[an error occurred while processing this directive]
 
Go to previous section of document Link to chapter contents   Go to next section of document

Decide to Renew a Contract or Exercise Options

As discussed in the Consider Use of Renewals and Options topic of the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources, the Purchase/SCM Team should consider whether a particular contract should include clauses that will allow the Postal Service to renew a contract or exercise options to purchase additional items or services, once the original term of the contract has expired. The renewal of a contract or the exercise of a contractual option takes place when the Purchase/SCM Team decides that a need is continuing and that maintaining the current Supplier's performance would represent the best value to the Postal Service.

Contracts cannot be renewed and options cannot be exercised unless the current contract contains either Clause B-78: Renewal or the relevant clauses discussed in the Consider Use of Renewals and Options topic of the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources. A contract is renewed via modification and the mutual agreement of the Postal Service and the Supplier; contractual options can be exercised unilaterally by the Postal Service or following discussions and negotiations, depending on the clauses in the contract. The renewal of certain mail transportation contracts must follow specific procedures, and these are contained in the commodity-specific business practices.

Renewal

Contract renewal decisions are guided by the following:

Supplier contract performance

Item purchase history

Discussions and negotiations

Assessment of switching cost conditions and considerations

Market research

Assessment of pricing conditions

Restrictions on Postal Service action

Supplier Contract Performance

The decision to renew a contract is based on the Postal Service's continuing need for the good or service, the Supplier's successful completion of a contract, and the Supplier's proposed price. The Contracting Officer must leverage the findings generated during the Evaluate Contract Effectiveness topic of the Manage Delivery and Contract Performance task of Process Step 5: Measure and Manage Supply. The information from this topic is an assessment of whether the contract met the identified needs and expectations of the Postal Service. It also addresses whether project objectives were met, and determines what corrective action needs to be taken.

Suppliers that successfully meet the terms and conditions of a contract, and are positively evaluated by the Performance Evaluation Team (which is often the Purchase/SCM Team with a new function as discussed in the Evaluate Contract Effectiveness topic of the Manage Delivery and Contract Performance task of Process Step 5: Measure and Manage Supply), should be considered for contract renewal. While contracts should not be renewed if the Supplier has performed unsatisfactorily, a minor or temporary deviation from target measures and performance indicators should not automatically lead to a decision not to renew. The Contracting Officer, in conjunction with the entire Purchase/SCM Team, must review any such deviations and consider them when engaging in discussions and negotiations with the Supplier.

Return to top of page

Item Purchase History

Purchase histories contribute to a clear understanding of the existing purchasing process while providing an opportunity to determine whether any steps require modification or elimination. Some benefits of reviewing purchase histories include:

Controlling inventory discrepancies and late orders

Determining the extent to which suppliers can lower prices

Improving the quality and timeliness of the delivered product or service

Market Conditions

Renewals with an existing supplier should only be made when the Purchase/SCM Team determines that doing so will be the best business decision. To make this determination, the Purchase/SCM Team must examine the marketplace to ensure that the incumbent supplier provides the best value in relation to other potential suppliers.

Discussions and Negotiations

The Contracting Officer is responsible for holding discussions and negotiations with the Supplier to determine the contract terms and conditions that will be established upon contract renewal. If the new terms and conditions are so different from those of the original contract that they are outside the scope of the original contract, then renewal should be abandoned and the new requirement solicited. Before the renewal can be awarded, the entire Purchase/SCM Team is responsible for determining whether the Supplier is still capable of offering best value.

Depending on the outcome of the discussions, the Contracting Officer consults the Purchase/SCM Team and decides whether renewal is the best business solution. However, before renewing the contract, the Contracting Officer must also verify that the current contract type still reflects the appropriate risk and responsibility assumed by the Supplier, as explained in the Select Contract Type topic of the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources. If the contract type is no longer favorable, a more appropriate contract type should be selected. All discussions and negotiations must be documented and included in the contract file.

Return to top of page

Cost-Switching Conditions and Considerations

Switching cost considerations associated with changing suppliers should influence the overall contract renewal decision. In certain cases (e.g., when other suppliers can meet Postal Service demand more efficiently and less expensively than the current Supplier), the extent of competition in the marketplace mitigates the investigation and development of new relationships with other suppliers. However, changing suppliers has the consequence of procedural, financial, and relational switching costs. Because switching costs can become quite substantial, it can be in the Postal Service's best interest to resist changing suppliers and instead renew the contract, unless the cost savings from the alternative supplier(s) are greater than the cost of switching. The Contracting Officer is responsible for leveraging the results of the switching cost analysis when deciding whether to renew the current Supplier's contract. This analysis is discussed in the Perform Switching Cost Analysis topic of the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources.

Renewal Procedures and Restrictions

The Purchase/SCM Team should renew a contract only when doing so reflects the best value to the Postal Service. When making this decision, the Purchase/SCM Team must consider whether the performance and administrative benefits of the renewal outweigh the potential benefits of competition and other business considerations. If the Purchase/SCM Team decides to renew a contract, the Contracting Officer provides written notice of renewal to the Supplier. This notification must be provided 60 days before contract expiration (preliminary notice will not be deemed to commit the Postal Service to a renewal). The contract file should be documented with the rationale for the renewal decision. Contracts may be renewed only once, and the term of the renewal may not exceed four years.

Return to top of page

Exercising Options

Before exercising an option, the Purchase/SCM Team must determine that:

Funds are available

The Postal Service still needs the supplies or services covered by the option

Exercising the option is the most advantageous alternative, price and other factors considered ("other factors" includes any need for continuity of operations and the switching costs or other costs of disrupting operations discussed above)

The Contracting Officer must determine that the option price is the most advantageous to the Postal Service, based on one of the following:

Market research clearly indicates that a better price than that offered by the option cannot be obtained.

The time between the award of the contract containing the option and the exercise of the option is so short that the option price is probably the lowest obtainable, considering such factors as market stability and usual duration of supply or service contracts.

A new solicitation fails to produce a better price than that offered by the option (this method of testing the market should be used only if neither of the other methods is satisfactory).

If the contract provides for economic price adjustment, the effect of such adjustment on prices under the option must be ascertained in determining whether to exercise the option.

When an option is to be exercised, the Contracting Officer must, in writing:

Determine that the option may properly be exercised (as discussed above)

Notify the Supplier within the time specified in the contract that the option is being exercised

Modify the contract as needed, citing the option clause as authority

Return to top of page

Other Topics Considered

Conduct Spend Analysis topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources

Select Contract Type topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources

Consider Use of Renewals and Options topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources

Perform Switching Cost Analysis topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources.

Evaluate Contract Effectiveness topic, Manage Delivery and Contract Performance task, Process Step 5: Measure and Manage Supply

Clauses & Provisions

Clause B-78: Renewal

Clause 2-17: Option for Increased Quantity

Clause 2-18: Option Item

Clause 2-19: Option to Extend (Service Contract)

Clause 2-20: Option to Renew (with Preliminary Notice)

Clause 2-25: Unpriced Options

Go to previous section of document Link to chapter contents   Go to next section of document