Exercising options

Exercising options means the contracting authority formally chooses to obtain the additional goods, services, quantities or period of performance that an existing contract describes as an option. The option is written into the original contract. Exercising it turns that pre-agreed possibility into a binding requirement on the supplier.

An option is a right for the buyer, not an obligation. The buyer decides whether and when to use it, under terms that were set before the contract was signed. Typical uses include extra quantities, follow-on option years, extensions of the contract period, accelerated production, and periodic decisions to continue a major system or service contract.

How an option works inside a contract

An option lets a buyer lock in pricing and conditions for future work without committing to that work on day one. The base contract covers the firm requirement. The option sits beside it and stays dormant until the buyer acts.

In Canadian practice the term shows up mainly through option clauses in contracts and contract amendments. It is not a standalone procurement method. The CanadaBuys Supply Manual also uses the related concept of options-to-purchase in its procurement-strategy guidance. You can find it in the Supply Manual chapter 3 annexes.

How the U.S. Federal Acquisition Regulation treats the exercise of options

The U.S. Federal Acquisition Regulation (FAR) places the subject in Part 17, Special Contracting Methods, Subpart 17.2, Options. Its authoritative wording is "exercise of options." Under FAR Part 17, the contracting officer must give the contractor written notice within the period specified in the contract. An option may be exercised only after the officer determines that funds are available and that the requirement satisfies an existing government need.

The FAR also requires consideration of whether exercising the option is the most advantageous way to meet the government's need, taking price and other factors into account, as set out in the FAR option-exercise provisions.

U.S. defence rules add conditions on top of the FAR. The Defense Federal Acquisition Regulation Supplement, Subpart 217.2 includes verification of the contractor's active registration and accurate entity information. It also requires cost or price analysis before an option is exercised on certain firm-fixed-price contracts containing spare parts. These rules bind U.S. buyers, but they show what a mature option process looks like.

A Canadian example: extending an interpretation-services contract

A published federal interpretation-services contract shows how the mechanism reads in Canadian contract language. In the Office of the Procurement Ombud review, the contract grants Canada an irrevocable option to extend the contract by up to one additional one-year period under the same conditions.

• Only the Contracting Authority may exercise the option.
• Canada must exercise it by written notice to the contractor at least 30 calendar days before the contract expires.
• The exercise is evidenced administratively through a contract amendment.

The clause makes the option a buyer-controlled right. It does not allow the contractor to require Canada to exercise it.

What exercising options means for a supplier bidding on Canadian public contracts

Read the option clauses in any solicitation as part of the contract's real length and value. The base period may be only part of the opportunity, and the options are decided by the buyer.

• Track the option notice deadline in each contract you hold.
• Stay capable of performing under the original terms, including pricing, staffing and capacity, for the full option period.
• Confirm who holds the authority to exercise the option. In the Canadian example, only the Contracting Authority can.
• Respond to any notice or contract amendment in line with the contract's terms.

Option terms are set contract by contract, so the clause in your own contract governs how and when an option can be exercised.