John:

I guess we'll have to part in disagreement on this one.

I do not know what you mean by what you have variously called "present duty to perform," "current duty to perform," "current liability for the payment of money," and "current bona fide need," and I cannot find any support for the theory that you base on these terms, which you say prohibits an obligation in the absence of what I'll call an immediate need.

The statute which establishes the prerequisites for recording an obligation is 31 U.S.C. § 1501(a), which says, in part:

"An 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 service to be provided... ."

It goes on to list other things, such as loan agreements, orders placed with another agency, an order issued under a law authorizing purchases without advertising, a grant or subsidy, a liability that may result from pending litigation, employment or services of persons or expenses of travel, services provided by public utilities, and "other legal liability of the Government against an available appropriation or fund."

The statute says nothing about "present" or "current" duty, liability, or need; neither does the GAO's discussion of the statute, which appears in the Redbook in pages 7-8 thru 7-19. In fact, the GAO's discussion says that if a given transaction meets any of the criteria in 31 U.S.C. § 1501(a), "the agency not only may but must at that point record the transaction as an obligation." As I have said, I believe that the promise to buy a minimum quantity during the term of an IDIQ contract meets the criteria for an obligation.

You have cited the bona fide needs rule as prohibiting an obligation in the absence of a present or current liability; however, that rule merely states that an obligation must be based on the bona fide need of the fiscal year for which the funds were appropriated. The GAO's explanation of the bona fide needs rule in Chapter 5 of the Redbook says nothing about the need having to be present, current, or immediate. Indeed, the GAO's discussion of obligations to maintain inventory levels (which appears on page 5-11 of the Redbook) directly contradicts your theory. The GAO says that the "basic" question of the bona fide needs rule is whether the obligation is incurred to meet the legitimate needs of the "period of obligational availability of the appropriation to be charged or sought to be charged." Redbook, p. 5-10.

Contrary to your assertion of May 2, DOD FMR paragraph 080303 does not say that an agency cannot obligate funds unless there is a "current" bona fide need. It says that contracts or orders must "meet a bona fide need of the period for which funds were appropriated." Underlining added. It also says, in subparagraph B. Performance Under Contracts or Orders, "Contracts entered into or orders placed for goods, supplies, or services shall be executed only with bona fide intent that the contractor (or other performing activity) shall commence work and perform the contract without unnecessary delay." Underlining added. This says that agencies should not award contracts in order to bank an appropriation. It says nothing about recording an obligation once a contract has been awarded.

Thus, you have not made a persuasive case, at least, not one that persuades me. The GAO Redbook, which is certainly authoritative, says:

"A fairly simple generalization can be deduced from the decisions: 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."

I have to say that your characterization of this statement by the GAO as mere "editorial comment" is somewhat disingenuous.

The GAO's position certainly complicates things in light of modern usages of IDIQ contracts, especially multiple award contracts awarded for use by multiple offices within an agency and multiple agencies. But until we get a decision that evidences a change in GAO's position, that position seems clear to me.

I have enjoyed this exchange with you.

Vern

By Eric Ottinger on Wednesday, May 3, 2000 - 05:07 pm:

Three questions.

1) Is there any good reason why a cost type Order (with LOF), for the minimum quantity, can’t be incrementally funded in the same manner as any Cost type contract.

2 Would you argue that the CO should make anything other than the best value selection for competitive awards at the outset, to satisfy the minimum?

3. The minimum may be specified in terms of dollars. Equally, the minimum might be some other quantity like hours. If the ID/IQ doesn’t specify the minimum in dollars and it isn’t clear what the cost of the minimum order will be until the mix is specified, (or the order is priced competitively) how does the CO know how many $ to obligate for the minimum. (You could argue that the minimum should be calculated at the lowest possible dollar amount. I find that answer artificial and unsatisfying.) What advice would you give. How does anyone fund the minimum when they don't know what it will cost?

Eric

By Eric Ottinger on Wednesday, May 3, 2000 - 03:40 pm:

Vern and John,

At the risk of slicing a hair: Having a (bona fide) need and having an immediate requirement are not quite the same thing.

It is abusive to stash money on any contract simply for the purpose of keeping the funds from expiring. It doesn’t follow that we can’t fund requirements several months into the future. We usually do.

Before FASA rewrote FAR 16.5, 16.504(b) (in the old FAR) stated, ‘Funds for other than the stated minimum quantity are obligated by each delivery order, not by the contract itself.”

Clearly, it was expected that funds for the minimum would be obligated on the contract, before orders were written to cover the minimum.

Although the current FAR is not as explicit, I don’t think the rule has changed in any fundamental way.

Eric

By Susan McCullough on Wednesday, May 3, 2000 - 03:36 pm:

How is the "use of funds as to time and purpose" issue different for the ID-IQ guarantee than for funds obligated to cover the cancellation ceiling on a multi-year contract? (FAR 17.106-1) Or are we even required to obligate funds to cover the cancellation ceiling? (Obviously, I've never seen one.)

I've always assumed this was done, but the FAR doesn't actually say so. (It goes on at length about how to determine the amount, but doesn't actually require it to be funded.) Is it? If yes, then what happens to this money if the contract is never cancelled? FAR calls for this reserve to be adjusted annually (which makes sense since there would be a smaller portion of the nonrecurring costs left to cover). What do you do with the amount removed from the ceiling each year?

By John Ford on Wednesday, May 3, 2000 - 02:13 pm:

Vern, and you have not convinced me. You must read the requirements for the bona fide needs rule in conjunction with the requirements for recording an obligation. A bona fide need is a prerequisite for an obligation. Without a bona fide need for supplies or services, the government is not permitted to obligate funds. To do otherwise can result in "banking" funds, i.e., obligating annual appropriations in one year to meet a need that arises in the next year.
Having said about all I can on this point, I will continue to maintain my position unless you can show me a statute, regulation, or authoritative decision (not editorial comment) that states unequivocably that the government can obligate funds for anticipated needs for supplies or services when there is no current need for those supplies or services. In the meantime, we shall continue to disagree on this and will wait for the next issue to debate or concur.

Al, Vern, et al: I stand corrected!

I looked up my Agency's FAR Supplement and found a prescription that we obligate funds for the minimum ordering quantity on an IDQ at the beginning of the basic period and at the award of each option (EFARS 16.5 (S-108)).

I seem to remember this EFARS prescription being added recently, because the COE Districts have been proliferating what are termed as "hollow contracts" - numerous broad scoped ID/IQ's for A-E services or construction with little or no capacity used, duplicative contracts, etc. This overuse of IDQ's is abusive to the industry

The requirement could have been incorporated into EFARS based on the background requirements which Al and Vern referred to in this thread. But it was added at the time USACE was trying to curb the Districts' misuse of IDQ's.

However, I still don't understand how we obligate specific funding on contracts which are broad enough in scope to allow task orders from multiplefunding sources. Perhaps we replace the original funding by the appropriate funding at the time of an order?? Happy Sails! Joel

By Vern Edwards on Tuesday, May 2, 2000 - 01:08 pm:

John:

I do not agree with you.

First, you seem to misunderstand the nature of "obligation." The GAO says that the word has many meanings, but cites a number of cases which hold that an obligation is "a definite commitment which creates a legal liability of the Government for the payment of appropriated funds for goods and services ordered or received." Redbook, p. 7-3. It seems to me that a government promise to buy a minimum quantity meets that definition of "obligation."

Thus, when a contracting officer promises to buy a minimum quantity under an IDIQ contract he or she has "obligated" the government. The Antideficiency Act says that anyone who obligates the government without an appropriation of funds has broken the law. The bona fide needs rule doesn't have anything to do with this; the issue turns on the definition of "obligation." In order for your conclusion to be valid, you must show that the government's promise to buy a minimum quantity does not constitute an obligation.

Please note that the Redbook says: "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." Redbook, p. 7-4.

The Redbook says that once a transaction meets the criteria for an obligation, "the agency not only may, but must at that point record the transaction as an obligation." I.e., the contract document must include a funds citation and the obligation must be recorded on the agency's books of account. The Redbook says that this "follows logically" from the Antideficiency Act. Redbook, p. 7-6.

I think that your argument twists the meaning of the bona fide needs rule. Here is the GAO's statement of that rule, quoted from Ch. 5 of the Redbook, p. 5-9: "A fiscal year appropriation may be obligated only to meet a legitimate, or bona fide, need arising in, or in some cases arising prior but continuing to exist in, the fiscal year for which the appropriation was made." Underlining in original.

The bona fide needs rule merely stands for the proposition that an agency cannot use funds appropriated for the needs of one year to pay for the needs of a different year. It concerns the limitations on the time in which an appropriation is available for obligation. If an agency does not need or anticipate the need for supplies or services, then it should not enter into an IDIQ contract. If the need is possible, but not certain, the agency should use a requirements contract, not an IDIQ contract.

When a contracting officer obligates the government to buy a minimum quantity, he or she must have appropriated funds to cover the minimum quantity and must record the obligation (i.e., "fund" the contract) at the time of award.

The GAO says so, not me. Redbook, p. 7-17.

I think that at this point the only way you can bring me around to your way of thinking is either to convince me that a promise to buy a minimum quantity is not an obligation, or show me some official policy document.

By Eric Ottinger on Tuesday, May 2, 2000 - 12:44 pm:

John,

I agree in general.

There is a similar issue with CPFF LOE term, tasking contracts. There have been some situations where the contract was signed and the money was obligated on September 30, but the work didn’t start until six months later. To preclude this kind of abuse, there is usually a local policy requiring that there must be at least one task signed on the same day that the contract is signed.

Similarly, I don’t think the ID/IQ should be awarded until there is a Task Order or Delivery Order in hand. However, I don’t think every contractor under a multiple award vehicle has to get an Order on the first day.

Generally, we have an order of precedence issue. The requirement to award a minimum takes precedence over the requirement to compete tasks. However, there is no good reason to think this rule would apply on the first day of the ordering period. If the PCO is confident that there will be other Orders in the future to satisfy the minimum for a particular offeror the imperative to give all of the offerors a fair opportunity should take precedence.

In short, I think Kennedy’s people have it right.

If we can’t square this with the old rules, it may be that some of the old rules have to be updated.

This isn’t going to convince any of the fine legal minds in the Forum, but I would note 1) these multiple award vehicles have been around for several years, 2) many agencies can’t fund all of the minimums at the outset, 3) and many buying offices are following the rules that Kennedy described and 4) the GAO hasn’t, to my knowledge, written any opinions on this topic recently.

Maybe the GAO has other things to do. Maybe the GAO doesn’t want to get in the way of progress. Maybe the rules have changed.

In any case, we should be careful about taking rules which have been buried in the regulations for many years and applying them mindlessly, when the context has changed drastically.

Eric

By John Ford on Tuesday, May 2, 2000 - 10:56 am:

Vern, I don't know if you are confused but your comments miss the key fiscal point in this discussion. The key point that I have mentioned several times is the bona fide needs requirement before funds can be obligated. (See DoD FMR Vol 3 Ch 8 para. 080303, and the Redbook Vol III Ch. 5 for a discussion of the bona fide needs rule.) Plainly put, funds cannot be obligated unless there is a current bona fide need to be satisfied by that obligation. In the case of an IDIQ contract, there is no requirement that such a contract be awarded when there is a current bond fide need to be met by ordering the minimum quantity. Generally, the minimum quantity is based on historical requirements so there is a reasonable certainty that the government will need the minimum quantity during the period of the contract. Based on this reasonable certainty, the government obligates itself to order the minimum quantity at some point during the life of the contract. On the other hand, the contractor agrees to accept an order for the minimum quantity and additional orders up to the maximum quantity. It is these exchanges of promises that creates a binding contract. Therefore, it is not necessary to obligate funds to create a binding contract.
Applying these general principles, including the bona fide needs rule, to various scenarios we get different outcomes based on the specific facts of each scenario.
#1. An IDIQ contract is awarded when there is a current bona fide need for the minimum quantity and funds are available to satisfy that need. Funds should be obligated to cover the minimum quantity at the time of award either through the contract itself or an order issued concurrently with the contract.
#2. An IDIQ contract is issued and a bona fide need exists for the minimum but funds are not currently available to cover the minimum. Obviously, no funds can be obligated at this time. However, funds become available at a later point in the life of the contract and the need still exists. Funds for the minimum would be obligated at that time.
#3. An IDIQ contract is awarded and there is no current bona fide need for the minimum. A need does arise later. At that time, an order would be placed and funds obligated.
I could go on with various scenarios but I think this makes the point.
Joel is correct in his response to Al, particularly in regard to a contract awarded in one fiscal year that crosses fiscal years. In this regard, your reference to FAR Part 37 is off the mark. The quoted provision applies when a bona fide need arises in one fiscal year and services begin in that year but continue into the next fiscal year. The language has nothing to do with the situation where an IDIQ contract is awarded in one fiscal year, but a bona fide need for the supplies or services does not arise until the next fiscal year. Not only would it be illegal to obligate funds when there is no bona fide need for the supplies or services, but it would be a possible violation of the Anti-Deficiency Act to obligate funds from one fiscal year to cover a bona fide need arising in a later fiscal year if the funds were not available for obligation in the following year.
Finally, the AFFARS must be presumed to state the actual requirement in this area. After all, a FAR supplement cannot be inconsistent with the FAR unless there is some statutory basis for the inconsistency. If the AFFARS is inconsistent with FAR policy, one would suspect that the situation would have been corrected, if not prevented during the promulgation and review process.

By Vern Edwards on Monday, May 1, 2000 - 10:02 am:

Kennedy:

Just to clarify my position: While I believe that the GAO requires agencies to obligate funds to cover the minimum quantity at the time of the award of an IDIQ contract, I do not believe that an agency has to order the minimum quantity at the time of award. I believe that an agency can order the minimum at any time during the contract period. I also believe that the agency can order the minimum in increments, under several orders.

I don't know why the Air Force has adopted the policy that it has with regard to funding IDIQ contracts. As far as I can tell, no other agency FAR supplement requires the issuance of an order for the minimum quantity at the time of award.

Vern

By Kennedy How on Monday, May 1, 2000 - 09:53 am:

Vern,

It sounds to me that your interpretation is the same interpretation of some of our contracting personnel, as well as our legal people, in days past. Namely, the base contract obligates the Government to buy something, and any obligation to the Government to buy something means that we have to have money to do this, which follows we have to buy the something NOW.

What the the Air Force is doing (to issue an order concurrent with Award of base contract), we do as well, especially if there is a requirement to buy before the LTC is awarded. Otherwise, it appears that our activity is allowed to award LTCs without the immediate requirement to issue a Delivery Order. In either event, our guidance doesn't seem to require we obligate the minimum immediately. This is in line with buying to our requirements, and not buying excess (which may be the case if your minimums cover multiple years).

(BTW, our guidance states that ASBCA cases have recognized that minimum quantities equal to approximately 10% of the estimated maximum contract quantity meets the requirement for "more than a nominal minimum qty.")

(This is where I say the need to innovatively contract (in terms of efficiency) is hamstrung by existing regulations which don't really allow us to do things the smart way.)

I don't agree with John's position on obligations either, because I think the Board would rule against us if it ever came to that. The Board has ruled on an Equity basis in the past, and if a contractor pleads "But the Govt. guaranteed me this much!", the board would rule in his favor.

As far as crossing FY on services, I'm a hardware guy; services aren't my area of expertise. While I'm in an office that has a number of services contracts in support of our mission, I don't have contracting responsibility over it, so I haven't had the need to really learn it. So, I can't say how going across FY would work. However, in hardware, your requirement will cross FY, and since our requirement to restock is now, we can obligate that now, even though that particular item may well be used in some future FY.

Finally, I mentioned our corporate contracting efforts for Long Term support for emerging systems. Where we may run into a problem is if the program gets cancelled in the out years (think any of the 6 systems the Army cancelled to fund the Med BDE). If that happens, our support contract goes down as well, so, we'd not have funds to obligate for the minimum. My guess would be that we'd either renegotiate, or Terminate for Convenience.

Kennedy

By Eric Ottinger on Friday, April 28, 2000 - 03:51 pm:

Before FASA, the FAR required that each Order be separately funded. I think the current FAR has essentially the same requirement.

FAR 16.505 Ordering.

"(6) Orders placed under indefinite-delivery contracts shall contain the following information:

…

(vii) Accounting and appropriation data.”

Presumably, you can put the money on the contract then move it to the order.

However, it would seem to me that “obligating” the money when you don’t really have a defined requirement is a dubious idea.

In short, I think Kennedy's organization has this right.

There is requirement to give each of multiple award contractors a fair opportunity for each order. One of the exceptions to this rule is the need to satisfy the minimum. If a PCO arbitrarily said that the minimum has to be satisfied at the outset, my guess is that would be an improper exception to the fair opportunity rule. In any case, it would lead to some less than optimum selections and some make-work Task Orders.

Eric

By Vern Edwards on Friday, April 28, 2000 - 11:20 am:

Hi Kennedy,

Yes, there is confusion about minimums under IDIQ contracts. Maybe I'm confused.

FAR 16.504(a)(4)(ii) says that an IDIQ contract must specify a minimum and a maximum quantity of supplies or services to be purchased under the contract.

The indefinite-quantity clause at FAR 52.216-22, which must be included in every IDIQ contract, says in paragraph (b) that the government "shall" order the minimum quantity and that the contractor "shall" furnish up to the maximum quantity.

Thus, at the moment of contract award the government is contractually obligated to order the minimum quantity within the contract period and the contractor is contractually obligated to comply with orders to furnish up to the maximum quantity during that period.

It seems to me that the government's promise to buy the minimum within the period of the contract "obligates" the government within the meaning of the Anti-Deficiency Act. Thus, the government must obligate funds to cover the minimum at the time of contract award. So I agree with AL, at least for now.

I don't agree with John's theory of "current obligation," which seems to be that the government is not obligated until it issues an order because the contractor is not obligated to do anything until then. Rather, I think that at the moment of award the government obligates itself to buy the minimum quantity and the contractor obligates itself to comply with orders, whether or not any orders have been issued at that time. That appears to be the stance that the GAO has taken in it's Redbook.

If neither party has any obligation to the other until the issuance of an order, then how can we say that there is a contract prior to the issuance of an order? And if there is no contract until the issuance of an order, then why is the contractor obligated to comply with any orders? Why don't we say that IDIQ contracts are merely basic ordering agreements?

Joel says that AL's position makes no sense in terms of fiscal law, and he poses the situation of contracts that cross fiscal years.

In order to address Joel's concerns, suppose that in July 2000 we award an annually-funded IDIQ contract for severable services that begins in August 2000 and ends in August 2001. The contract specifies a minimum of $10,000 and a maximum of $1,000,000, and we plan to order some of the minimum in FY00 and the rest in FY01. I think Joel is saying that AL's argument doesn't make fiscal law sense because we don't have FY01 funds and thus cannot obligate funds to cover the entire minimum. (Joel: I'm not sure that I've understood you correctly.)

FAR 32.703-3(b) says:

"The head of an executive agency, except NASA, may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year (10 U.S.C. 2410a and 41 U.S.C. 2531). Funds made available for a fiscal year may be obligated for the total amount of an action entered into under this authority."

Underlining added. This passage is repeated at FAR 37.106(b).

I interpret the underlined sentence to mean that we can use FY00 funds to cover the entire minimum, even though some of the minimum will be ordered in FY01. Does anybody know if my interpretation is wrong? If I'm not wrong, then AL's argument is sound in terms of fiscal law.

I think that it is generally accepted that we don't have to order the minimum at the time of award. However, the Air Force FAR supplement says that under an IDIQ contract the CO may not obligate funds on the basic contract, but only on an order placed against the contract. As far as I can tell the Air Force is the only agency that has adopted this policy. Thus, if the CO must obligate funds to cover the minimum at the time of contract award, then he or she must issue an order simultaneously with the award. I have been told by several USAF people that that is what they do.

By Kennedy How on Friday, April 28, 2000 - 09:40 am:

Hi Vern.

I think there is some confusion as to exactly what is meant by "guaranteed minimum qty", and how it relates to obligations. Like you, my activity has previously taken the position that an IDIQ contract has to have the minimum guaranteed qty obligated at time of contract award. Based on feedback I've heard over the years, this was predicated on the "guarantee" of a minimum, it was considered to be tantamount to paying the contractor money for the quantity guaranteed. And, if you're obligating the Government to buy this much, you'd better have the money. I think somebody made a case of this internally, and legal concurred.

Now, our activity has released guidance on IDIQ contracts. It was developed by the buyers, item managers, and I'm sure legal coughed up somebody to bless it. It does not say that there has to be an award of a quantity (any quantity) at time of base contract award. Since our IDIQs are 5 years, there is also included the "Availability of Funds" clause (FAR 52.232-18).

The guidance for the requirements are relatively specific, on how to calculate minimums and maximums, to include yearly estimates, etc. A lot of this info is passed on to the contractors via contract clauses.

Having said all that, a couple of observations on how this all is working. First, there are times that some quantity IS obligated at time of base contract award; this is usually when there is a requirement for the item, and it was decided that we'd move to some sort of Long Term Contract (LTC) to ease the lead times normally associated with contracting in general.

Second, we are also moving toward Corporate Contracting, where, for some of the newer versions of systems, we are contracting either for a) their entire catalog of products, or b) contracting for all of the parts support for a specific weapons system. Either way, this is very onerous when trying to develop minimums and maximums, mainly because you don't have any history of usage. Not only that, you don't always have a fixed list of parts to even base an estimate on. I've heard that these types of contracts are hybrid Requirements type IDIQs. A case was made to our legal dept (which has been historically conservative in everything it does), who blessed off on the end contract. I don't know the details, but I will say that there is a nominal minimum, based on dollar value.

I will also state that we've been looking at innovative ways to contract, but certainly, some of the older regulations tend to hamstring what we can do; in the sense they aren't flexible enough, or because we've gotten into one interpretation of it, and are hesitant to change.

Kennedy

Al, you can't simply "obligate funds" for a future order. You must use the correct funds of the correct fiscal year for each order or task.
Most or many ID/IQ contracts are not funds specific. I can issue task orders under many different funding scenarios for different purposes. I must provide the correct funds for each task.

I don't buy your position. It makes zero fiscal law sense. Happy Sails! Joel

By joel hoffman on Thursday, April 27, 2000 - 10:01 pm:

Well, I suppose I have a problem with Al's interpretation that we must obligate funds upon award of the ID/IQ.

What about a contract which crosses fiscal years, e.g., it is awarded in August or so???

You are saying either 1) I must immediately place an order or issue a task or 2) I must put the ordering minimum in funds on the contract at award, even though I don't issue a task or delivery order until I'm into the next FY.

There's this little matter of appropriation law - you know, time and purpose statutes. If I'm using multiple award TO or DO contracts, I may not award a task order/delivery order to one of the contractors until later in the "year", which could be well into the next fiscal year. I can't necessarily use last year's funds for that. In that case what do I do with the funds I previously obligated?

Just curious. Happy Sails! Joel

By Vern Edwards on Thursday, April 27, 2000 - 03:44 pm:

John:

AL has made a very good argument, and I must concur, especilly when I consider it in conjunction with the GAO's position in the Redbook. However, I am ready to be wrong and hope you've got something else in your argument kit.

Your thinking about "current obligation" or "present duty" doesn't work for me. At the moment of award of an IDIQ contract the contractor is "presently" contractually obligated to fill any order that the goverment may issue, up to the maximum quantity. The contractor can escape that obligation only if the government terminates the contract for convenience or commits a material breach of contract.

At the moment of award of an IDIQ contract the government is "presently" contractually obligated to order the minimum quantity at some time during the contract period. (FAR 52.216-22: "The government shall order at least the minimum quantity of supplies or services designated in the schedule as the 'minimum'.") The government is obligated to pay for the price of the minimum, but can defer doing so until after it has issued an order and the contractor has delivered. The contract merely allows to government to defer ordering ("indefinite-delivery" contract). The only way for the government to escape the obligation to order the minimum without breaching the contract would be to terminate the contract for convenience, which would make the government liable to a termination settlement, or to terminate it for default.

John, I hope you don't consider my response to be "pushing and shoving." It's not intended to be that. You have raised an issue about what I had considered to be a well-settled matter, and I would like to get to the bottom of it.

Vern

By Eric Ottinger on Thursday, April 27, 2000 - 03:32 pm:

Al,

As long as we are all agreed that the Government doesn't have to "to pay the contractor for the minimum quantity" if it terminates, I don't have a problem.

My position is that FASA has effectively rewritten all of these rules, but we haven't figured it out yet.

I agree that we need to have some kind of task/delivery order at the outset, to establish bona fide need. I am not sure that we have to have an order for every one of our multiple award contractors to stay legal.

Your argument about a normal, definite quantity, fixed-price contract is to the point. That was the norm when these rules were engraved in stone.

Since FASA, we are allowed to have CPFF Task Orders and Delivery Orders.

I know there is a saying to the effect that the Law is a donkey. But, I don't see why it shouldn't be allowed to change to adapt to changed conditions.

Eric

Eric--Those would be among the rare instances I mentioned in which the government's obligation might be extinguished, and the funds "de-obligated," but it shouldn't stop the obligation from being recorded in the first place. Suppose, for example, we have a run-of-the-mill, firm-fixed-price, definite-quantity, definite-delivery contract. Despite the fact that the contract could be terminated for default or convenience, either partially or totally, the agency should still obligate the funds to pay the contract price, shouldn't it? If termination does happen, the government's legal obligation will go away (or get reduced), and the fiscal obligation would be adjusted accordingly. However, it doesn't mean there wasn't an obligation (legal) to trigger an obligation of funds in the first place. The same applies to the minimum quantity on an ID/IQ.

By Eric Ottinger on Thursday, April 27, 2000 - 02:26 pm:

Al,

I don't mean to discourage you or drive you back to lurking.

The fact that there is a minimum quantity doesn't prevent the Government from doing either a termination or a partial termination.

Cibinic & Nash have the cites if you need them.

Eric

O.K., here's a response from a lurker (who left government service within the past year). With an ID/IQ contract, the legal obligation of the agency to spend the amount of money required by the minimum quantity clause arises at the time of contract award--not when the first order is placed under the contract, which may be later. An "obligation" of the agency's funds should be recorded whenever, and as soon as, a legal obligation to pay the money arises. Thus, for an ID/IQ contract, the agency should obligate the minimum required funds at the time of contract award. The contractor may not have a legal obligation under the contract to do anything yet, but the government still has the obligation to spend that minimum. The government's obligation may be extinguished in some rare instances, and if it is the agency can "de-obligate" the funds, but that is the rare case, and does not change the fact that the government has a legal obligation to pay as soon as the contract is awarded. The government's obligation to spend the minimum amount is (initially, at least) not related to the contractor's obligation to perform. In fact, if the government never issues any orders under an ID/IQ contract, it still has to pay the contractor for the minimum quantity.

The answer, is different, of course, for a requirements contract, in which the government has no legal obligation to buy anything under the contract or pay anything unless and until it places an order. Its promise not to buy the goods or services from anyone else is the consideration that makes the contract binding. With an ID/IQ contract, the consideration on the government side is the promise to spend/buy the minimum quantity.

There was some mention of the "bona-fide needs" rule being an issue. It could be, but if there is no bona-fide need, the problem is not with obligating the funds before an order is placed, it is with awarding the contract at all when there is no bona-fide need.

I understand obligating the funds for the minimum quantity before there is an order can be troublesome for the financial accounting folks to keep track of, but I don't know the details, and frankly that is a different issue. It does not change the rule that an obligation of funds has to be made when a legal obligation to pay the funds arises.

By Vern Edwards on Thursday, April 27, 2000 - 11:05 am:

John:

Interesting analysis. I wonder what government personnel who are reading this think. What is the policy of their agencies?

It has been my impression that it was a common belief that the CO had to obligate funds to cover an IDIQ minimum at the time of contract award. I seem to recall a discussion about this at the old Water-cooler, but I don't remember the gist of it.

Can we get some input from some of you lurkers out there?

By John Ford on Thursday, April 27, 2000 - 10:43 am:

Vern, let's look at the definition of "obligation" as it is used in the fiscal sense. There are two operative phrases in the definition you quoted, which is essentially the one I operate under. First, is "liability for payment." If the contractor has no present duty to perform when the contract is awarded, the government has no "liability for payment" at that time. The liability for payment only arises when the contractor has a corresponding current duty to perform and has fulfilled that duty. This is bolstered by the other operative phrase, which is "goods or services ordered or received." This clearly indicates that there must be something that orders a contrctor to perform before an obligation can be recorded. If an IDIQ contract is awarded without an "order," i.e., current duty to perform, and the duty to perform is contingent upon the issuance of a later order, we do not have the prerequisites for an "obligation."
Turning to your last point, the obligation the government has when it issues an IDIQ contract is to place an order for the minimum quantity specified in the contract. As you know I am sure, this is the consideration that creates a binding contract. The award of an IDIQ contract does not create a current liability for the payment of money unless the contractor has a current duty to perform. Thus, you do not have a violation of the Purpose Statute or the Anti-Deficiency Act.
As to other agencies agreeing with my position, during part of my government career, I worked for the Office of Naval Research who had this interpretation. The company I now work for does business with Defense Supply Service-Washington who appears to agree with this interpretation as this is their practice. Finally, I worked for various components of DoD for 23 years. During that time, I had many occasions to discuss IDIQ contracts with contemporaries and customers. During that time, I never heard anyone suggest that funds had to be obligated for the minimum quantity at the time of award of an IDIQ contract.

By Vern Edwards on Wednesday, April 26, 2000 - 02:48 pm:

John:

Although -- here's another thought:

What is an obligation? The GAO discusses that in Principles of Federal Appropriations Law, 2nd ed., Vol. II, Ch. 7, pp. 7-2 through 7-4. The GAO admits that there is no "all-inclusive and universally applicable" definition of obligation, but cites several decisions which stand for the principle that an obligation is "a definite commitment which creates a legal liability of the Government for the payment of appropriated funds for goods and services ordered or received."

If that is correct, then doesn't a CO ,ale am obligation when he or she awards an IDIQ contract in which the government promises to buy a minimum quantity? If so, then doesn't the CO have to record that obligation at that time?

What we call "funding" a contract is really nothing more than recording the obligation on the agency book of accounts and typing a fund citation on the contract form. See Principles of Federal Appropriations Law, Vol. II, Ch. 7, pp. 7-5 through 7-12.

Furthermore, if the act of awarding the contract is what obligates the government, then how do you award an IDIQ contract that includes a minimum if you don't already have a bona fide need?

I'm not "pushing or shoving," I'm just asking in order to get a clear idea into my own head.

By Vern Edwards on Wednesday, April 26, 2000 - 02:25 pm:

John:

Don't get me wrong. I like the idea of being able to obligate funds for the minimum at the time the order is placed, rather than at the time of contract award. It would solve many practical problems if agencies could wait until they place orders against the minimum to obligate funds.

But so many people cite the GAO Redbook and the DoD FMR that I have simply given in to their arguments. I have even heard government lawyers claim that you have to order the minimum at the time of award!

What you say makes sense to me. Still, many persons consider the GAO Redbook to be authoritative, even though it does not have the force and effect of law, and the sentence in the DoD FMR seems to be plain in its meaning.

Are you aware of any agencies that share your interpretation?

By The Professor on Wednesday, April 26, 2000 - 12:15 pm:

Prof 1: I am.

Prof 2: No . . . I am.

Prof 1: Stop it. I am.

Prof 2: Are Not!

Prof 1: Am too.

Prof 2: Then sign your name to your answers.

Prof 1: No way. That would make me accountable.

Prof 2: Then don't answer.

Prof 1: No way. I would have nothing else to do.

Note to All: I am just kidding around. The e-mail address that I included in my name is a hoax.

By John Ford on Wednesday, April 26, 2000 - 12:07 pm:

Vern, I don't want to get into a pushing and shoving contest over who is right. All I will do is state my opinion and tell you the reasons for it. It is then up to you to decide what you consider the right answer to be. After all, this is just a place to exchange ideas and should not be viewed as a source of definitive guidance on any subject.
As to your reference to the Red Book, I agree that there is a statement there that indicates an obligation should be recorded at the time of award for the minimum requirement under an IDIQ contract. However, that statement is not taken from any decision. Further, it is caveated by the statement that it is only a generalization which is gleaned from "the cases." However, no case is identified as supporting this generalization. Thus, this is nothing more than an editorial comment. Also, if we go back to the cases discussed in that section, nothing in those discussions supports the statement. So that does not sway me from my original assertion that the DoD FMR does not require an obligation, at the time of contract award, to cover the minimum quantity specified in an IDIQ contract unless the contractor has a current obligation to perform. By that I mean that the contractor's obligation to provide the stated minimum is not contingent upon the issueance of an order. Let me expand on my fiscal reasoning for this position.
Appropriated funds can only be obligated for bona fide needs arising in the fiscal year(s) for which those funds are available for obligation. Because of the indefinite nature of an IDIQ contract, it is quite possible there is no existing bona fide government need for covered supplies or services at the time the contract is awarded. Because there is no bona fide need, it would be impermissible to obligate funds at that time. In this regard, it is fundamental that statutes and regulations should not be interpreted as requiring persons to do an illegal or impermissible act. Further, if funds are obligated in one year, and their period of availability expires before a bona fide needs arises, those obligated funds cannot be used to cover a need arising in a subsequent fiscal year. This would be a violation of the Purpose Statute and a possible violation of the Anti-Deficiency Act as it could constitute an obligation in advance or in excess of appropriations.
Other problems with the obligate at award theory are whose money is to be obligated if more than one agency or activity can order against the contract? What happens if somone other than the agency whose funds were used to obligate the minimum, places the order for the minimum quantity? Also, if the contract has multiple CLINS with only a minimum dollar amount specified, what CLINS are covered by the obligation? If the CLINS are properly funded by different appropriations, what appropriation do you use for the minimum?
This discussion demonstrates the need for a marriage of the fiscal and procurement regulations. I have believed for along time that the FAR needs a section on fiscal principles. Hopefully, this would result in a regulatory scheme that is comprehensive and coordinated between these two disciplines.

By Vern Edwards on Wednesday, April 26, 2000 - 09:58 am:

Which one of you is right?

By The Professor on Wednesday, April 26, 2000 - 09:21 am:

Don't listen to people who disagree with my answers. I am right. Trust me.

By Vern Edwards on Tuesday, April 25, 2000 - 02:04 pm:

John:

The GAO has taken the position that funds to cover the price of the minimum amount of an IDIQ contract must be obligated at the time of contract award. See Principles of Federal Appropriations Law, 2nd ed., Vol II, page 7-17.

I believe that the DoD Financial Management Regulation merely reflects the GAO's position. Chapter 8 of that regulation says, in pertinent part:

"080404. Open-End Contracts and Option Agreements. When the quantity required under a contract or agreement is indefinite and is determined by subsequent orders, an order not requiring acceptance by the contractor shall be recorded as an obligation in the amount of the price stated in the order upon placement. When the contract or agreement requires acceptance of the order by the contractor, the amount of the order must be recorded as an obligation upon acceptance. In the case of indefinite quantity contracts for supplies or services that specify delivery of minimum quantities during a given period, an obligation must be recorded upon execution of the contract for the cost of the minimum quantity specified."

Underlining added.

I interpret the underlined sentence to require that funds to cover the minimum quantity must be obligated at the time of award. In my opinion, the minimum amount can be ordered at a later date.

Do you disagree?

By John Ford on Tuesday, April 25, 2000 - 01:28 pm:

Looking at the post concerning the obligation of funds on IDIQ contracts, it seems that neither "professor" answered the question posed and that both answers are misleading.
I interpreted the question presented as "must the minimum quantity be ordered at the time of contract award?" If this was the intent of the question, it was not answered.
As regards, the second "professor's" answer and citing to the DoD FMR, he appears to have taken a sentence and quoted it out of context which results in a misleading answer. When put in the context of the entire paragraph in which it appears, this sentence requires an obligation of funds for the minimum amount when the contractor has a current obligation to deliver that minimum amount. However, if the minimum amount is subject to being ordered at a later date, the FMR states that funds to cover that amount are not obligated until the order is placed. This is consistent with the statutory requirement (31 U.S.C. 1501) for recording obligations. Under that statute, an obligation is recorded when there is a contract for "specific" supplies or services.
Turning to Susan's observation concerning the Anti-Deficiency Act, a violation could occur if the government obligated one year's money when it awards an IDIQ contract, but there is no bona fide need for supplies or services covered by the IDIQ contract and the contractor did not have a current duty to perform yet a need arises in the next fiscal year. At the least, this would be a violation of the Purpose Statute.

By Eric Ottinger on Friday, April 21, 2000 - 01:44 pm:

I think Susan is right. However, our Professor friend should have been a little more forthcoming.

This illustrates several bad habits, which could use improvement in our profession.

First, there is the tendency to raise a rule or procedure to the status of law for the purpose of intimidating our customers. There are not near as many “laws” as people like to think.

Second, the rule, enshrined in the finance regulations, was written at a time when, according to the regulations, ID/IQs were limited strictly to fixed price, commercial items. Of course, if your ID/IQ minimum is 100 Goodyear tires, it would be best to fully fund the 100 tires, as you would fully fund any simple fixed price contract for 100 Goodyear tires. (The Judge would look at you real funny if you said, Whoops, I had to do a partial termination of a strictly commercial contract, because it turned out that I didn’t really have the money.)

Someday, somebody is going to notice that Congress authorized cost type ID/IQ Task Orders, and realize that these Task Orders may be incrementally funded like any other cost type contract.

Last, some of the people teaching our CON classes don’t know any more than what is in the book. They teach the class for a few years, then return to a ship or a battalion. (Equally, many of the people teaching CON classes, military and civilian, are superb professionals with many years of practical experience.)

My last thought, apropos the National Performance Review and Acquisition Reform-- It is not so much the rules that need to be reformed as the attitude that we have toward the rules.
It isn’t more business knowledge that we need; it is more business sense.

Eric

By Susan McCullough on Thursday, April 20, 2000 - 05:59 pm:

I suspect the "it's the law" comment in the original answer probably refers to the Antideficiency Act. It has always been my understanding that concern about unfunded liability is the reason for the requirement to obligate sufficient funds to cover the guaranteed guaranteed minimum at time of award.

By Vern Edwards on Tuesday, April 18, 2000 - 10:57 am:

Here's another howler from Ask A Professor. This time, Barry Foster caught the mistake:

"Funding of ID/IQ Contracts. Posted to Business, Cost Financial Management on 9/1/99 by Barry Foster

The Scenario:
Regarding a previous question and answer exchange, the following information was offered:

The [Original] Question:
Do I need to buy the minimum units on contract award?

The [Original] Answer:
The FAR Regulation 16.504(a) and 16.505(a) require that any minimum purchase on an ID/IQ contract must be obligated when the contract is executed. This is the law and therefore overrules any funding policy set by OSD. Funds availability in the FYDP would not be sufficient justification to meet this requirement. Outyear funding in the FYDP has not been authorized or appropriated by Congress and therefore is merely a plan and is subject to change. The full funding policy which governs the procurement appropriation, states that you must obligate funding at the time of contract award for the amount of quantities of end items that can be delivered in a 12 month period. In this case, the FAR regulation would overrule this policy if the 250 minimum was less than or more than what could be delivered in a 12 month period.

[Barry Foster's] Question:
Question: The FAR cites referenced in the answer (16.504(a)and 16.505(a)) DO NOT "require that any minimum purchase on an ID/IQ contract must be obligated when the contract is executed" as stated in the answer. They simply state that the contract must establish a meaningful guaranteed minimum amount that the Government is bound to order and the contractor is bound to provide. The answer states that "this is the law...". Which law, specifically?

Please revisit the original question ("must the Government obligate funds sufficient to cover the guaranteed minimum at the time of initial contract award under an ID/IQ contract type?") If funds obligation equal to the guaranteed minimum is required at contract outset, please provide references that make this explicitly clear.

The [Second] Answer:
The DoD Financial Management Regulation (DoD 7000.14-R), Volume 3, Chapter 8, Paragraph 080404 states, 'In the case of indefinite quantity contracts for supplies or services that specify delivery of minimum quantities during a given period, an obligation must be recorded upon execution of the contract for the cost of the minimum quantity specified.' The Army Fiscal Law Course cites the following legal cases and Comptroller General rulings as the basis for the requirement for the government to buy the minimum quantity specified on a contract: Tennessee Soap v. United States, 130 Ct. Cl. 154 (1954); Federal Elec. Corp., ASBCA No. 11726, 68-1 BCA P. 6,834; and Federal Elec. Corp., B-160560, Sept. 15, 1967, 47 Comp.Gen 155."

Wow! Note, first, that the "professor" who responded to the question the first time did not answer the question that was asked, which was, "Do I need to buy the minimum on [i.e., at the time of] contract award?" Italics added. "Buy" could mean "order." Some agencies obligate the funds for the minimum at the time of award, but order the minimum at a later date; other agencies obligate and order at the time of award. There is no indication that the "professor" had contacted the questioner and determined that he or she had meant "obligate funds for the minimum." Thus, the answer could confuse readers. (Barry Foster restated the question differently than it was originally posted. I don't know why he did that. I don't know if he was the original questioner.)

Note, second, that the first "professor" read something into the FAR that simply isn't there, and then said, "This is the law... ."

Note, third, that the first professor was unfamiliar with the DoD financial management regulation.

I'd like to know whether the person who answered the question the second time is the same person who answered it the first time. Unfortunately, the answerer did not post his or her name.

Be careful about relying on the answers you get at Ask A Professor. Many of the answers are quite good. The good ones tend to be signed by the person providing the answer. But, as we have seen, some of the answers are terrible. The problem is: If you don't know what the right answer is, then how do you know when the answer is right?

Don't misread me--I'm not saying that this is a good place to get answers. I'm just saying that Ask A Professor is not a reliable (or better) place to get them. At least here you get some dialogue among the participants and a wrong answer is more likely to be nailed. Unfortunately, some people think that DoD sanctions the answers at Ask A Professor. It doesn't.

You would think that it would embarrass DoD to have its "professors" give out such patently bad information and advice. DoD needs to establish a panel to vet the answers given at Ask A Professor. If there already is such a panel and these answers are getting by, then we have a truly scary situation on our hands.

By joel hoffman on Monday, April 17, 2000 - 11:21 pm:

I read the same answer today at Ask A Professor. The answer is wrong as well as incomplete. Your concern is well founded.

As to the basic question of paying overtime for an employee working on two different jobs in one day, I believe it is negotiable, even if the costs are properly accounted for. Thus, a "technical analysis" (business judgement) of the situation is also necessary.

The answer depends on whether the practice is "reasonable" under the circumstances. Who's project was the employee originally assigned to - the Gov't job or the commercial job? Is it reasonable to pay overtime premiums (allocability) for an employee charging LESS than or no more than 8 hours a day on your contract? Or did you piggyback on top of another project which the employee was already assigned to? Can anyone else do the job on straight time, etc.

But for the "Professor" to say "overtime is seldom allowable on Government contracts" is wrong.

I won't pretend to know the absolute answer to the question of accounting procedures for overhead allocation on overtime or whether there should be adjustments to overhead for overtime.
Happy Sails! Joel

By Vern Edwards on Monday, April 17, 2000 - 08:13 pm:

I found the following Q&A at DOD's Ask A Professor website under the heading: Overtime pay and indirect cost pools. The question was posted by one Chuck Battiato on March 24, 2000, and received a quick answer.

"The Scenario: We have entered into a cost reimbursable contract whereby we bill actual labor rates plus allocable overhead. We pay certain employees time and one-half for overtime.

The Question: When an employee gets paid an overtime premium and spends part of a day on the government contract and part on an industry work, how do we allocate the premium pay between the two jobs?

Should a different labor overhead calculation be applied to the premium pay?

Is there FAR or CAS guidance on this?

The Answer: Per FAR 22.103 -- Overtime, billing of overtime is seldom authorized only in extreme situations. [Sic.] Looks like you'll have to bill it all to the industry work unless you can convince your contracting officer to pursue approval."

What a howler of an answer! Not only does the "professor" fail to answer any of the three questions asked by Chuck, but he or she gives him potentially dreadful advice about billing his non-government customers. (I wonder what Chuck's commercial customers would say if they found out that he was billing them for overtime spent on government work?)

FAR 22.103 says absolutely nothing about the allocation of overtime premiums. Even if the premiums are unallowable, they must be properly allocated for accounting purposes.


The "professor" should have told Chuck that the answer to his questions depends in large measure on Chuck's company's standard accounting practices. The "professor" should have told Chuck to check those policies and then do the following:

(1) Check his contract for the clause: 52.222-2, Payment for Overtime Premiums (JULY 1990), to make sure that the overtime payments are allowable. Chuck should also check for any other advance agreements about overtime premiums and indirect costs.

(2) Read FAR 31.201-2, Determining allowability; 31.201-3, Determining reasonableness; 31.201-4, Determining allocability; and, 31.201-6, Accounting for unallowable costs.

(3) Read FAR 31.205-6, Compensation for personal services.

(4) If the CAS apply to the contract, then check CAS's 401, 402, 405, and 418. CAS 407 may also apply, depending on the company's accounting system.

(5) Read the DCAA audit manual at 6-409 and 6-413.

(6) Consult with the cognizant ACO and DCAA auditor.

No wonder the Ask A Professor site posts disclaimers to the effect that the answers given are not official and "cannot be construed as official in any way," and that the government makes no warranty of, and assumes no liability for, the answers.

I find it noteworthy that the answer was anonymous. Hopefully, Chuck ignored the advice the "professor" gave him and called a government contracts accountant. Why would anyone accept advice from a person who doesn't post his or her name with their answer. Why, we don't even know if the person who answered the question really is a professor.

This is by no means the only bad answer I've found at Ask A Professor. Take heed and take care.