FAR 17.207—Exercise of options.
Plain-English Summary
FAR 17.207 governs when and how a contracting officer may exercise an option in a federal contract. It covers the notice that must be given to the contractor, how economic price adjustment clauses affect option pricing, and the specific findings the contracting officer must make before exercising the option. Those findings include availability of funds, continued Government need, whether exercising the option is the most advantageous method considering price and other factors, whether the option was properly synopsized, and whether the contractor has an active exclusion record in SAM and acceptable past and current performance. The section also explains the methods a contracting officer may use to determine whether the option price is the best value, including market testing, informal market analysis, and timing considerations. It further ties option exercise to competition requirements under FAR part 6 by requiring that the option have been evaluated in the original competition and that the option price be determinable from the basic contract. In practice, this section is the checklist for legally and prudently extending a contract through an option period, and it is designed to prevent automatic renewals, ensure competition and accountability, and document why exercising the option is in the Government’s best interest.
Key Rules
Timely written notice
The contracting officer must give the contractor written notice of option exercise within the time period stated in the contract. Missing the contractual notice window can jeopardize the Government’s ability to exercise the option.
Adjust option pricing first
If the contract includes economic price adjustment and the contractor requests a price revision, the contracting officer must determine how that adjustment affects the option prices before exercising the option. The option should not be exercised until the pricing impact is resolved.
Mandatory pre-exercise findings
The contracting officer may exercise an option only after determining that funds are available, the optioned requirement still meets an existing Government need, and exercising the option is the most advantageous method of meeting that need considering price and other factors. Additional required checks include proper synopsis, no active SAM exclusion record, and consideration of past performance and current contract performance.
Price and market basis
The contracting officer must support the best-value determination using one of the recognized bases: a failed recompetition to produce a better offer, an informal market analysis showing the option is better, or a short time between award and option exercise suggesting the option price is the lowest obtainable. The analysis must be reasonable and documented.
Continuity and small business
When considering 'other factors,' the contracting officer should weigh continuity of operations and the cost of disruption. The effect on small business may also be considered, but it is not the only factor and does not override the Government’s best-interest determination.
Part 6 competition compliance
To satisfy full and open competition requirements, the option must have been evaluated in the original competition and must be exercisable at a price that is specified or reasonably determinable from the basic contract. The option cannot require a new negotiation of the fixed-price work price.
Written file determination
Before exercising the option, the contracting officer must place a written determination in the contract file stating that the exercise complies with the option terms, FAR 17.207, and FAR part 6. This documentation is essential to show the decision was lawful and reasoned.
Proper notice document
The modification or other written notice exercising the option must cite the option clause as the authority. This confirms the legal basis for the action and ties the exercise to the contract’s option terms.
Responsibilities
Contracting Officer
Provide timely written notice; verify and document funds availability, continuing need, best-value rationale, synopsis compliance, SAM exclusion status, and performance history; resolve any economic price adjustment issues; ensure the option was properly competed and the price is determinable; make the required written determination for the file; and issue the modification or written notice citing the option clause.
Contractor
Track the option notice period; respond to any requested price revisions or economic price adjustment issues; continue to perform acceptably if the Government is considering exercise; and understand that option exercise is governed by the contract terms and the Government’s documented best-interest determination.
Agency/Program Office
Confirm the continuing mission need for the supplies or services, support the contracting officer’s assessment of continuity and disruption costs, and provide performance information or other input needed to evaluate whether exercising the option remains advantageous.
Contract Specialist/Acquisition Team
Support market research, synopsis documentation, pricing analysis, and file preparation so the contracting officer can make and record the required findings before the option is exercised.
Practical Implications
Option exercise is not automatic; the contracting officer must complete a documented decision process before extending performance.
A missed notice deadline or a price term that is not clearly determinable can make an option exercise vulnerable to protest or invalidation.
Past performance and current performance both matter, so a contractor with declining performance may lose the option even if the price is attractive.
Market research and price analysis are critical; if the Government can get a better deal through recompetition, the option may not be the most advantageous choice.
The file documentation should be strong enough to show compliance with FAR 17.207 and part 6, because option exercises are often reviewed after the fact for legal sufficiency and procurement integrity.
Official Regulatory Text
(a) When exercising an option, the contracting officer shall provide written notice to the contractor within the time period specified in the contract. (b) When the contract provides for economic price adjustment and the contractor requests a revision of the price, the contracting officer shall determine the effect of the adjustment on prices under the option before the option is exercised. (c) The contracting officer may exercise options only after determining that- (1) Funds are available; (2) The requirement covered by the option fulfills an existing Government need; (3) The exercise of the option is the most advantageous method of fulfilling the Government’s need, price and other factors (see paragraphs (d) and (e) of this section) considered; (4) The option was synopsized in accordance with part 5 unless exempted by 5.202 (a)(11) or other appropriate exemptions in 5.202 ; (5) The contractor does not have an active exclusion record in the System for Award Management (see FAR 9.405-1 ); (6) The contractor’s past performance evaluations on other contract actions have been considered; and (7) The contractor’s performance on this contract has been acceptable, e.g., received satisfactory ratings. (d) The contracting officer, after considering price and other factors, shall make the determination on the basis of one of the following: (1) A new solicitation fails to produce a better price or a more advantageous offer than that offered by the option. If it is anticipated that the best price available is the option price or that this is the more advantageous offer, the contracting officer should not use this method of testing the market. (2) An informal analysis of prices or an examination of the market indicates that the option price is better than prices available in the market or that the option is the more advantageous offer. (3) The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer. The contracting officer shall take into consideration such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services. (e) The determination of other factors under paragraph (c)(3) of this section - (1) Should take into account the Government’s need for continuity of operations and potential costs of disrupting operations; and (2) May consider the effect on small business. (f) Before exercising an option, the contracting officer shall make a written determination for the contract file that exercise is in accordance with the terms of the option, the requirements of this section, and part 6 . To satisfy requirements of part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g.- (1) A specific dollar amount; (2) An amount to be determined by applying provisions (or a formula) provided in the basic contract, but not including renegotiation of the price for work in a fixed-price type contract; (3) In the case of a cost-type contract, if- (i) The option contains a fixed or maximum fee; or (ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102 (c)); (4) A specific price that is subject to an economic price adjustment provision; or (5) A specific price that is subject to change as the result of changes to prevailing labor rates provided by the Secretary of Labor. (g) The contract modification or other written document which notifies the contractor of the exercise of the option shall cite the option clause as authority.