Can these upgrades and new equipment be acquired with the same procurement funds used to buy the end item?
IAW DoD Financial Management Regulations under Volume 1, Chapter 01, Section 02, Paragraph 13C7, there are rules pertaining the use of proper appropriated monies for “Product Improvement” as applied to major end items and major components of major end items currently in production or in the operational inventory. Within this rule, Procurement Funds are authorized only to the following circumstances:
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1) Engineering services or related manufacturing efforts applied to an item currently in production to extend its useful military life within the current performance envelope (i.e. NO Development Testing or Operational Test & Evaluation (OT&E) by an independent operational test agency is required). The phrase “an item currently in production” implies that the item has end-item procurement funding in the year the product improvement effort is to take place. Key discriminator here is that the end-item must be currently in production (post MS C) and no engineering design, integration, test, or evaluation efforts which requires an independent DT or OT&E is needed for that product improvement effort; otherwise, you have us use RDTE or OMA funds.
2) If there is no need for “Product Improvement” on an existing end-item currently in production and you simply need to procure more of these end-items from the contractor, then the use of Procurement funds is appropriate. Please note that the above statements are based on whether there is a need to improve an end-item buy currently in production that is not considered a “New Start”…i.e. requires re-development/re-design/major enhancement effort on that current end-item configuration.
However, I believe the root of your question deals more with the contractor’s current manufacturing plant capacity and whether you can use Procurement monies to specifically fund the contractor’s need to invest in additional contractor-owned capital assets (new equipment/upgrade equipment on their production line) in order to increase their production rate. If this is the case, use of appropriated Procurement Funds for the purpose funding the contractor’s manufacturing capability is NOT allowed as it violates Federal Appropriation laws as well as violating the Anti-Deficiency Act.
It is also worth noting that use of appropriated funding to pay for the end-item we contracted them for can indirectly be used by the contractor to invest in capital assets in order to increase their production capacity and meet our government-unique end-item quantity requirements. In non-commercial EMD and Production acquisitions, there is an element of cost called Facilities Capital Cost of Money (FCCOM) which is an allowable cost contractors can charged to government contract. FCCOM is designed to help contractor offset government unique working capital cost requires to execute the program. Be advised that FCCOM is part of the overall end-item unit pricing that we negotiate and pay for in government contracts (not a separate line item price).
It is best to seek further guidance from your local legal counsel and your local Comptroller as they are experts in fiscal law issues and versed in the proper use of appropriated procurement funding.