Does the Contract Need to End, or Can It Live Forever?
Editor's note: This blog has been updated to include information about statutory requirements regarding terms in job order contracts.
When developing a contract, an important decision point is deciding how long your contract will last, which usually will be documented in the “term” section of your contract agreement.
In many cases, identifying the term of your contract is a simple decision when you have a construction project or you are buying a product or piece of equipment, as you can clearly determine when these are delivered to your agency and subsequently could be considered a “one-off” need. However, when you have a service that you foresee needing for years down the road the discussion points should be:
- We may always need this.
- Can we have the contract be active forever?
- What are the options?
This blog will explore considerations for selecting the term for your contract.
Here are some statutory requirements related to the term of a contract as grouped under unit price contracts, architecture and engineering (A&E) contracts, job order contracts, and selecting an official newspaper by second-class cities and towns.
Unit price contracts
For the list below, the statutes require the affected local government’s initial term of contract not to exceed three years, but the agency also has the option to extend or renew the contract for one additional year. This applies to:
- First-class cities at RCW 35.22.620(11);
- Second-class cities and towns at RCW 35.23.352(13);
- Code cities at RCW 35.23.352(13) — and as referenced by RCW 35A.40.210;
- Port districts at RCW 53.08.120(3); and
- Public utility districts (PUDs) at RCW 54.04.070(7).
For the local governments listed below, the initial term of the contract may not exceed one year but the agency has the option to extend or renew the contract for one additional year. This applies to:
- Counties at RCW 36.32.235(9);
- Transit districts at RCW 39.04.235; and
- Water-sewer districts at RCW 57.08.050(6)
Architectural and engineering contracts
Under the statute RCW 39.80.040 there is no specified term limit for A&E contracts. However, the statute requires local governments to annually encourage A&E firms to submit their statement of qualifications. A best practice is to review these annual submissions when considering a term extension.
Job Order Contracts
Under the statute RCW 39.10.440, job order contracts may be executed for an initial contract term of not to exceed two years, with the option of extending or renewing the job order contract for one year.
Selecting an official newspaper for a second-class city or town
Second-class cities and towns do not have term limits, but bids are required annually when selecting an official newspaper for public bid advertisements per statute RCW 35.23.352(8).
Specialized contracts for school districts
School districts, under the statute RCW 28A.335.170, can enter contracts with term limits as specified below:
- To rent or lease building space and portable buildings for periods not exceeding 10 years in duration;
- To rent security systems, computers, and other equipment or to have maintained and repaired security systems, computers, and other equipment for periods not exceeding 5 years in duration; and
- To provide pupil transportation services for periods not exceeding 5 years in duration
With regards to other contract types for local governments (e.g., consultant, service, or product contracts), there are no specific statutory requirements to consider for a contract term.
Below are some options you could use for the term of your contract, along with a short description and my recommendation for each option.
Option 1: Indefinite term until cancelled
Under this option, contract language is written so that the agreement may be of perpetual duration or renews automatically for additional yearly increments, cancelable at either party’s option with advance notice.
My recommendation: Use this option as sparingly as possible. This is what I call the “contract everlasting” approach; easy contract management for the people creating the agreement but not easy for those who inherit the contract in the future. I have seen this option cost money and time for agencies to cancel. Why? Because once they are signed, they are filed away, and no one looks at the contract until issues arise years later. When issues occur, trying to determine how to cancel the contract consumes a lot of staff time.
Additionally, these contracts normally have some sort of notification window to cancel and, more times than not, the cancellation window has already passed. This becomes a factor because your agency will now be required pay for the next term of the contract before you can cancel again, which sometimes could be an automatic renewal for multiple years before the opportunity to do a notification to cancel occurs again. These are the reasons I am not a fan of this option.
Option 2: Term with specific end date
In option 2, contract language is written so that the agreement is of a specific duration, although it can also be written to allow for extensions.
My recommendation: When considering the end date, do not go longer than 5-6 years, inclusive of potential extensions. There is no exact science, but this was the amount of time I learned and used when writing contracts over the years in my career in government. (When you look at state master contracts, many of them are active for 3-6 years).
In my opinion this amount of time provides the benefit of locking in pricing for the time being but still allows the ability to test the market for pricing and service level updates once the contract expires.
If your local government has a contract with a specific end date, like 5-6 years, it could be specified in a couple of ways:
- As an initial term, with extensions not to exceed 5-6 years, or
- As a term for entire time, such as for the entire 5-6 years.
Even with a specific term, a local government has flexibility on how to approach the length of time in the contract.
Unless specified in statute, your agency could have a contract for an indefinite amount of time, and it could live forever. While this is something your agency could decide to do, my recommendation is to avoid this as much as possible and have a contract term — including any potential extensions — with a clear, definitive ending date not exceeding 5-6 years.
Having a clear ending date for your contract allows you the ability to determine the exact term by reading only the contract (and amendments), ensures your contract is in alignment with pricing in the marketplace, and keeps service levels for your agency up to date over the duration of the agreement.
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