Options-to-Purchase

An option-to-purchase is a contract provision that gives the buyer the right, but not the obligation, to order additional goods or services, or to extend the contract term, under conditions set out in the original solicitation and contract. The buyer decides whether to use it. The supplier does not receive a guaranteed order simply because an option is priced.

In Canadian federal procurement, options-to-purchase are used where additional equipment or follow-on requirements may arise. The additional purchases are written into the contract as options instead of being treated as an entirely new procurement. NATO's Procurement Manual describes an option as “a unilateral right in a contract” that lets the buyer purchase additional supplies or services covered by the contract, or extend its term, within a specified period.

How an option works inside a contract

The idea comes from option contracting. The buyer keeps a contractual right to order defined additional goods or services, or to extend the contract, and the terms for doing so are fixed at the start. Those terms are established in the original solicitation and carried into the resulting contract.

NATO's Procurement Manual says solicitations must include appropriate provisions and clauses when the resulting contract will provide for options. It also says the procurement officer must give the contractor written notice, within the period the contract specifies, when an option is exercised. An option that is not exercised within its period is simply not used, and the buyer owes the supplier nothing further under it.

Options in the Government of Canada Supply Manual

The Government of Canada's Supply Manual addresses options-to-purchase in its procurement-strategy guidance for sole-source procurements. Officials are directed to consider whether additional equipment or warranty services may be required. Where follow-on equipment is possible, the guidance says that “options to purchase additional equipment” should be incorporated into the contract.

That guidance is tied to Public Works and Government Services Canada (PWGSC) procurement-strategy material, and the surrounding sole-source context refers to Government Electronic Tendering Service postings and applicable trade agreements. Suppliers can expect to see options in these situations:

• Equipment procurements where the buyer anticipates needing additional units after the initial requirement.
• Follow-on procurements where future purchases are foreseeable when the original contract is designed.
• Warranty or related services where additional services may be needed.
• Multi-period or extendable contracts where the buyer reserves the right to acquire additional quantities or extend performance under stated option provisions.

Option periods in NATO procurement documents

NATO procurement documents use the term option periods for additional contract periods that are exercised at the contracting officer's discretion. Examples include an Allied Command Transformation invitation for bid and a request for proposal amendment. In these documents, exercising an option period can depend on satisfactory contractor performance, available funding and continuing or evolving requirements.

This shows that an option is conditional on the buyer's circumstances. A strong performance record and a funded requirement make exercise more likely, but the decision stays with the buyer.

What options-to-purchase mean for a supplier bidding on Canadian public contracts

Treat each option as a separate commitment that you may be asked to honour. Review the solicitation and the resulting contract for the following:

• the goods or services covered by each option;
• option quantities, prices or pricing methodology;
• the period during which an option may be exercised;
• notice requirements;
• any conditions, including funding and satisfactory performance; and
• whether the option is a buyer's right rather than a guaranteed order.

Price options with the same care as the base requirement, because the terms are fixed when the contract is awarded. Do not build revenue forecasts on options, since the buyer is not required to exercise them.