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  • Question

    Is the customer permitted to use O&M funds to pay for RFP development of a major MILCON project?


    Answer

    One of the biggest issues that we have with MILCON appropriations is that they fall under what we call the Full Funding Policy.  Drawing its authority from the Office of Management and Budget Circular A-11, DoD Financial Management Regulation 7000.14-R (FMR), Volume 2A, Chapter 1, paragraph 010202, section A, defines the Full Funding Policy by calling it, “A budgeting rule that requires the total estimated cost, of a military useable end item, be funded in the fiscal year in which the item is procured. Under the full funding policy, the entire procurement cost of a weapon or piece of military equipment is to be funded in the year in which the item is budgeted. An end item budgeted in a fiscal year cannot depend upon a future years funding to complete the procurement. Regulations governing the full funding policy are found in Office of Management and Budget (OMB) Circular A-11 and DoD Directive 7000.14-R.”

                                                                                       

    DoD uses the Full Funding Policy to procure items that are considered to be investments, specifically capital investments.  The FMR,  further defines what goes into a fully funded program when, in Volume 2A, Chapter 1, paragraph 010202, section C.2, it says, “Within defense system acquisition programs, nonrecurring costs and costs of certain production items related to, but not integral to, the end item of equipment are considered part of the overall acquisition cost. DoD Components shall plan and budget in a manner to ensure completion of the nonrecurring effort or delivery of such production items consistent with the planned delivery of the associated end items. That is, the programming and budgeting shall be on a time-phased "lead-time away" or "need to commit" basis…”

     

    FMR, Volume 2A, Chapter 1, paragraph 010201, sections D.2 and D.3 discuss what kinds of expenses are considered to be part of an investment and therefore need to be funded with MILCON appropriations.  Specifically relevant to this MILCON question, section D.3.h. says, “Construction program costs, associated with construction management in general, as distinguished from supervision of specific construction projects, are expenses. Costs incident to the acquisition (i.e., design, direct engineering, technical specifications) and construction of a specific project are investments. The cost of administering the facilities sustainment program is an expense at all levels.”  Therefore, if the RFP development and surveys in question in this scenario can be shown to be for this specific construction project, they absolutely should not be separated out as an expense, but should be included in the full cost of the project.  And as such, should be funded with MILCON appropriations.

     

    Note that while all of the policies regarding expenses versus investments, and the Full Funding Policy, are derived from the OMB Circular A-11, the component, or agency, can submit an exception request to the OMB Circular A-11 in accordance with FMR, Volume 2A, Chapter 1, paragraph 010105.  If the exception is approved, it may be possible for an organization to treat some costs as expenses and thus use O&M appropriations to fund what otherwise would be considered investments.

     

    Summary:  Clearly per FMR, Volume 2A, Chapter 1, all of the investment costs associated with the MILCON acquisition should be include in the fully funded project cost.  Therefore, unless the customer has been granted an exception to the OMB Circular A-11, I am having a hard time seeing how the scenario that you have described in the Background does not violate the Full Funding Policy with regards to MILCON appropriations.  Thus, the Full Funding Policy would require that the RFP development and surveys for this construction project should all be funded using the MILCON appropriation.

    Suggestions:  First, read DoD Financial Management Regulation 7000.14-R (FMR), Volume 2A, Chapter 1, from the beginning through paragraph 010211.  Second, ask the customer what is the justification that they are using to allow the use of O&M appropriations for the funding of RFP development and survey efforts.  Finally, it is most strongly recommended that you contact your contracting authority, local comptroller organization and your legal counsel for their interpretation with regards to this effort and contract, particularly in light of the utilization of the Full Funding Policy for MILCON appropriations. 

     

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