17.106-1 General
Source: FAR 17.106-1 on acquisition.gov
FAR 17.106-1 ensures multi-year contracts are structured to manage risk, funding, and cancellation through clear procedures for contracting methods, cancellation ceilings, and payment limits.
Overview
FAR 17.106-1 outlines the general principles and requirements for multi-year contracting, focusing on the selection of contracting methods, contract types, cancellation procedures, and financial obligations. It emphasizes that the nature of the requirement should dictate the contracting method, and that multi-year contracts can use sealed bidding or negotiation. The section provides detailed guidance on establishing and adjusting cancellation ceilings, calculating nonrecurring costs, and managing payment obligations. It also addresses the importance of presolicitation conferences and sets limits on the government’s payment liability, including procedures for contract termination and cancellation charges.
Key Rules
- Method of Contracting
- The requirement’s nature determines the contracting method; multi-year contracts are compatible with sealed bidding and negotiation.
- Type of Contract
- Fixed-price contracts should consider economic price adjustments and profit objectives reflecting contractor risk and financing.
- Cancellation Procedures
- All years except the first are subject to cancellation; contracting officers must establish and adjust cancellation ceilings based on nonrecurring costs and remaining requirements.
- Cancellation Ceilings
- Ceilings and dates can be revised before contract award, with specific procedures for sealed bidding and negotiation.
- Payment of Cancellation Charges
- Government liability for cancellation is determined by contract terms.
- Presolicitation Conferences
- Recommended to ensure all sources understand multi-year contracting.
- Payment Limit
- Government payment is limited to available funds for each program year.
- Termination Payment
- If terminated for convenience, the government’s obligation is capped at the available amount plus the cancellation ceiling.
Responsibilities
- Contracting Officers: Select appropriate contracting method, establish and adjust cancellation ceilings, ensure payment limits, and conduct presolicitation conferences as needed.
- Contractors: Understand cancellation and termination terms, provide cost data as required, and comply with contract payment limits.
- Agencies: Oversee compliance with multi-year contracting procedures and ensure funding availability.
Practical Implications
- This section ensures that multi-year contracts are structured to manage risk, funding, and cancellation effectively. It impacts daily contracting by requiring careful calculation of cancellation ceilings, clear communication of contract terms, and strict adherence to funding limits. Common pitfalls include miscalculating nonrecurring costs, failing to update cancellation ceilings, or exceeding payment obligations.
(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.