tied to later-year performance.
Set cancellation dates
The contracting officer must establish cancellation dates for each program year based on production lead time and the date by which funding can reasonably be established. These dates should be included in the schedule as appropriate.
Ceilings and dates may change
Cancellation ceilings and dates can be revised after solicitation if needed. In sealed bidding, the solicitation must be amended before bid opening; in two-step sealed bidding, changes may be made during step one or incorporated into step two; in negotiated acquisitions, changes may be made during discussions before final negotiation and award.
Cancellation liability is contractual
If cancellation occurs, the Government’s liability is determined by the contract terms. The contract must therefore clearly state the cancellation charge framework and related obligations.
Use conferences when helpful
Presolicitation or pre-bid conferences may be advisable so potential offerors understand how the multi-year contracting approach works, including cancellation risk, funding structure, and pricing assumptions.
Limit payment to available funds
The contracting officer must limit the Government’s payment obligation to the amount available for contract performance. The amount for the first program year is inserted at award and then modified for later years when funds become available.
Convenience termination cap
If the contract is terminated for convenience in whole, including requirements subject to cancellation, the Government’s obligation cannot exceed the amount shown in the schedule as available for performance plus the cancellation ceiling.
Responsibilities
Contracting Officer
Select the contracting method appropriate to the requirement; structure fixed-price pricing with appropriate economic price adjustment and profit considerations; calculate and document cancellation ceilings and dates; estimate nonrecurring costs using engineering and cost data; amend solicitations or revise terms when ceilings or dates change; insert and update the amount available for performance as funds become available; and ensure the contract clearly states cancellation and termination payment limits.
Agency
Support the acquisition strategy with funding planning, production lead-time analysis, and timely availability of funds for later program years. The agency must also ensure the multi-year approach is used only when it fits the requirement and when the funding and cancellation structure can be properly supported.
Offerors/Contractors
Price the offer with awareness that later program years may be canceled and that payment is limited by available funds and contract terms. Contractors should account for startup, learning, financing, and amortization assumptions in their proposals and participate in conferences or discussions to clarify cancellation and funding risk.
Program/Technical Personnel
Provide in-house engineering and cost estimates identifying recurring and nonrecurring costs, including labor learning effects, startup costs, and other technical inputs needed to set reasonable cancellation ceilings and dates.
Funding Officials/Resource Managers
Help determine when funding for later program years can reasonably be established and support the timing and amount of funds inserted into the contract for each program year.
Practical Implications
Multi-year contracting can lower prices, but only if the cancellation structure is realistic; underestimating nonrecurring costs can produce ceilings that are too low and expose the Government to avoidable liability.
Contracting officers need solid cost support, not just rough percentages. The regulation expects detailed engineering and cost analysis, especially for startup, learning, tooling, relocation, and other amortized costs.
The first year is treated differently from later years, so parties must not assume all years are equally firm. Contractors should treat later-year work as contingent and build that risk into pricing and financing.
Ceilings and dates are not static. If market data, discussions, or bid information show the original assumptions were wrong, the solicitation or negotiated terms may need to be revised before award.
The contract language matters a great deal. Cancellation charges, available-funds limits, and termination-for-convenience exposure should be clearly stated so the Government does not promise more than it can legally pay and contractors understand their downside risk.
Official Regulatory Text
(a) Method of contracting . The nature of the requirement should govern the selection of the method of contracting, since the multi-year procedure is compatible with sealed bidding, including two-step sealed bidding, and negotiation. (b) Type of contract. Given the longer performance period associated with multi-year acquisition, consideration in pricing fixed-priced contracts should be given to the use of economic price adjustment terms and profit objectives commensurate with contractor risk and financing arrangements. (c) Cancellation procedures. (1) All program years except the first are subject to cancellation. For each program year subject to cancellation, the contracting officer shall establish a cancellation ceiling. Ceilings must exclude amounts for requirements included in prior program years. The contracting officer shall reduce the cancellation ceiling for each program year in direct proportion to the remaining requirements subject to cancellation. For example, consider that the total nonrecurring costs (see 15.408 , Table 15-1 , III. Formats for Submission of Line Item Summaries C(8)) are estimated at 10 percent of the total multi-year price, and the percentages for each of the program year requirements for 5 years are (i)30 in the firstyear, (ii)30 in the second, (iii)20 in the third, (iv)10 in the fourth, and (v)10 in the fifth. The cancellation percentages, after deducting 3 percent for the first program year, would be 7, 4, 2, and 1 percent of the total price applicable to the second, third, fourth, and fifth program years, respectively. (2) In determining cancellation ceilings, the contracting officer must estimate reasonable preproduction or startup, labor learning, and other nonrecurring costs to be incurred by an "average" prime contractor or subcontractor, which would be applicable to, and which normally would be amortized over, the items or services to be furnished under the multi-year requirements. Nonrecurring costs include such costs, where applicable, as plant or equipment relocation or rearrangement, special tooling and special test equipment, preproduction engineering, initial rework, initial spoilage, pilot runs, allocable portions of the costs of facilities to be acquired or established for the conduct of the work, costs incurred for the assembly, training, and transportation to and from the job site of a specialized work force, and unrealized labor learning. They shall not include any costs of labor or materials, or other expenses (except as indicated above), which might be incurred for performance of subsequent program year requirements. The total estimate of the above costs must then be compared with the best estimate of the contract cost to arrive at a reasonable percentage or dollar figure. To perform this calculation, the contracting officer should obtain in-house engineering cost estimates identifying the detailed recurring and nonrecurring costs, and the effect of labor learning. (3) The contracting officer shall establish cancellation dates for each program year’s requirements regarding production lead time and the date by which funding for these requirements can reasonably be established. The contracting officer shall include these dates in the schedule, as appropriate. (d) Cancellation ceilings . Cancellation ceilings and dates may be revised after issuing the solicitation if necessary. In sealed bidding, the contracting officer shall change the ceiling by amending the solicitation before bid opening. In two-step sealed bidding, discussions conducted during the first step may indicate the need for revised ceilings and dates which may be incorporated in step two. In a negotiated acquisition, negotiations with offerors may provide information requiring a change in cancellation ceilings and dates before final negotiation and contract award. (e) Payment of cancellation charges . If cancellation occurs, the Government’s liability will be determined by the terms of the applicable contract. (f) Presolicitation or pre-bid conferences . To ensure that all interested sources of supply are thoroughly aware of how multi-year contracting is accomplished, use of presolicitation or pre-bid conferences may be advisable. (g) Payment limit. The contracting officer shall limit the Government’s payment obligation to an amount available for contract performance. The contracting officer shall insert the amount for the first program year in the contract upon award and modify it for successive program years upon availability of funds. (h) Termination payment . If the contract is terminated for the convenience of the Government in whole, including requirements subject to cancellation, the Government’s obligation shall not exceed the amount specified in the Schedule as available for contract performance, plus the cancellation ceiling.