Difference Between a Two-Year, Base Year and Option Contract
@ Mark G | Tuesday, Feb 2, 2021 | 6minuteRead | Update at Tuesday, Feb 2, 2021

Two Year vs Base Year + Option Year – Subtle but Important Difference.

Your organizatoin requires a contract for one year - in government terms, a one-year period of performance (POP).

Alternatively, the organization may prefer a one-year POP with an option to extend a second year.

Finally, a third option - a two-year POP billed annually.

To assume less risk, the government prefers to have the option to have the second year. It’s entirely up to the government to decide. This is the preferred method because the government has no risk involved. It’s a definite win for the government and it will speed up the acquisition process. If the government wishes to exercise that option (the second year), it will cost almost no administrative burden to do it. Also, if they choose not to exercise the option, the government is not on the hook.

In this article, I’m going to describe a ** two-year** versus a base year plus an option contract. I will also describe a serious problem that could creep into your proposals costing your company thousands of dollars.

Acquisition Process Overview

Before I talk about the nuances of a two-year vs a Base year + Option year, I want to quickly go over the acquisition process at a very high level.

Acquisition Process Flow

Acquisition Process Flow


Determine if there’s a written acquisition plan that’s required within the organization. This might be determined by the dollar thresholds for your project. You might have to plan this out using a template provided by the organization or agency.


If there is an acquisition plan that’s required, you then have to get the approval of that plan through leadership. This might include some revisions and back and forth communication.

Follow Plan

Finally, after being approved through leadership channels, your team would execute that plan.

Market Research

More than likely, your organization will have the acquisition team conduct market research. One of the goals of the research is to find out if there’s already a department or existing agency that can perform this type of work – and if they have the resources to be part of your team. If not, research the available commercial entities that could do the work.

There are several market research methods to choose from. Consult your organization’s plans for specifics.

Cost Estimating

Next, create an independent government cost estimate or IGCE, for short. Of course, if you’re not working on behalf of the government, you would still want to create some sort of cost estimate. Your organization might have software or predefined templates available for your use.

It’s critical to make sure that the data you are using for the research is current, valid, and reliable. There are numerous types of cost estimation techniques. There are the top-down, bottom-up, analogous, and parametric approaches, and many other options.

Subject Matter Experts

There are subject matter experts (SMEs) with years of experience creating government acquisition packages. I can guarantee you that they are learning something new about acquisitions every day. It’s very difficult to know all of the rules for every type of acquisition during every circumstance. All acquisitions are unique. Don’t get discouraged. Most organizations have multiple layers of checks and balances along the way, to protect you. There are many different types of contracts. There are many different types of bidding that can take place. There are different ways to solicit.

The general idea is that there is a statement of work (SOW) or a statement of need or a performance work statement (PWS) that will identify the gaps in the business capability that are required to be fulfilled.

Evaluate Proposals

After you solicit to the public and receive the responding proposals. You would then evaluate those proposals and choose a clear winner. Depending on the type of work and how long it’s been solicited and what type of contract vehicle you utilized, you may have anywhere from a single bid to 20 or 30 different bids! You might need a team of people to evaluate. You may not. In the example to follow, it’s simply a license for using certain software. In this case, you might have a single evaluator or maybe just a couple of people from your team doing the evaluation.

For more details about contracts, check out this article I wrote.

Two Year vs one Year and Option

The statement of work (SOW) or requirements document, stated that I must have one year of service and support plus an option year that starts exactly 12 months after the award - if the organization chooses to execute that option. This option year is important. When I received the proposals, every single vendor offered what appeared to be the same services and support. That’s not common for custom software development, but when you’re dealing with commercial off-the-shelf or COTS software, it is common. All the vendors are the third parties to a sole manufacturer that produces this software. So, it makes sense that they would be similar.

As I read through the proposals, all of the bidders itemized year one from year two. They did this with both the support and services and the actual pricing. Again, year one and year two were completely separated.

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Here lies the problem. It’s very subtle, but one of the proposals received, instead of stating year one and year two as an option, they just wrote, year one and year two (without the option) and that they would bill annually. This doesn’t give the government an out if needed. If the government does not need to exercise the option, they won’t have a choice, because it’s not an option, it’s just two years of the contract, billed once per year. I am not a contracting officer (CO) or contract specialist (CS) but that subtle difference of calling it year one and year two versus year one and option year can be a huge, costly mistake. Especially if the government no longer requires that software or support after the first year.

After your organization has solicited the requisition to the public for bidding, you can’t make significant changes to the actual solicitation. We must not give any single vendor an advantage over the others. So, if the government decides to give one vendor more information or a chance to fix the proposal, they have to give that chance to all of them equally.

Technically, it’s not me, or my organization giving the vendors that chance. Instead, it will be the Contracting Officer (CO) with that authority. So, if the CO requests, in writing, that this particular vendor can change its proposal to say “option” instead of just, “second year,” this could raise an issue. The problem with that is that there may be multiple bidders that made the same mistake. If the CO grants this opportunity to every bidder, I think this would be acceptable. However, if the CO only offered this chance for one bidder, then that could be a cause for arbitration or a lawsuit. Again, I am not a CO and I rely on teams of people to help with the legality of these things. However, this is a 1000-foot view, a layman’s version of what can go on or wrong with a contract bid.

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