By casia on Tuesday, April 16, 2002 - 11:01 am:

What kind of a contract is the contractor performing?

By Vern Edwards on Tuesday, April 16, 2002 - 11:02 am:

I don't know if your attorney is basing his analysis on case law and I don't know whether your contract is cost-reimbursement or fixed-price, however, you might want to take a look at FAR § 32.704(c), which says:

"Government personnel encouraging a contractor to continue to perform work in the absence of funds will incur a violation of Revised Statutes Section 3679 (31 U.S.C. 1341) that may subject the violator to civil or criminal penalties."

If you do anything that is interpreted as obligating the government to an expenditure of appropriated funds when funds are not available, then you are taking a personal risk.

By Dave Barnett on Tuesday, April 16, 2002 - 11:26 am:

Vern, I know you read the "Red" book, can one use FY03 appropriations to pay for an FY02 expenditure? Wouldn't the Bona Fide needs rule come into play. I note that the bona fide needs rule states that "in some cases arising prior to but continuing to exist..." may apply but my reading is that this would apply if a prior years bona fide need wasn't met in that fiscal year and the bona fide need still existed in the subsequent year. Am I missing something here?

By Eric Ottinger on Tuesday, April 16, 2002 - 12:22 pm:

AnonX,

It strikes me that you are in a situation similar to precontract cost.

Have you or your counsel considered negotiating an agreement similar to a precontract cost agreement, with a clear statement that there will be no liability to the government if the anticipated FY 03 funding does not materialize.

On the whole I agree with your counsel. Even with an advance agreement I would be very careful what I communicate.

Eric

By Anonymous on Tuesday, April 16, 2002 - 12:49 pm:

Your attorney is correct.

By AnonX on Tuesday, April 16, 2002 - 01:06 pm:

Anonymous - Are you my attorney?

Vern & Casia - It is a CPFF contract and we are operating under the Limitation of Funds clause. Thank you for you FAR reference, Vern. This must be his concern, and it sounds like a valid one.

It's not unusual though, that on annually funded contracts of this type, come September 30th in any given year, the contractor runs out of funding and the following fiscal-year funding is not made available until some time in the late-November to early December time frame. The contractor continues to perform, but we certainly don't manage these programs any differently under these circumstances. Is there something about the Continuing Resolution process that differentiates this type of situation from the one I described in my initial post? (On a different topic, I would love a short dissertation on the CR process. I've never quite understood it. Do you know of a good source for information on this topic?)

AnonX

By Vern Edwards on Tuesday, April 16, 2002 - 01:54 pm:

Dave:

You cannot use FY03 appropriations to pay for an FY02 "expenditure." That's because in budgetary terminology an expenditure is an outlay, i.e., a payment--the issuance of a check or cash or an electronic transfer of funds to liquidate an obligation. See: A Glossary of Terms Used in the Federal Budget Process, Exposure Draft, Revised January 1993, GAO/AFMD-2.1.1., pp. 45 and 63-64. An agency making an FY02 expenditure would be making a payment in FY02, before FY03 funds are available for obligation or expenditure.

You cannot use FY03 appropriations to pay for an FY02 obligation, either, since an obligation must be recorded at the time that it is made. An FY02 obligation would be made in FY02, before an FY03 appropriation is available for obligation.

However, you can obligate FY03 appropriations to pay for an unfulfilled need that arose in FY02. See: Principles of Federal Appropriations Law, Second Edition, (the Red Book) p. 5-16:

"If a need arises during a particular fiscal year and the agency chooses not to satisfy it during that year, perhaps because of insufficient funds or higher priority needs, and the need continues to exist in the following year, the obligation to satisfy that need is properly chargeable to the later year's funds. 'An unfulfilled need of one period may well be carried forward to the next as a continuing need with the next period's appropriation being available for funding.' B-197274, September 23, 1983. Thus, an important corollary of the bona fide needs rule is that a continuing need is chargeable to funds current for the year in which the obligation is made, regardless of the fact that the need may have originated in a prior year."

The key to that passage is the word "unfulfilled." Anonymous wants to fulfill the FY02 need in FY02 and then pay for it with FY03 money. According to page 5-18 of the Red Book:

"The essential requirements of the 'continuing need' corollary are that (1) the need, unmet in the year in which it arose, must continue to exist in the subsequent obligational period; (2) the incurring of an obligation must have been discretionary with the agency to begin with; and (3) no obligation was in fact incurred during the prior year."

Underlining added.

Anonymous: For a discussion of the continuing resolution process see the Red Book, Vol. II, Chapter 8, "Continuing Resolutions." You can access the Red Book through Wifcon's Guidance page.

By Anonymous on Tuesday, April 16, 2002 - 04:15 pm:

Are you all nuts, except for Vern?

Vern,

While I agree with everything you stated I think your response may be too academic for the questioner, who obviously misunderstands some very basics.

Of course you cannot have a contractor perform in FY02 under an unfunded contract, then use FY03 appropriation to fund a contract to cover what the contractor has already performed during FY02. At a minimum, this would be a violation of the Anti-Deficiency Act.

The CPFF contract that currently exists with a Limitation of Funds clause tells the contractor to perform his best efforts on the SOW requirements to the extent the the funds have been put on the contract; to advise the KO anytime the contractor becomes aware that it cannot complete the SOW within the funds obligated; and to advise the KO when the contractor has incurred costs + fee equal to 80% of the funds obligated. The government then has essentially three options, add additional funds to the contract to allow the contractor to continue performing the SOW; reduce the SOW to match the available funding; allow the contractor to continue performing against the original SOW ONLY UNTIL COSTS + FEE EQUAL THE FUNDS OBLIGATED, then the contractor must stop performance.

This is not a subtle nuance of the bona fide need rule. This is not pre-contract costs. This is contracting 101.

By casia on Tuesday, April 16, 2002 - 04:26 pm:

As a CO, I would be extremely uncomfortable in having a contractor perform under a contract that has run out of money. Both parties are very much at risk should the contractor continue to perform. There must have been some poor planning/estimating to have run out of money at this time. I would in this case trust the attorney.

By Anoncon on Tuesday, April 16, 2002 - 07:41 pm:

Anonymous 4:15:

Did you get up on the wrong side of the bed? I don't think we are all nuts. I think this chat site is intended to explore possibilities and to seek opinions from others, who for the most part, have knowledge from their professional experiences. As far as contracts 101 goes, perhaps you should revisit the LOC or LOF clause (because we don't really know if the contract was fully funded or incrementally funded for the period in question or at least, I didn't see it) and you most likely will find the percentage expended for notification as well as the time you provide notification can differ.
(What 75-85%--30 to 90 days)Not neccessarily your laconic statement of 80%. Nor do I see where it says anything about fee. It says total cost. What's that mean?

Fact is , in the real world, we have gone at risk on the LOF or LOC clause, as perhaps others have (although I do not recommend it)but there is precedent such as unforeseen circumstances or pending EA's which might grant a Contractor some relief.We really don't know enough about AnonX situation to give a carte blanche answer but Vern gave very good sage advice.

My point is, your type of answer might scare away some people on this site that are new to the profession. They seem to range from entering the profession(contracting)to 20+ years. I am in the latter category and always try to find a new way to do things. Perhaps you might open a little also, after all we are supposed to be kinder and gentler after 9/11.

By Eric Ottinger on Tuesday, April 16, 2002 - 09:10 pm:

The FAR addresses AnonX’s situation as follows:

FAR 32.704 Limitation of cost or funds.

“(a)(1) When a contract contains the clause at … 52.232-22, Limitation of Funds, the contracting officer, upon learning that the contractor is approaching … the limit of the funds allotted, shall promptly obtain funding and programming information pertinent to the contract’s continuation and notify the contractor in writing that--

(i) Additional funds have been allotted, or the estimated cost has been increased, in a specified amount;

(ii) The contract is not to be further funded and that the contractor should submit a proposal for an adjustment of fee, if any, based on the percentage of work completed in relation to the total work called for under the contract;

(iii) The contract is to be terminated; or

(iv)(A) The Government is considering whether to allot additional funds or increase the estimated cost,

(B) the contractor is entitled by the contract terms to stop work when the funding or cost limit is reached, and

(C) any work beyond the funding or cost limit will be at the contractor’s risk.
…
(c) Government personnel encouraging a contractor to continue work in the absence of funds will incur a violation of Revised Statutes Section 3679 (31 U.S.C. 1341) that may subject the violator to civil or criminal penalties.”

Since the government does intend to provide additional FY 03 funds, FAR 32.704(a)(iv) is clearly the only correct course of action. It is the contractor’s call whether to continue at risk or not.

In context, the prohibition re “encouraging a contractor to continue work” does not mean that the contractor may not continue at risk.

(I will note that all of the assumptions underlying earlier threads no longer seem to be operative. AnonX has presumably negotiated additional fee to compensate the contractor for shifting work into FY 03. But now it turns out the contractor does not want to shift work into FY 03. Nobody is contemplating a stop-work. And, in light of 32.704(a)(iv) there is no need for a stop work.)

I believe, based on earlier threads, that AnonX is talking about deliveries which were slipped from FY 02 to FY 03 due to performance problems and an overrun. This looks like a “prior year’s need” to me. I don’t see a bona fide need issue.

Assuming that this is the advanced technology R&D project that AnonX addressed in earlier threads, it is unrealistic and unlikely that the contractor and the government technical people will not talk for four months straight.

I still think an advance agreement similar in principle to a pre-contract cost agreement is the way to go. Otherwise, AnonX is going to put the technical people on both sides in a very difficult situation. An advance agreement would legitimize necessary communication.

Also, if worse comes to worse, it may be very hard to make the LOF stick if it turns out that the government and contractor technical people were conferring regularly. A piece of paper where the contractor states unequivocally that he knows that he is at risk, may be a good thing to have. But, as always, AnonX should run this by his fine agency legal mind.

Anon 4:15,

I am not sure how you conclude that everyone but Vern is nuts and then ignore his clear elucidation of the “Prior Years’ Needs” rule.

Allowing the contractor to work at risk does not create an anti-deficiency problem. Encouraging the contractor to continue at risk most certainly would. There is a difference.

AnonX,

It is true that contractors often recoup September costs with October funds. In my experience they don’t call attention to what they are doing, so the issue does not come up. The peculiarity of your situation is the length of time that the contractor plans to perform at risk.

I note that you used the phrase “actively manage” in your initial post. It isn’t clear whether your counsel would consider other routine communication, which doesn’t rise to level of “active management,” to be permissible.

Whether it is permissible or not, I would expect such routine communication to be inevitable.

Perhaps, since the contractor has put you all in an uncomfortable position, it would be best to reshedule that quarterly program review to October.

Eric 

By Dave Barnett on Wednesday, April 17, 2002 - 07:40 am:

Sheesh, ask a simple question, get a debate rolling. From my original question let me provide the following which led to my question for Vern. I assumed this was a situation of a contractor providing services. Money had run out and the services were still required for the period June 02 to Sep 02, therefore a bona fide need for the services exists in FY02 however FY02 funds for that need are unavailable. My question was how can FY03 funds be used to pay for services provided for the period in FY02 where FY02 funding was not available.

I know, I know, words mean things and in the future I will carefully word my comments so that even the most nit pickiest can fully gra...arrrrgh

By Anonymous on Wednesday, April 17, 2002 - 08:37 am:

My understanding of the question was the same as Dave's. That is, can FY03 money be used to provide "after the fact" funding for services performed in FY02 under a cost contract beyond the point at which the contract was funded with FY02 funds?

I believe the answer to that question is an unequivocal NO!

If the question is different ten of course the answer is likely to be different.

By Dave Barnett on Wednesday, April 17, 2002 - 09:05 am:

Thanks Anonymous of 8:37, that was my intent.

By Eric Ottinger on Wednesday, April 17, 2002 - 09:13 am:

Dave and Anon,

Let’s go back to November 28, 2001 when AnonX first brought this topic up. Per AnonX, “In order to minimize the funding pressure in FY '02 we are considering deferring some deliveries in '02 as well as in each of the subsequent calendar years.”

I see no reason to imagine that the deliveries are services rather than hardware. This would seem to fit the “Prior Years’ Needs” rule to a tee.

With at least a couple more years to go on the contract, “Nuts” would be terminating the contract at the end of May. I can’t imagine how that would benefit either party. I would be very surprised if the the senior people in AnonX's organization allowed that to happen.

Eric

By joel hoffman on Wednesday, April 17, 2002 - 09:14 am:


In summary of the above, it appears that FY02 funds must be used to meet an obligation incurred in FY02 and that the questioner's agency must find some FY02 funding, if they are going to pay for the service. From my understanding of one year funds (well, at least DOD O&M funds), they remain available to pay for obligations incurred during their "active" life and for in-scope changes to the original contract, until exhausted. Thus, the agency could scrounge up unused funds to pay for the FY02 service - as long as the Contractor was not encouraged to continue performance and unilaterally continued, on its own. Am I correct, so far?

It would be interesting to find some examples, testing the limits of "encouragement." I would think that accepting the services would be tantamount to encouraging continued performance, but would like to see some examples. happy sails! joel

By joel hoffman on Wednesday, April 17, 2002 - 09:17 am:

AnonX- is this a service or supply contract? If it is CPFF, does it mater? happy sails! joel

By AnonX on Wednesday, April 17, 2002 - 10:01 am:

For clarification:

The contract in question is a different contract then the one discussed in previous threads regarding fee.

Also, the contract is a combined services/supplies contract and is incrementally funded on an annual basis.

Thanks to all of you for your insight.

AnonX

By Eric Ottinger on Wednesday, April 17, 2002 - 10:08 am:

AnonX,

Apologies for the incorrect assumption.

I take it the government is not going to receive either the supplies or the services until FY 03. Is this correct?

Eric

By Vern Edwards on Wednesday, April 17, 2002 - 10:40 am:


All:

AnonX has said that the contract is an incrementally-funded cost-reimbursement contract (he said that it included the Limitation of Funds clause) and that it is "annually funded." I presume that when he/she says "annually funded" he/she means that the funds come from an annual appropriation.

Now let's follow Eric's lead and suppose that the contract is for supplies rather than for services. As I understand it, Eric's plan is to: (1) notify the contractor that the government "is considering whether to allot additional funds or increase the estimated cost"; (2) enter into an advance agreement with the contractor in which the contractor acknowledges that if it continues to work it will perform at its own risk and with no obligation by the government and that the government's continuing communications do not constitute "encouragement"; and (3) pay for the work with FY03 funds, pursuant to the "prior years" corollary to the bona fide needs rule. The question before us is whether or not that plan will work.

I'm not sure that it will.

Here is the problem as I see it. A contract already exists for the supplies, contingent upon the availability of funds. The Limitation of Funds clause includes a paragraph (i), which says:

"When and to the extent that the amount allotted by the Government to the contract is increased, any costs the Contractor incurs before the increase that are in excess of (1) the amount previously allotted by the Government or, (2) if this is a cost-sharing contract, the amount previously allotted by the Government to the contract plus the Contractor's corresponding share, shall be allowable to the same extent as if incurred afterward, unless the Contracting Officer issues a termination or other notice and directs that the increase is solely to cover termination or other specified expenses."

The GAO has said:

"The essential requirements of the 'continuing need' corollary are that (1) the need, unmet in the year in which it arose, must continue to exist in the subsequent obligation period; (2) the incurring of an obligation must have been discretionary with the agency to begin with; and (3) no obligation was in fact incurred during the prior year. If the agency has no discretion as to the timing of an obligation (for example, in situations where the obligation arises by operation of law), or, even in discretionary situations, if the agency has actually incurred a valid obligation in the prior year (whether recorded or unrecorded), then the 'continuing need' concept has no application and the obligation must be charged to the prior year. Absent statutory authority, current appropriations are not available to fund an obligation or liability (as opposed to an unmet and unobligated-for need) of a prior obligational period."

Underlining added. Principles of Federal Appropriations Law, Second Edition, Vol. I, Ch. 5, p. 5-18.

It seems to me that postponing the delivery of the supplies under the existing contract until some time in FY03 might not be enough to meet the third of GAO's "essential requirements" for use of the continuing need rule. We have to decide whether or not merely deferring the provision of additional funds until FY03 satisfies the "no obligation" requirement. Some might argue that paragraph (i) of the Limitation of Funds clause and the advance agreement with the contractor are prime facie evidence of an obligation, or at least of a de facto obligation (if there is such a thing). Or they might argue that those texts are evidence that the supplies are a bona fide need of FY02 that cannot be funded with FY03 money.

On the other hand, some will argue that there was no obligation because of the second sentence of paragraph (e) of the Limitation of Funds clause, which says:

"In the absence of the specified notice, the Government is not obligated to reimburse the Contractor for any costs in excess of the total amount allotted by the Government to this contract, whether incurred during the course of the contract or as a result of termination."

On at least two occasions the GAO has held that it is improper to incrementally fund nonseverable service contracts across fiscal years without express statutory authority. In the main decision, Incremental Funding of Multiyear Contracts, 71 Comp. Gen. 428 (1992), B-241415, the GAO said:

"We agree that the inclusion of the Limitation of Funds clause in a contract would prevent an Antideficiency Act violation. The difficulty, however, is that although such a clause limits the obligation initially incurred, it does not remedy the bona fide needs problems that necessarily arises when an agency attempts to charge subsequent year(s) appropriations for the needs of a prior year. Further, use of the clause will not free an agency from the future-year dilemma of either abandoning a partially completed project or completing the project at the cost of funding other priority activities."

However, since that decision had to do with nonseverable services it is not clear how, if at all, it applies to supply contracts.

We could pursue this inquiry a long way, but I don't have either the time or the inclination to engage in speculation. I simply don't know enough about AnonX's contract or requirement to know whether deferring delivery of supplies until FY03, if supplies are what AnonX is buying, will allow him/her to use FY03 funds.

If we are going to continue this discussion intelligently, we need the answers to some questions, including: Is the contract really funded with annual appropriations? (That is crucially important.) Is the contract for supplies, services, or both? (Also crucially important.) What work will the contractor be doing during the unfunded period? (May be crucially important.)

If AnonX wants to continue with this discussion, then he/she should answer those questions and perhaps a few more. While I enjoy these discussions, I don't want to invest time and energy only to have AnonX change the course of the debate time and again by dribbling out new information a bit at a time.

By Eric Ottinger on Wednesday, April 17, 2002 - 11:04 am:

Since I assume that we are discussing the issues rather than providing authoritative advice, I don’t really mind if we don’t have absolutely all of the facts.

Everything that Vern has said seems to be cogent. However, to my worker-bee mind, “obligation” normally doesn’t happen until the money is on the contract.

Using the “Availability of Funds” clause we may sign contracts in September of FY 02 that will be funded with FY 03 money. That would seem to be parallel to the situation which AnonX describes.

The question of what constitutes an “obligation” is a question for agency counsel. Barring the extreme case where AnonX is advised to do something illegal or totally stupid, that is the place where AnonX should be getting advice.

If I were AnonX, I most certainly would not accept any services between June and September.

Eric

By Vern Edwards on Wednesday, April 17, 2002 - 11:37 am:


Eric wrote: "However, to my worker-bee mind, 'obligation' normally doesn’t happen until the money is on the contract."

It is important to recognize the distinction between obligating the government and recording an obligation. Here's the GAO:

"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."

Principles of Federal Appropriations Law, Second Edition, Vol. II, Ch. 7, p. 7-4.

And again:

"It is important to emphasize the relationship between the existence of an obligation and the act of recording it. 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."

Ibid., pp. 7-6 to 7-7.

An obligation may happen well before money is "on the contract." Too many contracting officers think that an obligation doesn't happen until the contracting officer puts a fund citation on a contract document. Too many think that "putting funds on the contract" is the same as obligating funds. They are not necessarily the same. A board or court might find that the Limitation of Funds clause and Eric's advance agreement, when read together, constituted a promise to fund the contract if funds became available. Some might call that promise an obligation.

I advise caution. AnonX's issue is complex and tricky.

By Eric Ottinger on Wednesday, April 17, 2002 - 11:56 am:

Actually Vern, you are advising termination, which would be a rash thing to do before the wise heads at the agency have considered this issue very carefully.

(I should note that AnonX’s counsel doesn’t seem to see an anti-deficiency problem. From the little bit that AnonX passed on, I assume that this individual is conservative. I see no point in questioning the competence of this individual for the purpose of this thread.)

As you say, "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."

We sometimes sign contracts with the explicit understanding that the government will not be committed to make a disbursement until Congress appropriates funds at some point in the future. That’s the purpose of the “Availability of Funds” clause.

Eric

By Vern Edwards on Wednesday, April 17, 2002 - 12:34 pm:

Eric:

I'm haven't advised anything except caution. I'm certainly not advising termination. (Whatever gave you that idea?) I don't know enough about AnonX's contract to give advice about it, much less advice to terminate it.

Also, you attribute to me the quote about the nature of an obligation. I must, in all modesty, report that the GAO said that, not I. I merely quoted the GAO.

The question that must be answered is whether AnonX can use FY03 money to finish what was started with FY02 money. I don't know the answer to that question. Do you?

Do you know how AnonX's contract is written? Do you know the CLIN structure or the contents of the S.O.W.? I don't. That's why I'm not giving any advice. And if you don't, then neither of us should be giving any advice, including advice not to accept any services between June and September. (Of course, I'm assuming that you meant "accept" in the sense in which it is used in FAR Part 46.)

By Eric Ottinger on Wednesday, April 17, 2002 - 01:33 pm:

Vern,

I am addressing the question that AnonX asked, not questioning whether AnonX's counsel had led him into anti-deficiency.

Since I try not to take myself too seriously and I assume that the people advising AnonX are big boys who can think for themselves, the remainder of your questions are irrelevant.

Once more-- I regard this forum as a place to discuss issues. I regard anyone, who comes here looking for authoritative advice, when they should be talking to their supervisors and agency counsel, as people displaying very bad judgment.

Eric

By Dave Barnett on Wednesday, April 17, 2002 - 01:50 pm:


I see nothing wrong with coming to this forum and asking questions. Any advice received is free and should be so treated. I prefer to do some reading on my own and then solicit ideas from sources other than within my organization since offices begin to develop a certain mind set when approaching some issues. Also, fresh ideas can help in developing innovative approaches.

By Vern Edwards on Wednesday, April 17, 2002 - 01:53 pm:

Eric:

Uh-huh. Okay.

Vern

By AnonX on Wednesday, April 17, 2002 - 02:03 pm:

Vern - I apologize for "dribbling" information out, but it's difficult to determine what is pertinent to the issue until the questions surface. The only item I believe I have left out of my previous post is that the contractor will not be deliverying any supplies or services through the end of this fiscal year. His efforts will be focused on completing his development efforts in support of some prototype deliveries in 2003. There were two design reviews scheduled for later this fiscal year that have now been postponed to 2003 due to our attorney's advice.

AnonX

By Eric Ottinger on Wednesday, April 17, 2002 - 02:22 pm:

Dave,

Lest I be misunderstood--

Many offices, supervisors and counsel are stuck in a rut. Many do things which are illogical, unbusinesslike or borderline improper. Nevertheless, I don’t advise contract specialists to butt heads with their supervisors or agency counsel.

As a general rule I don’t try to win arguments. I try to give people what they need to think things through and convince themselves.

Vern does like arguments, and that does give a different shape to the dialogue. Vern will even, very occasionally, concede a point, as I guess he just did.

I sincerely hope that nobody goes back to their supervisor with some recommendation on the authority of this Ottinger guy that he met in a chat room. If he wants to borrow an idea, a reference or a citation, more power to him.

In short, I don’t disagree with you, and I hope that I haven’t given you any offense.

Eric

By Vern Edwards on Wednesday, April 17, 2002 - 02:26 pm:

AnonX:

Is the contract funded with RDT&E money or some other type of funding?

By Dave Barnett on Wednesday, April 17, 2002 - 02:32 pm:

No offense taken, and I never cite an opinion from wifcon or artnet as an authority, though I have some people in my office who like to cite as their authority "per Dave". They're the ones I constantly ask, "What did your supervisor say" or "What does the FAR say on the subject".

Funny thing is, after 20 years in this business, I'm still learning something new everyday, usually on my own (or with a bit of prodding from the likes of Ed, Vern, Joel, Bob etal).

By Anonymous on Wednesday, April 17, 2002 - 02:40 pm:

AnonX,

The critical issues, in my mind, are as follows:

Are annual appropriations being used to provide contract funding? (I assume the answer is yes for what follows.)

To the extent the contract requires the contractor to perform services or deliver supplies, the Government has created an obligation to pay for those supplies or services, provided they conform to contract specs or SOW, when it entered into the contract. The Limitation of Funds clause essentially limits the Government's obligation to accept and pay for conforming supplies/services to the extent funds have been allocated to the contract (and, in consonance, equally limits the contractor's obligation to perform). In essence, the Limitation of Funds clause causes the Government's obligation to be directly equal to the recording of that obligation because recording the obligation in the form of putting funds on the contract defines the Limitations of the Limitation of funds clause.

The issue you have raised is a separate issue of Appropriations law; i.e., for what purpose and in what manner may annual appropriations be used to fund the Government's obligation under the contract. The primary factors are fiscal-year related and prospective funding. The bona fide need rule essentially states that annual appropriations may only be used to fund obligations that are created to satisfy bona fide needs of that fiscal year. The continuing need corollary that has been mentioned, in essence, reflects that a need that may have originally risen in a prior fiscal year, but was not satisfied in that fiscal year (i.e, no order/contract or obligation was created in the prior fiscal year), remains unsatisfied and may still be needed, becoming a bona fide need of the subsequesnt fiscal year. If a decision is now made to satisfy that need, current year funding may be used to fund the newly created obligation. Prospective funding means you cannot use current appropriations to fund a previously established obligation, regardlkess of when delivery takes place. If you enter into a contract for widgets in FY01, for which annual appropriations are used, you must fund the obligation created upon contract execution in full using FY01 funds, even though deliveries may stretch out through FY02 into FY03. Likewise, services performed in FY01 must be funded with FY01 funds; services performed in FY02 must be funded with FY02 funds, etc., except to the extent that a particular service is non-severable into separate periods and the performance period crosses fiscal years. At least within DOD, such a non-severable service may be and must be funded with the funds current at the inception, and the total performance period may not exceed one calendar year.

By Vern Edwards on Wednesday, April 17, 2002 - 02:52 pm:

Eric:

I didn't concede anything to you. Where do you get these interpretations?

You plunged into this discussion from a platform constructed of all sorts of invalid assumptions ("I believe, based on earlier threads, that AnonX is talking about deliveries which were slipped from FY 02 to FY 03 due to performance problems and an overrun. This looks like a 'prior year’s need' to me. I don’t see a bona fide need issue." and "I see no reason to imagine that the deliveries are services rather than hardware. This would seem to fit the 'Prior Years' Needs' rule to a tee.") and suggested a course of action. You even said that it was "clearly the only correct course of action." Then, when you realized that you had been hasty, you tried to point a finger at me: "Actually Vern, you are advising termination, which would be a rash thing to do before the wise heads at the agency have considered this issue very carefully." I never did any such thing. Never said it; never hinted at it. Not even close. The only advice I ever gave in this thread was to be careful. Next, when confronted with some pointed questions, you tried to dodge the bullet by calling them "irrelevant" instead of simply admitting that you didn't know the answers. You remind me of a guy who yells "Yahoo! Bar fight!" and charges in, only to turn and run when he sees people hitting each other.

Don't worry about being misunderstood. The people who've been paying attention here understand you perfectly.

By AnonX on Wednesday, April 17, 2002 - 02:52 pm:

It is RDT&E funding from annual appropriations.

AnonX

By Eric Ottinger on Wednesday, April 17, 2002 - 03:36 pm:

Vern,

AnonX has presented us with two distinct “Contractor runs out of money in FY 02 and deliveries are in FY 03. What should I do?” scenarios. I was incorrect to think this was all the same scenario, but I was not unreasonable.

As for the arm waving to the effect that you are not advising termination, it can’t be that complicated. Either it is anti-deficiency or it isn’t.

As far as I can tell, short of a termination, the agency has no authority to tell the contractor that he cannot work “at risk” if he clearly understands that he is at risk and chooses to do so.

As usual I think your rhetoric is getting way out ahead of your logic.

I would note that I and agency counsel seem to be thinking along the same lines. I recommended moving the program review to October and agency counsel advised moving the design reviews to FY 03. I haven’t met this fellow (or lady) but I am beginning to like him a lot.

Eric

By Vern Edwards on Wednesday, April 17, 2002 - 03:57 pm:

AnonX:

When a multiple year (not multi-year) development contract is incrementally funded with RDT&E money, the parties are supposed to develop a program execution plan based on a annual funding plan (funding profile). Congress appropriates RDT&E money annually to cover the work described in the government's budget submission for each program year. If the contractor overruns, then the agency should either obtain additional money; restructure their program to permit continuation of the work within the original funding and adjust its budget submissions to Congress to reflect changed out-year funding requirements; or terminate the contract.

According to DOD 7000.14-R, DOD Financial Management Regulation, Volume 2A, Section 010213, RDT&E -- Incremental Programming and Budgeting Basics:

"Annual estimates of initial financing needed for new major weapon systems and other development programs and projects requiring several years to complete, and which involve contracts spanning more than one year, should be formulated to cover costs expected to be incurred during each fiscal year. Generally this will represent a 9-month or lesser period for the initial, first year increment of a new start program due to the nature and timing of the congressional budget approval. The second and succeeding increments will be programmed and financed for the entire fiscal year... In this regard, DoD components should make every effort to align subsequent years’ funding requirements on an annual basis coincident with the fiscal year, although it is recognized that there may be circumstances where this will not be feasible. The estimate of the financing required in the budget year to continue development projects must always take into account any changes (such as slippage’s) that have occurred. RDT&E funding requirements should be based on forecasted obligations that consider costs and timelines for each milestone and other programmatic event."

If you are currently in an overrun situation and do not realistically expect to recover to the original budgeted cost of the work scheduled by completion, but want to continue your program, then you should restructure the program to permit the contractor to continue working at some level during the remainder of FY02 and amend your budget request for FY03 (and other years?) to obtain the additional funds that you will need to pay for the overrun. If you do not change your budget request and use the FY03 appropriation to pay the contractor for the work that it continued to do at its own risk during June through September, then you will face this overrun problem again in FY03, not to mention the ire of Congress and higher level agency management when the overrun can't be hidden any longer.

It may be tempting to let the contractor continue to work at its own risk until funds become available. Some will argue that stretching out the performance may make the overrun worse, but if you let the contractor continue to work at the same pace and pay for it with next year's program funds you will be robbing Peter to pay Paul. You will have to face the overrun sooner or later. I know of one brilliant colonel on a famous program who wrecked his military career that way.

I may still not understand your program or your situation, but I have given the best response that I can based on what I know.

Vern

By Smokey on Thursday, April 18, 2002 - 11:15 am:

Wow...Rush Limbaugh made the wifcon site...unbelievable.

Lack of planning and bad program management is the problem here, but as usual, they look at the CO to pull the rabbit out of the hat.

If this were my program and the contractor elected to continue performance, I would not so much as approve a submittal during this period. I am sure I would take some heat, but so be it. This is a program management problem, not my contract's terms and conditions.

Vern...was the Col at LA AFB????

By Vern Edwards on Thursday, April 18, 2002 - 11:30 am:

Smokey:

Yes.

By anon11:30 on Thursday, April 18, 2002 - 11:31 am:

There is a possibility that the Contractor isn't performing within cost and or time targets/budgets...

By Vern Edwards on Thursday, April 18, 2002 - 11:56 am:

Smokey:

I will take issue with one thing that you said: I think it's a program management problem and a contracting problem.

Anyone managing an incrementally-funded contract should read the Limitation of Cost clause carefully, especially paragraph (b), which is often given scant attention. That first sentence of that paragraph says:

"The Schedule specifies the amount presently available for payment by the Government and allotted to this contract, the items covered... and the period of performance it is estimated the allotted amount will cover."

The reference to "items covered" should be interpreted as referring to elements of the work breakdown structure, not contract line items. Under a well-managed, incrementally-funded contract in a well-managed program, the government and the contractor should agree on what work will be done with the amount allotted during the period of performance and should describe that work in the contract schedule or in an attachment in terms of specific contract work breakdown structure (WBS) elements. This description should be linked to the contract budgeted cost of the work scheduled (BCWS) and the contract schedule. If the parties don't do this, then they are not "managing" the program or the contract in any meaningful sense of the word.

I think that the CO has an important role to play in that program/contract management process, assuming that he or she is familiar with the contract work breakdown structure and understands at least the rudiments of project planning and cost and schedule control techniques. If the parties decide to restructure the program, the CO is the one who will have to analyze the costs associated with the changes and negotiate the necessary contract modification. The program manager and the contracting officer have to work together and with the contractor to fashion a solution that is workable within the available funding and to understand the prospective impact on overall program costs.

Proper and effective use of incremental-funding under the Limitation of Funds clause requires that the parties agree to a program plan--a schedule and budget--and include that plan in the contract as required by paragraph (b) of the Limitation of Funds clause. Program/contract restructuring is a matter negotiating changes to those schedules and budgets. I think that COs have a crucially important role to play in that process. It is the role that I played when I was a contracting officer.

By Smokey on Friday, April 19, 2002 - 03:12 pm:

Vern...of course I agree with you, I never meant to imply that the CO was not an important member of the team. Heck, on my program, they considered me the Deputy Program Manager!

What I meant to say was....I bet this program was in trouble long before 16 Apr 02, the first post. My experience has been....program starts sliding right, IPT puts their collective heads together, decides they can catch up, reports "we're okay...we're okay..." and boom, soon realizes they are not okay. As a CO on major "non-developmental (right!) program", I saw this happen time and time again. I believe they thought they could catch up, but never could.

Then, add to it the fact that the PM never wants to report to the Director that his program is in trouble.

What you outlined in Para 4 is exactly what needs to happen, but my experience has been that is rarely does. As a CO, it is real tough to force the PM(s) to go thru the process you outlined, especially if they are both convinced it is not as bad as it looks...

By Vern Edwards on Friday, April 19, 2002 - 03:31 pm:

Smokey:

I like your description: We're okay... we'll be okay... uh, guys, we're not okay!

In order to catch up and recover the overrun the contractor will have to work more efficiently and effectively than it did at first and, of course, they always think they will.

Vern

By Eric Ottinger on Monday, April 22, 2002 - 09:43 pm:

I know I am being repetitive at this point. But let me reemphasize that AnonX started this thread with a statement that his cautious, conservative agency counsel had reviewed this situation.

I don’t know what all of the facts are. Nor do I know how agency counsel approached this issue. I don’t know that there is an overrun (rather than an acceleration). And I don’t know whether anyone is in any way at fault.

I should also note that I don’t know whether the shortfall is a significant percentage of the amount estimated for the fiscal year. (It might be that most of the money is going to subcontractors. It might be that the cost increase is in one of these subcontracts. It might be that the cost increase is due to changes in market conditions and not due to any failure on the part of program management.)

At this point I really don’t want to know. This is a good forum for discussing issues, not for discussing the propriety of any particular real world contract decision.

Vern,

I would note that it impossible to get from the text that you cite to the conclusions that you reach without already being expert in appropriation law.

I am not expert in appropriation law. In fact I am so inexpert that I would in all cases seek out a real expert and rely on that expert.

I can understand how a promising colonel who keeps sweeping overruns under the rug might find his career seriously shortened. All I know about AnonX’s agency is that AnonX considers his counsel to be conservative. I doubt a conservative general counsel is hiding overruns under the rug. On the other hand, I don’t really know one way or the other.

AnonX hasn’t said anything about an overrun. Nor do I know how the work planned lines up with the program execution plan.

AnonX,

If you really had questions about the legality of what your agency is doing, I expect that you wouldn’t be discussing the issue with strangers at the local bar.

I trust you see my point.

For whatever it is worth—

I have never personally encountered this kind of problem (i.e. a contractor working at risk for four months). To this extent that this might result from bad program management on either side, I would consider it entirely unacceptable.

Getting back to the original question, I really don’t know what I would do in AnonX’s position. I would certainly take counsel with any wise heads that I knew and my highly intelligent legal counsel.

Eric

By Vern Edwards on Monday, April 22, 2002 - 11:09 pm:

Eric:

Which conclusions of mine are you referring to? The ones about how to interpret paragraph (b) of the LOF clause? Heck, that's not a matter of expertise in appropriations law. Appropriations law doesn't have anything to do with it. Like Smokey said, that's just good old program/contract management know-how of the kind that a good contracting officer is supposed to have. The kind that I learned 25 years ago from contracting pros like Ed Hancock, Jim Mahoney, C. Howard Kirk, Bob Crossley, Ron Hudson, and Cecil Moore, and program managers like Gen. Don Henderson and Gen. Ralph Tourino. Great SPO (system program office) contracting officers and program managers, all.

AnonX says his contractor will run out of money by the end of May, but that it is willing to work at its own risk until October. That sounds to me like it's overrunning, which, under an incrementally funded contract, means that it's incurring costs more quickly than planned, either because the budgeted cost of the work performed is greater than the budgeted cost of the work scheduled (wishful thinking) or because the actual cost of the work performed is greater than the budgeted cost of the work performed (more likely). If the former, then the answer is to slow the contractor down; if the latter, then the answer is more problematical. No matter what the cause of the problem, it's not good to run out of money four months early. Something must be done.

AnonX's lawyer gave him pretty good advice, but not the kind that would make him unusually conservative or intelligent. According to AnonX, he simply said, "[I]f we were to continue to actively manage the program, we could still be held liable for the contractor's expenditures, even if additional funding is not forthcoming." Heck, that's just Contracting 101, a conclusion that any novice could reach who'd read FAR 32.704(c) or sniffed around in a Cibinic and Nash text.

AnonX doesn't need a lawyer or an expert in appropriations law at this point; he needs a program manager and a contracting officer who know what's what.

By ANONY819 on Tuesday, April 23, 2002 - 08:24 pm:


And after all the training, all the improvement efforts and all the retreats to discuss contracting why are "program manager[s] and a contracting officer[s] who know what's what" so scarce? This is basic, yet seems to be an issue and mystery for more than a few outside this forum.

I wonder what is being done with all those contractor reports that should flag a program getting into such trouble. PMs making paper planes to play with?

By Vern Edwards on Wednesday, April 24, 2002 - 07:02 am:

Anon819:

I think that training is a big part of the problem. Good training must include both classroom and OJT. Classroom training these days is pretty sketchy and not especially well designed. Not long ago I was visiting a civilian agency in Maryland and some of the folks were attending the government's introductory pricing class (CON something or other. It was a variation on the old, three-week AFIT class.) I knew some of the students and asked them how they liked the class. They didn't. They had spent an entire week on learning curves. Learning curves! Here were people who did virtually no production contracting spending one-third of their class time on learning curves. Here we are in an era in which service contracts account for more than 50 percent of all obligations and in which most people are buying services and commercial items, yet students were spending a week in an introductory class learning a technique for analyzing production costs. I took that class in the mid-1970s and didn't find it especially useful then, since I was buying spacecraft one and two at a time.

Too often, OJT is training by rumor and innuendo. As conducted in most offices it is disorganized and haphazard and conducted by people who aren't especially knowledgeable.

My comments apply not only to contracting training, but to program and project management training, as well. Until managers get serious about providing their folks with good classroom and on-the-job training, their people will continue to lack the know-how they need.

Another problem is that too many contracting people see every program and contract management problem as a legal problem and go running to lawyers for advice. Consider the commonplace advice that AnonX received. The lawyer told AnonX what not to do; however, the problem is what to do. The solution to that problem isn't legal in nature, it's bigger--it's managerial. The needed know-how comes from experience and deep training, study, and thinking.

By Anon2U on Wednesday, April 24, 2002 - 04:44 pm:

Vern,

I went to intermediate and advanced cost/price last year at Rock Island and Wright Patterson. Yes, the majority of the time was on learning curves and production theories. Almost no one in class were in a job that needed this information.

By Vern Edwards on Thursday, April 25, 2002 - 06:31 am:

Anon2U:

It really is time for someone to update those pricing courses. People need to know how to price service contracts and contracts for commercial items, and how to determine fairness and reasonableness without cost or pricing data.

By Anon on Thursday, April 25, 2002 - 08:33 am:

Dadblameit, service contracts can be a bear, ask for payroll records to get a base line hourly rate. As far as overhead burdens, it would be nice if the rest of the gov't got on board with what HHS does for grant recipients (advance rate agreements subject to post audits), then the KO could do a WGL analysis to determine fee/profit. ODCs shouldn't be much trouble if these costs have an overall minimal impact on the target price for the services contracted for. As for levels of effort, the program managers have got to get a better feel for the effort involved (for example, do I really need a full time timekeeper at 2080 hours per man year? Shouldn't that timekeeper position be a part of G&A or labor OH?) Just some thoughts...