In this installment we talk about ordering requirements under two types of variable contracts -- requirements contracts and indefinite quantity contracts.

Requirements Contracts

Under a requirements contract, the government fills all actual purchase requirements for certain supplies or services during a specified contract period. The government schedules deliveries or tasks by placing orders with a contractor. FAR 16.503(a). The contractor is obligated to furnish all the supplies or services the government needs, and the government, in turn, is obligated to obtain all of its requirements, if any, from the one contractor.

Some have argued that such contracts are illusory because the government isn't really "required" to buy anything -- i.e., no consideration, no contract. The courts have found, however, that the government's good faith duty to order from a single contractor is sufficient consideration. Consideration is satisfied by the government's agreement to contractually limit its range of future options and to "turn to the seller for all such requirements as do develop." Torncello v. United States, 681 F.2d 756, 761.

From a buyer's perspective, the key thing to remember about requirements contracts is that, during the term of the contract, no source other than the awardee may be used to satisfy the stated requirements.

Indefinite Quantity Contracts

Under an indefinite quantity contract, the government commits to buy an indefinite quantity of supplies or services within a specific time period. As with requirements contracts, the government schedules deliveries or tasks by placing orders with the contractor. FAR 16.504(a)

The government is not limited to purchasing from a single contractor but is required to buy a stated minimum quantity of supplies or services.

The contract also will set forth a maximum quantity beyond which the parties are not bound. FAR 16.504(a)(1). The contracting officer should establish a reasonable maximum quantity based on market research, trends on recent contracts for similar supplies or services, survey of potential users, or any other rational basis. Id.

The FAR requires that a solicitation and contract for an indefinite quantity--

(i) Specify the period of the contract, including the number of options and the period for which the Government may extend the contract under each option;

(ii) Specify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract;

(iii) Include a statement of work, specifications, or other description, that reasonably describes the general scope, nature, complexity, and purpose of the supplies or services the Government will acquire under the contract in a manner that will enable a prospective offeror to decide whether to submit an offer;

(iv) State the procedures that the Government will use in issuing orders, including the ordering media, and, if multiple awards may be made, state the procedures and selection criteria that the Government will use to provide awardees a fair opportunity to be considered for each order;

(v) Include the name, address, telephone number, facsimile number, and e-mail address of the agency task and delivery order ombudsman if multiple awards may be made;

(vi) Include a description of the activities authorized to issue orders; and

(vii) Include authorization for placing oral orders, if appropriate, provided that the Government has established procedures for obligating funds and that oral orders are confirmed in writing.

FAR 16.504(a)(4). Contracting officers should use an indefinite quantity contract when they cannot determine, above a specified minimum, the exact quantities of supplies or services that the government will require during the contract period. They should use an indefinite quantity contract only when they anticipate a recurring need. FAR 16.504(b).

Consideration Requirements Under an Indefinite Quantity Contract

To ensure that the contract is binding, the minimum quantity must be more than "nominal." The stated minimum quantity forms the consideration for the contract. Sea-Land Serv., Inc., B-278404.2, Feb. 9, 1998.

On the other hand, the minimum quantity should not exceed the amount that the government is "fairly certain to order." FAR 16.504(a)(2).

The question then is how does the contracting officer make sure she orders an amount that is more than nominal without ordering too much?

To analyze whether the minimum amount is nominal, courts consider the potential value of the contract as a whole. Some amounts that the courts have suggested might be nominal:

• Minimum of $25,000 in a contract with a ceiling price of $33 million. Systems Engineering & Management, Co., B-275786, 97-1.
• Minimum of $100, estimated price $40,000. Goldwasser v. U.S., 325 F.2d 722 (1963).

In neither case, unfortunately, was the issue directly decided.

In Travel Centre v. Barram, 236 F.3d 1316 (Fed.Cir. 2001), the court found that a minimum quantity of $100 was more than nominal in a travel management services contract where the solicitation estimated gross sales of approximately $2,500,000 per year. The court emphasized the reasonable expectations of the parties:

Regardless of the accuracy of the estimates delineated in the solicitation, based on the language of the solicitation for the IDIQ contract, Travel Centre could not have had a reasonable expectation that any of the government's needs beyond the minimum contract price would necessarily be satisfied under this contract.

Travel Centre, at 1319.

Measure of Damages

What's the proper measure of damages when a buyer fails to order the minimum quantity under an indefinite quantity contract? Is it (A) the difference between the amount ordered and the full guaranteed minimum amount, or (B) the amount of costs incurred plus profits lost?

For a short time, the answer was "A", according to the Armed Services Board of Contract Appeals, as long as the contract requires the contractor to maintain the capability of providing the minimum services throughout the contract period. Delta Construction International, Inc., ASBCA No. 52162 (2000).

But then the U.S. Court of Appeals vacated that decision, finding that the answer is "B". White vs. Delta Construction International, Inc., 285 F.3d 1040 (Fed. Cir. 2002), http://www.contracts.ogc.doc.gov/cld/rd/courts/01-1253.html. ("The proper basis for damages in this case is the loss the contractor suffered as a result of the government’s breach, not the total amount it would have received without the breach.") See also Marut Testing & Inspection Services, Inc. v. GSA, GSBCA 15412, August 2, 2002, http://www.gsbca.gsa.gov/appeals/w1541202.txt.

More Information

White vs. Delta Construction International, Inc., 285 F.3d 1040 (Fed. Cir. 2002),
http://www.contracts.ogc.doc.gov/cld/rd/courts/01-1253.html

Travel Centre v. Barram, 236 F.3d 1316 (Fed.Cir. 2001)
http://www.ll.georgetown.edu/Fed-Ct/Circuit/fed/opinions/00-1054.html

FAR Subpart 16.5 - Indefinite-Delivery Contracts
http://www.arnet.gov/far/current/html/Subpart_16_5.html