Am I misinterpreting something, or is the FAR english-challenged again?

In an IDIQ contract, the government must order at least the minimum quantity. (52.216-22: "The Government shall order at least the quantity of supplies or services designated in the schedule as the minimum." However, 52.216-19 states as follows:
(a) Minimum order. When the Government requires supplies or services covered by this contract in an amount of less than _____________ [insert dollar figure or quantity], the Government is not obligated to purchase, nor is the Contractor obligated to furnish, those supplies or services under the contract.

If you insert the minimum quantity in the blank, what does it mean that "the Government is not obligated to purchase ... those supplies or services." Does it mean that if the Government finds it needs fewer than the minimum items, it is not obligated to buy them? If so, what happened to the obligation to buy the minimum?

By Anonymous on Monday, October 08, 2001 - 06:47 pm:

I think you are confusing A) a minimum amount to be ordered from the contract, with B) the minimum amount that is to be on each individual order that is to be placed against the contract.

By Vern Edwards on Monday, October 08, 2001 - 09:22 pm:

Ron:

In an IDIQ contract you must include a minimum and a maximum quantity that the Government must purchase during the ordering period. See FAR 16.504(a)(1) and (a)(4)(ii), and 52.216-22(b). The purpose of the minimum quantity is to provide adequate consideration to bind the parties. The maximum is a policy limitation.

In addition, you may establish a minimum and a maximum order that the Government may place. The purpose of the minimum order is to protect the contractor from uneconomically small order quantities or unreasonably large order quantities that the contractor cannot fulfill. See FAR 16.504(a)(3) and 52.216-19.

By ZELDA ANON on Tuesday, October 09, 2001 - 09:05 am:

Now here's another question for you. Do you have to obligate funds for the minimum on the contract at the time of contract award, or can you fund the minimum at a later time with a task or delivery order against the contract?

By ji20874 on Tuesday, October 09, 2001 - 10:23 am:

For Zelda's question, the answer depends on your agency and local practices -- the FAR does not require funding an ID/IQ to the minimum at time of award; it only requires that the Government order the minimum DURING THE LIFE OF THE CONTRACT -- I have worked in places that require issuance of the first order (for the minimum) simultaneous with issuance of the contract, but this was local practice...

By Dave Barnett on Tuesday, October 09, 2001 - 10:35 am:

And I've seen where the minimum was funded directly on the contract with the first orders placed drawing against those obligated funds. As long as you can properly manage and account for the funds, you should be okay.

By Ron Vogt on Tuesday, October 09, 2001 - 12:09 pm:

Thanks for the answers. If I am now reading them right, 216-22 refers to the min and max for the entire contract, whereas 216-19 refers to individual purchase/delivery/task orders, correct?

If so, I think an RFP I am looking at has used 216-19 and 22 incorrectly. The minimum and maximum in the schedule are 12 and 350, and the minimum and maximum order quantities listed in 216-19 are 12 and 350 also. By doing so, hasn't the Government obligated itself to order the contract minimum under each purchase order?

By Dave Barnett on Tuesday, October 09, 2001 - 12:34 pm:

Looks like it. Modification time!

By ZELDA ANON on Tuesday, October 09, 2001 - 12:58 pm:

If you have an ID/IQ contract that is a base with 4 option years, do you have to have a minimum purchase for each option year? Or can you get away with having a minimum for the life of the contract? If you do that, where is (or is )there any consideration in the option years?

By Dave Barnett on Tuesday, October 09, 2001 - 01:29 pm:

No, you must have a minimum for the term of the contract, you may, but are not required to, establish minimums per option year.

By Dave Barnett on Tuesday, October 09, 2001 - 01:45 pm:

As regards consideration, the consideration is the guaranteed minimum established for the term of the contract, exercising an option extends the term of that contract; option years are not contracts separate to themselves and apart from the contract of which they are a part.

By Kennedy How on Wednesday, October 10, 2001 - 12:19 pm:

I don't necessarily see the identical min/max in each section as a problem; it depends on what the Government has in mind. A min qty of 12, awarded on the first delivery order, fulfills the contract minimum. Or, there is the possibility that 12 is the minimum economical order quantity.

The way it's presented isn't real flexible, but not necessarily a mistake.

Kennedy

By Ron Vogt on Wednesday, October 10, 2001 - 07:04 pm:

Your point is valid - it could be that for some contracts, the minimum for the entire contract is also the minimum economical order quantity. For this particular item however, I don't think that would be the case.

By Anonymous on Wednesday, October 24, 2001 - 07:55 am:

If the Government awards an IDIQ contract for a base year and four options with a guaranteed minimum in the base year, are the options binding if the contractor is not guaranteed a minimum in the option periods? Please consider that one of the basic elements of a contract is "consideration". Are the options binding?

By Anonymous on Wednesday, October 24, 2001 - 10:47 am:

If it were binding, it would not be an "option."

By Anonymous on Wednesday, October 24, 2001 - 02:35 pm:

Dear Anon,

You exercise the option, it becomes binding - where is the consideration if you have no mins in the options?

Would this work for consideration? Dave (post of 09 October) indicates that the mins are for the term of the contract. While I don't think that is necessarily incorrect, I am having a difficult time understanding how during the term of the contract you would administer such a provision for the minimum that let's say is a million dollars. If what Dave says is true then I could hypothetically split the $1.0 mil over the 5 year period (if I exercised four options) and only commit to $200k per year.

My main point being that exercise of the option makes the requirement binding. But where is the consideration ?????? Any thoughts/ideas on this would be helpful.

Thanks

By Dave Barnett on Wednesday, October 24, 2001 - 02:52 pm:

Provided you exercise the option periods(s), I see no reason why one can't obligate your minimum over the base and option periods. Failure to exercise the option thus failing to meet your guaranteed minimum would put you in a breach of contract situation.

Picture a multiyear IDIQ, the guaranteed minimum is met with the first order placed, the contract remains binding for its entire term. Or vice versa, the government doesn't meet its guaranteed minimum until year 3 of the multiyear contract, the government has still fulfilled its contractual obligation.

By SINEQ on Thursday, October 25, 2001 - 02:20 pm:

DAVE IS RIGHT

By Anonymous on Thursday, October 25, 2001 - 04:39 pm:

The guaranteed minimum must be ordered during the base contract period - the government is required by the contract terms to purchase the minimum quantity.

An option is exactly that - optional, no obligation, until the government elects to award the option. One can't "guarantee" something which is optional. The contractor has the right to expect the minimum guaranteed order during the base period.

By SINEQ on Friday, October 26, 2001 - 08:24 am:

I don't believe that is true. The minimum ,if its ordered at all,must be ordered within the term of the contract...the entire term. Base period is irrelevant.

By joel hoffman on Friday, October 26, 2001 - 09:13 am:

Actually, it may depend upon your organization. My organization's FAR Supplement requires a minimum for the base period as well as each option period. The option periods are about half the minimum for the base period. happy sails! joel hoffman

By Dave Barnett on Friday, October 26, 2001 - 09:21 am:

SINEQ IS RIGHT. I discussed this scenario with a few of my fellow contracting officers and they agreed with me. Also, where in the FAR does it say the minimum must be ordered in the base period? Part 16, Subpart 17.2? One of the reasons for an IDIQ is for the government to maintain inventories over a period of time. Also, options are used because not every ongoing requirement of the government is approved for multiyear contracting. We know we need janitorial support for our building every year but we don't receive multiyear authorization, so we use options.

By the by, nothing is 100% guaranteed. What if Congress does an about face right after award of an IDIQ and cuts off all funding, there goes that so-called guaranteed minimum. That's why when choosing the contract type, one assesses the risk and uses business judgement.

By anonymous8 on Friday, October 26, 2001 - 09:33 am:

Dave,

Don't you obligate the minimum upon award, either in the contract or in a contemporaneous task order?

By Dave Barnett on Friday, October 26, 2001 - 10:22 am:

Not necessarily, you may obligate funds via the issuance of individual delivery/task orders. For example, I have an IDIQ for engineering services with a minimum of $500,000. I may issue a series of orders that total $500,000 over the course of time, but no single order would meet the guaranteed minimum.

And like Joel stated earlier, various contracting offices have their own policies. I like to embrace maximum flexibility, this encourages innovation (it also creates more risk).

By joel hoffman on Friday, October 26, 2001 - 03:47 pm:

This is from an Air Force Fiscal Law, web-based tutorial at http://www.saffm.hq.af.mil/fiscallaw/index.htm

"Indefinite-Delivery/Indefinite-Quantity Contract

In an indefinite-delivery/indefinite-quantity (IDIQ) contract, the government is obligated to purchase a guaranteed minimum quantity. With an IDIQ contract, the government may have more than one contractor for the same or similar goods or services.

How much do we obligate for an IDIQ contract? We obligate the amount of the guaranteed minimum quantity stated in the contract at contract award, and for each additional order above the minimum quantity, we obligate current funds at the time we issue each DO or TO."

The Corps of Engineer's EFARS at 16.504 also state the same policy. I don't know whether Dave is right or wrong, whether this is optional. happy sails! joel

By joel hoffman on Friday, October 26, 2001 - 03:50 pm:

Sorry, it is an Army Fiscal Law course...

By Anonymous on Monday, October 29, 2001 - 07:29 am:

Thanks Joel,

I am an ex-Army (and ex-Corps)Contract Specialist/Contracting Officer and not until I moved to a civilian agency (through DOD cutbacks) did I see IDIQ contracts without minimums in the option periods. That's why I raised the question.

By Vern Edwards on Monday, October 29, 2001 - 09:35 am:

A question for SINEQ and Dave Barnett, who say that the minimum does not have to be ordered during the base period, but may be ordered during one or more option periods--

The indefinite quantity clause at FAR 52.216-22 says that the government shall order at least the stated minimum quantity and the ordering clause at FAR 52.216-18 provides for insertion of ordering period beginning and ending dates. Presumably, at the time of contract award the ordering dates will encompass only the base period, not the option periods. Upon exercise of the option the CO modifies the ending date. Since an option is just that, an option, which the government does not have to exercise, what promise do you make to the contractor about the minimum? What do you say in the contract to permit ordering of the minimum during the option periods?

Do you include the option periods in the ordering clause even before you exercise the options? Do you modify the ordering clause? Do you write a special provision? If you do either of the last two, would either of those solutions be FAR deviations (FAR 1.401)?

Also, Dave, the U.S. General Accounting Office requires agencies to obligate funds for the minimum quantity at the time of contract award. See Principles of Federal Appropriations Law, 2d ed., Chapter 7, Section B, Criteria for Recording Obligations, Subsection 1, paragraph e., pp. 7-16 through 7-19. ["In a variable quantity contract (requirements or indefinite quantity), any required minimum purchase must be obligated when the contract is executed; subsequent obligations occur as work orders or delivery orders are placed, and are chargeable to the fiscal year in which the order is placed."]

How do you deal with that requirement?

By SINEQ on Tuesday, October 30, 2001 - 03:30 pm:

VERN I PROMISE I WILL DEFEND MY COMMENTS SOON. I HAVE ALL MY RESEARCH I JUST LACK TIME TO KEYSTROKE IT

By Vern Edwards on Tuesday, October 30, 2001 - 05:30 pm:

SINEQ:

Okay. But you don't have to defend your comments (not yet, anyway), just explain them. I just want to know how you do it.

Do you include the option period(s) in the date range in the Ordering clause, even before exercising the option(s)? Do you modify the clause in some way? Do you insert some kind of special provision into the contract?

And how do you deal with the GAO's stance on obligating the money to cover the minimum at the time of contract award? Do you obligate the money, but issue orders against the obligation during the option periods? Do you know of an exception to the GAO's position? Do you just ignore the GAO?

Vern

By Anonymous on Tuesday, January 29, 2002 - 04:18 pm:

I was glad to see this discussion on minimum guarentee (mg) on IDIQs because it has been bothering me for a long time. I was trained at the Navy that the mg had to be placed on contract at time of award (or task order).

Since the first law of contract formation (which happens at award!) is consideration and the intent of the mg is to bind the parties, I never could see how the Contracting Officer would not be Anti-Deficient if funds were not on contract or task at time of award.

I certainly agree that a Contracting Officer should not deferr the mg to an option, otherwise it would obligate the Gov. to excercise the option to meet that binding obligation.

Where can I get a copy of the Principles of Accounting Law referenced here?

By Linda Koone on Tuesday, January 29, 2002 - 04:27 pm:

Like many things you may be looking for, it's right here at WIFCON.

Go to the Guidance link, Appropriations Law.
http://www.cfo.doe.gov/budget/gao/index.htm

By Smokey on Wednesday, January 30, 2002 - 04:28 pm:

Okay..I am going to throw this out for comment:

Mulitiple awarded ID/IQ efforts..How can I obligate the minimum at the same time as contract award? Fair opportunity to compete and all...

First task will satisfy one of the 3's minimum, but certainly not all of them.

Vern's comment: "U.S. General Accounting Office requires agencies to obligate funds for the minimum quantity at the time of contract award." Why would the FAR not also require this???

Additionally, a requirements contract does not guarantee a minimum. Kind of hard to obligate the minimum is this case.

By Eric Ottinger on Wednesday, January 30, 2002 - 04:40 pm:

Smokey,

We go around on this every so often. I know what GAO said. But this was back in the 80's and ID/IQ's were very different animals in those days. They were fixed price and strictly commercial.

I doubt GAO or anyone else has actually enforced this rule any time recently. It should be revisited.

Eric

By Vern Edwards on Wednesday, January 30, 2002 - 11:23 pm:

Smokey:

Q. "How can I obligate the minimum at the same time as contract award? Fair opportunity to compete and all..."

A. There is a lot of confusion over the concept of "obligate" in government contracting. An obligation is made when a CO enters into a legally binding agreement, i.e., a contract. What many 1102s call "obligating" is actually the act of recording the obligation by citing the applicable accounting data on the contract document and sending a copy to the agency's finance office. What the GAO requires is that agencies record an obligation at the time that it is made. At the time of award of an IDIQ contract the CO obligates the government in the amount of the minimum quantity. In order to obligate the minimum amount at the time of award, but before issuance of the first delivery or task order, you write down the appropriate fund citation and amount on each contract award document (e.g., SF33, blocks 20 and 21) and distribute a copy the the cognizant finance office. Later, when you issue the first delivery or task order, you refer to the amount of the minimum recorded on the original award document and you record the obligation of any additional amounts that you need to cover the total amount of the order.

Some agencies require COs to issue an order to cover the minimum simultaneous with contract award. That is not necessary.


Q. "Vern's comment: 'U.S. General Accounting Office requires agencies to obligate funds for the minimum quantity at the time of contract award.' Why would the FAR not also require this???"

A. I don't know why the FAR does not expressly require agencies to record the obligation of the minimum quantity at the time of contract award.

Your comment: "Additionally, a requirements contract does not guarantee a minimum. Kind of hard to obligate the minimum is this case." That's right, there is no requirement for a minimum quantity on a requirements contract, so why would you want to obligate a minimum? I don't get your comment. Under an IDIQ contract, the minimum is the consideration that binds the parties. Under a requirements contract the promise to buy exclusively from the contractor if there is any need is the consideration that binds the parties.

By AL on Thursday, January 31, 2002 - 07:37 am:

As for why the FAR does not expressly require or discuss the need to obligate the minimum on an IDIQ at the time of contract award, I think it's because the FAR is a set of regulations related to acquisition, while the requirement to obligate funds is a fiscal law question. While the two fields (acquisition and fiscal law) have many times and reasons to interact, they are not the same thing. Obligation is a fiscal law issue, not acquisition.

By Anonymous on Thursday, January 31, 2002 - 07:41 am:

Smokey,

The FAR makes provisions for exceptions to the "fair opportunity to compete" for multiple award contractors. One such exception is to meet the minimum on the contract you don't have to compete. Look at FAR part 16.505 for the four/five exceptions - to meet the "minimums", sole source, logical follow-on to an already competed order, etc.

As far as the second issue is concerned, some contracting offices require the funding for the minimum guarantee to be obligated up fronton the contract, others require a commitment of funds be provided and use those funds when the first order is placed. Some office award the contract and place the first order concurrrently.

By John Ford on Thursday, January 31, 2002 - 11:20 am:

Let me resurrect an old argument that Vern and I had on this issue. What needs to be observed is that Vern's reliance on the GAO is in the Red Book. However, the Red Book does not cite a single decision that is on point. It would be much better if the GAO had issued a decision on this issue which would help to clarify it. However, it has not, therfore it is still an open issue on which reasonable people can disagree.
As for DoD, the Financial Management Regulation appears to require obligation of the minimum at the time of contract award. However, that is not always a simple task, particularly when there are separate CLINs in the contract that can be funded by separate appropriations such as R&D and procurement and there is no statement as to whether the minimum applies to the R&D CLIN or the procurement CLIN. Another problem is how do you appropriately obligate this years funds for a need that may not arise until next fiscal year? This can occur when a multiple award IDIQ contract is issued. An award is made to one contractor that satisfies this years needs for the supplies or services. When the next order is issued, it is to satisfy a need that has arisen in the next fiscal year. If the funds obligated for the minimum for the second contractor that got the second award were O&M funds, you have a definite fiscal and possible anti-deficiency problem. I agree with Eric on this that this area needs to be rethought.

By Smokey on Thursday, January 31, 2002 - 12:17 pm:

Thanks for all your input...

Vern, great explanation on the act of obligation. As far as my comment on the requirements minimum, I was simply stating it was not possible abide by the GAO reg. I agree with you...the promise to buy exclusively is the consideration.

Anon 07:41, I know about the exceptions you stated..however, the problem remains. I can pick one of the 3 to get the first task, but the other 2 would still not have the minimum covered at time of award.

John..I was a DOD CO and your comments are most certainly valid. 1-year money can be a serious problem with these types of instruments and you need to be very careful.

thanks all

By Eric Ottinger on Thursday, January 31, 2002 - 01:24 pm:

Ask A Professor Bites Back

See

http://www.deskbook.osd.mil/scripts/rwisapi.dll/@
e_search.env?CQ_PROCESS_LOGIN=YES&CQ_LOGIN=YES&CQ_USER_NAME
=guest&CQ_PASSWORD=guest&CQ_SAVE[SearchText]=%22funds+utilization%22&CQ
_SAVE[file_name]=59\5931.html&CQ_SAVE[docid]=3855&CQ_SAVE[CQlibs]
=Ask_a_Prof&CQ_SAVE[T]=#FIRSTHIT

(Note: The above website works if you copy it to your browser or copy it to a Microsoft Word document.)

The AF “obligated” funds in just the manner that Vern recommends.

Per Professor Boggs, “What the Air Force did in the situation you describe was to "administratively reserve" funds to cover a contingent liability.”

Professor Boggs also provides some highly authoritative comments to the effect that there is no “all-inclusive and universally applicable definition of 'obligation.'”

Interesting.

Eric

By Vern Edwards on Thursday, January 31, 2002 - 03:16 pm:

Eric:

I don't understand Prof. Bogg's analysis. Here is what the GAO says in Vol. II of Principles of Federal Appropriations Law (the Redbook):

"Thus, in very general and simplified terms, an 'obligation' is some action that creates a liability or definite commitment on the part of the government to make a disbursement at some later time." Page 7-4.

"For appropriations law purposes, the term 'obligation' includes both matured and unmatured commitments. A matured commitment is a legal liability that is currently payable. An unmatured commitment is a liability which is not yet payable but for which a definite commitment nevertheless exists. For example, a contractual liability to pay for goods which have been delivered and accepted has 'matured.' The liability for monthly rental payments under a lease is largely unmatured although the legal liability covers the entire rental period. Both types of liabilities are 'obligations.' The fact that an unmatured liability may be subject to a right of cancellation does not negate the obligation. A-97205, February 3, 1944, at 9-10. An 'unmatured liability' as described in this paragraph is different from a 'contingent liability' as discussed later in this chapter." Page 7-4.

"The obligation takes place when the definite commitment is made, even though the actual payment may not take place until the following fiscal year. 56 Comp. Gen. 351 (1977); 23 Comp. Gen. 862 (1944)." Page 7-4.

"It is important to emphasize the relationship between the existence of an obligation and the act of recording. Recording evidences the obligation but does not create it. If a given transaction is not sufficient to constitute a valid obligation, recording it will not make it one... . Conversely, failing to record a valid obligation in no way diminishes its validity or affects the fiscal year to which it is properly chargeable." Pages 7-6 to 7-7.

"In a variable quantity contract (requirements or indefinite-quantity), any required minimum purchase must be obligated when the contract is executed; subsequent obligations occur as work orders or delivery orders are placed, and are chargeable to the fiscal year in which the order is placed. Thus, in a variable quantity contract with no guaranteed minimum--or any analogous situation in which there is no liability unless and until an order is placed--there would be no recordable obligation at the time of award." Page 7-17. Italics added.

In the scenario to which Prof. Boggs responds, the questioner says, "The [IDIQ] contract was authorized to include a basic two year ordering period and three one year options. The minimum award amount of the contract was set at $3M."

Based on what I've read and quoted above from the GAO's Redbook, that's an obligation that had to be recorded at the time of contract award. The questioner says, "At the time of award, the Air Force obligated $2.5M of FY 94 3080 and .5M of FY 95 3080 funds against the basic contract. The funds were obligated against the basic contract to be used during the basic award period to buy products and services." In other words, the Air Force recorded the obligation at the time of award, as the GAO has said that it must.

The questioner points out that the Air Force was delayed in placing orders because of a protest and asks, "Given that the Air Force obligated the $3M specified above against the basic IDIQ contract for the purpose of procuring needed LAN products/services and the intent of the parties was to use these funds to procure products/services during the basic award period, is it a violation of the AntiDeficiency Act to now issue an order for products/services from this contract with these funds? The minimum has been met. We are still in the basic award period of the contract."

The question is obscure, since if the $3 million minimum had been met, i.e., ordered, then there should not be any of the money left to spend. But in responding, Prof. Boggs tells the questioner, "On [sic] 'obligation' is an act that creates a legal liability for the Government to pay for products or services. For an obligation to be in existence, the Government must 'owe' appropriated funds. Your case does not describe a situation wherein the Government 'owes' appropriated funds for any products or services. Rather, your scenario describes, at most, a 'contingent liability.' A contingent liability is one that becomes a legal liability upon the happening of a certain event -- in your case, the failure of the Government to purchase the minimum amount ($3M) under the contract. Since the minimum was ordered under the contract, the contingency did not occur, and consequently the 'contingent liability' never became a legal liability such that an obligation could lawfully be recorded." Italics added.

The Prof's answer makes no sense to me. First, I don't understand how the promise to buy a minimum quantity under an IDIQ contract is a contingent liability rather than an obligation. (If that's what he's saying, which is how it appears to me.) Here's how the GAO defines contingent liability in Vol. II of its Redbook, page 7-49: "An existing condition, situation, or set of circumstances involving uncertainty as to a possible loss to an agency that will ultimately be resolved when one or more future events occur or fail to occur."

If anything, the promise to buy a minimum amount at some point during the term of an IDIQ contract is an unmatured commitment. It is not a contingent liability and I have never before heard of it referred to as such. The GAO certainly doesn't seem to think of it that way, based on the Redbook quotation that I provided above. Also, see the discussion under the heading of "contingent or indefinite liabilities" in Formation of Government Contracts, 3d ed., by Cibinic and Nash, pages 56-59, and the first paragraph of the discussion of indefinite-quantity contracts in the same book on page 1238.

I want to thank you, Eric, for pointing out yet another nutty answer from Ask A Professor. I always find them amusing. But what did you mean by "Ask A Professor Bites Back"?

By Rose McWms on Thursday, January 31, 2002 - 04:35 pm:

Do obligations only include unmatured and matured commitments? How about incentives? It is the practice at my office to obligate the full incentive amount at contract award - however incentives are neither matured nor unmatured commitments, since they are not liabilites for which DEFINITE commitment nevertheless exists.

By Vern Edwards on Thursday, January 31, 2002 - 04:47 pm:

Rose:

Here is what Cibinic and Nash say about contracts with incentives in their discussion of contingent or indefinite liabilities:

"In the case of a contract with an incentive clause, the target or billing price should be recorded as an obligation; the agency would be required, however,to safeguard against the possibility of violating the Anti-Deficiency Act by administratively reserving sufficient funds to cover at least the excess of estimated increases over decreases."

Formation of Government Contracts, 3d ed., p. 57. This appears to be the solution advocated by GAO in its Redbook discussion of Contingent Liabilities in Vol. II, pp. 7-48 to 7-50.

Vern

By joel hoffman on Thursday, January 31, 2002 - 05:21 pm:

I believe the reason that many offices obligate the funds, rather than administratively reserve the funds, is to protect them from being redirected to other programs. More than once, some of our unobligated, but "reserved" funds have been yanked, for various reasons. My PM's and KO's want to be protected, as much as possible. happy sails! joel

By amused and sometimes not on Thursday, January 31, 2002 - 05:30 pm:

This may not be proper technical language. It seems to have some basis in reality.

Unobligated funds are appropriated funds (shall we say "just sitting in the hopper") tagged with some sort of intended use (procurement, maintenance, research) that is often also tagged with a specific program (this torpedo, that health program and such). The funds are also tagged with a date (Congressional "pull date" in grocery store parlance) upon which the funds go bad and vanish. This is a part of the interesting "government money" game in which money has colors other than green and plays Cinderella at midnight on a certain date. Poof, the coach, horses and all turn into rotten pumpkin and small rodents.

Obligated funds are funds where some action (exactly what is sometimes not too precise) has created a promise to deliver them before they go "poof" to an external organization for goods, services or some other recognizable form of benefit. Obligated money is thus converted into ordinary green dollars. Most amazingly, under the wand of obligation it loses its magic Cinderella spell and can live on as a productive member of the overall economy.

Often agencies go about doing business as usual until they realize the "money hopper" contains an unusual proportion of nearly spoiled money where they scramble madly to find a means of obligating these nearly stale funds. This sometimes leads to the most amusing frantic displays of desperately seeking someone, anyone who can take this stuff and convert it to non spellbound "obligated money."

The ability to keep the hopper clear of nearly spoiled funds is a serious matter in the performance appraisal of certain executives. Ability to keep hopper spoilage low appears to have much more emphasis than eventual effective use of the funds. In fact, total wastage after the magical conversion to green and lasting money is less a blot than having them "expire." This can, sometimes does, lead to interesting philosophical discussions on the relative merit of virtually squandered purified funds vice the allowance of hopper spoilage where in theory they vanish and perhaps (no one seems to really know at ordinary working levels) reduce the deficit.

All attempts at a lighter tone aside, the system has its positive and negative side. It does keep a political (in the best sense of being "will of the people) handle on the money. The Executive cannot easily simply take money intended for something intended by the representatives of the electorate and apply it to its sole purpose. On the negative side it leads to some weird and interesting contortions -- including sometimes the sight of pickups rushing down to the GSA or other store (scale that way upward for some figurative pickups "getting on contract" to save bigger bundles of nearly "poofed" funds) on the waning days of the year to load up on something, anything . . .

By Eric Ottinger on Friday, February 01, 2002 - 08:45 am:

Vern,

I think Professor Boggs is saying that until funding is actually used for an order, it isn’t really obligated.

In the case described, other funds were used for the first order. The funds “obligated” on the contract just sat there unused.

Open ended “tasking” and “ordering” vehicles are sometimes used to bank funds which would otherwise expire or be swept up to be used somewhere else. There is good reason to question whether such funds have actually been “obligated.”

As I’ve said before, I don’t believe that any one professor is any nuttier than any other professor.

John,

I think you hit some good points.

I am taking a somewhat different tack. The minimum order requirement doesn’t take precedence over the government’s right to terminate, and I doubt it takes precedence over the “Limitation of Funding” clause. Hence, the government’s actual liability is likely to be quite a bit less than the “minimum.”

Under FASA, orders under FASA ID/IQs are government contracts just like other government contracts. A FFP order is the same contractually as a FFP contract. A CPFF order is the same as a CPFF contract.

I think the FASA ID/IQs are a new and different animal. I question whether the old rules automatically apply.

Joel,

Thanks.

Amused,

Thanks. Stop by often.

Eric

By Vern Edwards on Friday, February 01, 2002 - 12:28 pm:

Eric:

If Prof. Boggs meant that the obligation of funds to cover an IDIQ minimum doesn't count unless it is made in a delivery or task order, he didn't say so. I think that proposition would have been hard to support.

There is no doubt that an agency's authorized promise to buy a minimum quantity under an IDIQ contract is binding, that it therefore constitutes an obligation, and that the obligation must be recorded at the time of contract award. I demonstrated those points in my previous message by reference to GAO's Redbook and Cibinic and Nash. To the best of my knowledge the GAO has not said that there is no obligation to buy the minimum until issuance of a delivery or task order. Such a proposition would be inconsistent with the FAR clause at 52.216-22, GAO's own analysis of appropriations law (as set forth in its Redbook, Vol. II, Ch. 7), and one of the main ideas behind an "indefinite-delivery" contract, which is to allow the Government to defer ordering of supplies or services until they are actually needed. See FAR 16.501-2(b).

What happened in the AAP scenario was that the Air Force awarded the contract and recorded an obligation of funds to buy the minimum amount ($3M), but then didn't use that money to buy the minimum or anything else before the appropriation expired. The minimum was purchased through orders placed by other agencies and paid for with their funds, at which point there was an overrecording of the obligation. (See the Redbook, Vol. II, page 7-5.) Since the minimum was purchased with other funds, the status of the Air Force's money came into question once its appropriation had expired.

The Air Force tried to argue that the overrecording was a valid obligation. No good. The Air Force's unused money should have been de-recorded (or "deobligated") in time to obligate it for other purposes before the appropriation expired.

You have read Prof. Bogg's tortured analysis as a blanket condemnation of what I suggested, which is to record the obligation of the money to cover the minimum on the basic contract and to place the order for the minimum at a later time within the contract period. But your interpretation of Bogg's answer won't fly, since the key factor in his "contingent liability" theory is the fact that the minimum was actually purchased with other funds. He says:

"Your case does not describe a situation wherein the Government 'owes' appropriated funds for any products or services. Rather, your scenario describes, at most, a 'contingent liability.' A contingent liability is one that becomes a legal liability upon the happening of a certain event--in your case, the failure of the Government to purchase the minimum amount ($3M) under the contract. Since the minimum was ordered under the contract [with other funds], the contingency did not occur, and consequently the 'contingent liability' never became a legal liability such that an obligation could lawfully be recorded." Italics added.

He then goes on to say, "It follows then, that the potential legal liability never matured, and therefore, no obligation came into existence."

He erred in saying that there was never a legal liability and that no obligation came into existence. The Air Force's obligation to buy the minimum was real and not a mere contingent liability, and the original recording of the obligation was valid. But the obligation became excess when other funds were obligated and spent for the same purpose, and the excess should have been deobligated and then reobligated before the funds expired.

The problem was not the original method of recording the obligation; the problem was the Air Force's failure to deobligate the excess funds in a timely manner. The method that I proposed is a valid way to record an obligation to buy a minimum and may be used unless prohibited by an agency's internal rules. Your analysis leads to the goofy requirement that we have seen some offices impose on their people to issue an order to buy the minimum simultaneous with contract award.

By Vern Edwards on Friday, February 01, 2002 - 02:17 pm:

John:

Somehow, I missed your Jan. 31 post. I don't remember our previous argument, but I'll make a couple of comments in response:

1. Yes, I rely on the Redbook. What else is there to rely on?

The GAO is the government's accountant and its general counsel says, in the Redbook, that agencies have to record the obligation of the minimum at the time of contract award. That's what Eric would call "authoritative." (By the way, I didn't say I like the GAO's position or even agree with it; I just acknowledge that it's the GAO's position.) When I was an Air Force CO I argued that agencies don't have to obligate any funds under an IDIQ contract until they issue orders, but now I acknowledge GAO's position because it appears that GAO gets to make the rules in this regard.

Would a decision make things clearer? No, the GAO's position, as stated in the Redbook, is clear. But I admit that a decision would either confirm the GAO's current position or change it. Is the issue open, as you say? Well, I guess so, in an academic sort of way. In that sense it would still be an open issue even if GAO issued a decision, if an agency wanted to contest it. It would be an open issue until the Supreme Court rendered a decision. I suppose it's possible that if forced to issue a decision the GAO would reach a conclusion that's different than the one in the Redbook. What do you think are the chances of that?

Eric questions whether the old rules still apply. Well, there are a couple of ways to to find out: write GAO and ask for an advisory opinion or just do it your way and see what happens. All I'm doing is describing the "rules" as I understand them from GAO's published guidance.

2. I agree that the GAO's position that agencies must record the obligation of the minimum at the time of contract award poses many practical problems and that it ought to be revisited. (Again, I don't like the GAO's position, I just acknowledge it to be what it is.) I wish that OFPP would work something out with GAO that would give agencies more flexibility. But OFPP does not seem inclined to do so or to issue guidance of its own and the executive agencies seem to have fallen into line with the GAP Redbook.

I have described one solution that I think would make things a little easier, but Eric doesn't like it. What do I gotta do?

By anon2n on Monday, February 04, 2002 - 11:20 am:

I have a variation to add to this discussion. IDIQ (multiple award) RDT&E CPFF contract, X years basic + additional years options. The absolute minimum amount specified in the contract has been met during the basic period via TOs. The Options each have a specified minimum applicable to them of "R" dollars. Many of the TOs are completion type and cross the option date (ie they start during the basic and complete date is after the option period).
Here's the question. In exercising the option, if one had a modification to an existing TO (increased quantity) - could one meet the requirement for the R dollars using this modification (which would be made during the option period). Is it necessary to use funding which is from the base period years or the option period years (given it's RDT&E, the same funding might be useable for both, as RDT&E is valid for more than one year).

In other words, is one required to issue a NEW TO for the R dollar minimum with NEW dollars (if the option year is FY02, FY02 $) or can one meet the requirement via the modification to the existing TO (new work, in scope)using FY01 or FY02$ (I am stipulating that the contractor is amenable to the mod being counted, it is only Gov rules that might cause a problem)

By Vern Edwards on Monday, February 04, 2002 - 11:39 am:

anon2n:

The standard FAR clause (52.216-22) does not prescribe how you'll buy the minimum quantity (e.g., on one task order or two). So, I don't see any reason why you cannot fulfill your contractual obligation to buy the minimum quantity applicable to an option period by modifying a task order that was issued in a previous period.

My answer does not take into account any funding issues, such as the mingling of different appropriations in a single task order.

By John Ford on Monday, February 04, 2002 - 12:11 pm:

Anon2n: I agree with Vern. What matters is how your contract is written and whether the Government has fulfilled its obligations under the contract. Assuming the standard FAR provisions are applicable, the Government could meet its obligation by doing what you have described. There is no requirement for the Government to issue a new TO to meet its minimum for the option period.
Responding to Vern's comments on my post, as an authoritative source, the Red Book is subordinate to decisions of the courts and Comp Gen. It is also subordinate to statute. My problem with what the Red Book says on this subject is that it is not supported by either case law or statute. None of the decisions in the Red Book that are discussed prior to the conclusory statement regarding the need to obligate funds at the time an indefinite quantity contract is awarded are on point. It is interesting to note that the Red Book cites no decision or statute for that proposition. Based upon this state of affairs, I am not willing to give this statement from the Red Book much probative weight. That is why I said it would be better if there were a decision addressing a specific set of facts that could provide some guidance on how to address what has become a tricky issue.

By Vern Edwards on Monday, February 04, 2002 - 01:00 pm:

John:

Okay, you don't think the Redbook has much probative value. But what is your position?

Do you maintain that the award of an IDIQ contract with a promise to buy a minimum is not an obligation as that term is used in Federal appropriations law? Do you think that there is no obligation until the agency has issued an order for the minimum? If so, what are your criteria for obligation?

Alternatively, do you think that such an award is an obligation but that there is no legal requirement to record it until the agency has issued the order to buy the minimum?

Or, is your position something else entirely.

Vern

By Eric Ottinger on Sunday, February 10, 2002 - 06:30 pm:

After reading through the relevant sections in the Red Book, two points jump out at me. First, the fundamental rules are clearly stated in Section 1501. The Red Book doesn’t set forth a rule for ID/IQ’s, it merely applies Section 1501 to the ID/IQ contract type as it was described in the FAR before FASA. Second, it would be very difficult to obtain a substantially more flexible interpretation of the rules for FASA ID/IQ’s without first modifying the statute.

I don’t believe there is any stand-alone rule regarding ID/IQ’s in the Red Book. The rule regarding the indefinite-quantity contract type is a logical deduction based on other more fundamental rules, applied to the “indefinite-quantity contract, under CURRENT [i.e. 1992, pre-FASA] regulations.” The Red Book says this explicitly. “A fairly simple generalization can be DEDUCED from the decisions:” (See page 7-17.)

Pre-FASA, the FAR required that the ID/IQ be used for “specific supplies and services.” [This rule was often ignored. As a result, the Director of Defense Procurement and OSD General Counsel wrote memoranda complaining about the evil of ID/IQ’s used for “generic” rather than specific supplies and services.] FASA legitimized broad scope ID/IQ contracts. There is no specificity requirement for FASA ID/IQ’s as there was for pre-FASA ID/IQ’s.

This is important because the 1992 Red Book was written before FASA, and GAO regards specificity as a very important test for an obligation. Under Section 1501,

“(a) A amount shall be recorded as an obligation of the United States Government only when supported by documentary evidence of –

(1) a binding agreement between an agency and another person (including an agency) that is –
(A) in writing, in a way and form, and for a purpose authorized by law; and
(B) executed before the end of the period of availability for obligation of the appropriation or fund used for SPECIFIC goods to be delivered, real property to be bought or leased, or work or services to be provided; …”

Per the Red Book, “Subsection (a)(1) actually imposes several DIFFERENT requirements (1) a binding agreement: (2) in writing; (3) for a purpose authorized bylaw; (4) executed before the expiration of the period of OBLIGATIONAL availability; and (5) a contract calling for SPECIFIC [bold and underlined] goods, real property, work, or services.” (See page 7-8.)

“The statute requires documentary evidence of a binding agreement for SPECIFIC goods or services. An agreement that fails this test is not a valid obligation.” (See page 7-14.)

In the AAP scenario, the AF obligated $3,000,000 for an odd lot of LAN products to be specified later. This was perfectly legitimate under a FASA ID/IQ, although it would have been dubious under a pre-FASA ID/IQ. Unfortunately, the AF was unable to specify a first delivery order because the AF was tied up in a protest for two and a half years. (Bummer!) If the AF had placed an order as soon as the protest was resolved in August of 1997 the AF could have salvaged the $500,000 of FY 95 funds by immediately issuing a delivery order. But the AF did nothing with the funds until 1999 [!], when they put the inquiry in to Professor Boggs.

I don’t know what is “on point,” because most of these cases are so old that I can’t reference them without access to a law library. However, this Red Book summary of B-196109 seems clear enough. “Similarly, a purchase order which lacks a description of the products to be provided is not sufficient to create a recordable obligation. B-196109, October 23, 1979. In the cited decision, a purchase order for ‘regulatory, warning, and guide signs based on information supplied’ on requisitions to be issued did not validly obligate FY 1978 funds where the requisitions were not sent to the supplier until after the close of FY 1978.” (See page 7-14.) To me this sounds very similar to the AF “obligating” funds for unspecified LAN supplies on the ID/IQ contract and then not issuing an order with specific deliverables until years later.

Based on the specificity rule, I have to agree with Professor Boggs. The AF did not overobligate the $3,000,000. Unless that $3,000,000 was tied to specific deliverables, the money was never obligated.

As far as I can tell, the rule in the Red Book regarding overobligations is simply a corollary of the specificity rule. As long as the funds are obligated for specified supplies or services, there is really no opportunity to underobligate or overobligate.

“The OVERRECORDING and the UNDERRECORDING of obligations are equally improper. OVERRECORDING (recording as obligations ITEMS which are not) is usually done to prevent appropriations from expiring at the end of a FISCAL year.”

The Red Book regards overobligation as a means to park funds until they can be used in a subsequent fiscal year. The Red Book doesn’t really contemplate any other category of overobligation. (See page 7-5.)

Clearly, for pre-FASA type ID/IQ’s, which specify a minimum and a maximum quantity of tires, batteries, windshield wipers, etc., the old deduced rule still applies.

I would suggest a simple test. If the minimum is specified as a quantity, the minimum probably meets the specificity test and the dollar cost of the minimum is a recordable obligation. If the minimum is specified as a dollar amount, the ID/IQ is broad scope rather than specific. It is improper to say that there is a recordable obligation for a non-specific requirement. But, as Professor Boggs recognized, an “’administrative reservation’ or ‘commitment’ of funds” is needed to cover the government’s liability for the dollar cost of the minimum.

GAO addresses an obligation which isn’t a recordable obligation as follows: “The contingent liability poses somewhat of a fiscal dilemma. On the one hand, it is by definition not sufficiently definite or certain to support the formal recording of an obligation. Yet on the other hand, sound financial management, as well at ANTIDEFICIENCY Act considerations, dictates that it somehow be recognized. The middle ground between recording an obligation and doing nothing is the ‘administrative reservation’ or ‘commitment’ of funds.”

My suggestion for a rule would be, (1) the recordable obligation should be on the order with just one exception; (2) a funding cite on the ID/IQ vehicle which specifies the minimum quantity and the specific deliverables for the first order (e.g. 1,000 windshield wipers) should be considered a recordable obligation; and (3) a funding cite on an ID/IQ, which isn’t tied to a specific quantity of a specific deliverable, should be considered an “administrative reservation” or “commitment.”

For a CPFF order under a FASA ID/IQ, I would consider the recordable obligation to be the same as the limitation of funds. I don’t think this would violate any fundamental rule in the Red Book. I don’t see any reason why the government’s liability for a first minimum quantity CPFF order would be any different from the liability for similar CPFF contract.

Random Thoughts:

The Red Book does mention a GSA vehicle for which there is no binding commitment until the first order is issued. I’m not sure how this is done, but it might be worth looking into.

I note that some agencies set the minimum at a ridiculously low amount like $100. This is probably too low to meet the “more than nominal” test, but the ID/IQ would nevertheless become binding when the first “more than nominal” order was issued. At the worst, this would give the contractor an opportunity to get out of the ID/IQ contract at some point before this first order was issued. In a multiple award situation, this would not do the government any great harm.

Generally, in this thread, when we 1102 operator types have been talking about “obligations” we have intended what the Red Book would call “recordable obligations.” That would be a liability in the form of a contract which meets all of the Section 1501 tests, which has a funding cite on the contract, tied to a specific line of accounting and specific deliverables.

From the point of view of the Comp. Gen. any contract meeting the Section 1501 requirements would be an “obligation,” even if the contracting officer had neglected to cite any funds on the contract. It would be improper insofar as it would invite an anti-deficiency problem but it would still be an obligation.

If you have read this far, you should read Chapter 7 in the Red Book. This document was evidently written under some “plain English” imperative. It is, for the most part, written in straightforward, understandable language. (On the other hand, it appears that it was written at the point when professional editors were no longer employed. For a highly authoritative document, there are more run-together words and other weird typos than you would normally expect.)

http://www.cfo.doe.gov/budget/gao/index.htm

As always, any opinion is strictly my personal opinion. I don’t represent my agency, my GC, my comptroller or anyone else. If you need advice on an actual situation, you should obtain it from your agency GC. (On the other hand, I think the Red Book is clear and unambiguous on this topic, if you read it carefully and without preconceptions you shouldn’t have to rely very much on professors.)

Eric

By Vern Edwards on Monday, February 11, 2002 - 09:29 am:

Eric:

So--your position boils down to this: If the IDIQ minimum is stated in terms of a quantity of supplies or services, then it is an obligation that must be recorded. But if the IDIQ minimum is stated in terms of a dollar amount, then it is not an obligation and need not be recorded. If that is a valid restatement of your position, then I agree with the first half of it, but not with the second.

The GAO says, "Thus, in very general and simplified terms, an 'obligation' is some action that creates a liability or definite commitment on the part of the government to make a disbursement at some later time." A contract in which the government promises to order a specific dollar amount worth of supplies or services seems to fit that description. I don't see why stating the promise in terms of a specific number of dollars instead of quantities of supplies or services makes it "broad scope rather than specific," especially when the contract describes the various types of supplies and services that can be ordered thereunder.

Obligation is act of creating a liability, not the act of writing a fund cite on a document. Thus, your suggested rule about "'administrative reservation' or 'commitment'" ignores that fact that a promise to buy a minimum creates a legal liability. (See the Court of Federal Claims decision that Bob highlighted last week in Today's News.) Awarding a properly-written IDIQ contract obligates the government to buy a minimum. Issuing the order for the minimum specifies the particular supplies or services that the contractor must deliver or perform and the time and place of delivery or performance. Issuing an order for supplies or services above the minimum creates an new obligation. This interpretation is consistent with the language of the Indefinite-Quantity clause, FAR 52.216-22, as analyzed by the Court of Federal Claims in the decision that Bob brought to our attention.

If the IDIQ minimum represents a legal liability, which the Court of Federal Claims thinks it does, then it is an obligation, isn't it? And if it is an obligation, then it must be recorded at the time that it is made, mustn't it? These are the key questions. Thus, you have raised an important issue in theorizing that a minimum stated in terms of dollars is too vague to create a legal liability. I don't think it is.

Maybe Congress should revise 31 U.S.C. 1501 to state that obligations under IDIQ contracts may be recorded only when orders are issued. That would settle things nicely and also address your previously expressed concerns about the improper "banking" of funds.