Since the equipment is not GFP and is CAP, because the contractor is purchasing the equipment under the contract and it is not a direct purchase by the government and provided to the contractor, does the investment threshold of $250K apply (also this is not a deliverable under the contract)? Can we use the CLS contract and O&M funds to purchase the equipment/systems over the $250K as long as the contractor is purchasing it?
For a question of this nature, we would normally point the questioner to the DoD Financial Management Regulation 7000.14-R (FMR), Volume 2A, Chapter 1, paragraph 010201, section F. Section F provides a very useful Decision Tree (in a table format) that can be used to help determine if AF 3400 or Procurement funding is appropriate. The Decision Tree is based on the verbiage in FMR, Volume 2A, Chapter 1, paragraph 010201, sections D. 1, 2, and 3.
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The Section F Decision Tree, is utilized to make the determination as to whether a cost should be classified as an investment or an expense. That classification, which entails more than just the $250K threshold, will assist in deciding on the most appropriate funding type to be used to pay for that cost. FMR, Volume 2A, Chapter 1, paragraph 010201, section B. 1 says, “Expenses are the costs incurred to operate and maintain the organization, such as personal services, supplies, and utilities.” While FMR, Volume 2A, Chapter 1, paragraph 010201, section B. 2 states, “Investments are the costs that result in the acquisition of, or an addition to, end items. These costs benefit future periods and generally are of a long-term character such as real property and personal property.”
When the investment versus expense classification has been completed for a specific cost, FMR, Volume 2A, Chapter 1, paragraph 010201, section C. 3 provides the policy for what appropriation should be used. Section C.3 states, “Costs budgeted in the Operation and Maintenance (O&M) and Military Personnel appropriations are considered expenses. Costs budgeted to the Procurement and Military Construction appropriations are considered investments. Costs budgeted in the Research, Development, Test and Evaluation (RDT&E), Base Realignment and Closure (BRAC), and Family Housing appropriations include both expenses an investments.”
It is at this point that the specific scenario presented in the Question becomes potentially problematic. Unfortunately, there are a number of details that have not been addressed in the Background of this question that would have made it possible to more specifically answer it. There are three questions that come immediately to mind: 1.) What is the equipment and is it a government asset, 2.) How is the contract set up to reimburse the contractor for the cost of the equipment, and 3.) What is the nature of the test facility? Let us examine a these three questions in more detail.
With regard to our first question, if we assume that it is not an asset because as stated in the Question “this is not a deliverable under the contract,” the Decision Tree at FMR, Volume 2A, Chapter 1, paragraph 010201, section F would say that since it costs in excess of $250K, it is an investment and as such requires either Procurement or RDT&E funding. If we assume that it is an asset, the Decision Tree would still lead us to the conclusion that it is an investment. Since the Question states that, “the equipment is not GFP,” it could not possibly have come from DWCF. Therefore, again either Procurement or RDT&E funding is required.
With regard to our second question, the Question states that, “the equipment is not GFP.” However, the reality is that the government in this scenario has simply cut out the middleman in a GFP transaction. By doing so, the government waives the necessity to track the equipment as GFP. Basically, the government has given the contractor a capital asset for free. How will the government verify and quantify that, should the contract end prior to the equipment being fully depreciated, the contractor reimburses the government for the undepreciated book value of the equipment that has already been paid for? Even if the contract goes beyond the service life for depreciation of the equipment, how will the government negotiate the usage charge the contractor should be paying for use of equipment that the government bought? Certainly the contract in this scenario should address these issues.
Finally, with regard to our third question, Developmental and Initial Operational Test facilities are primarily funded using RDT&E appropriations (see FMR, Volume 2A, Chapter 1, paragraph 010201, section D.3.b). It is possible that in this scenario “test facility” does not mean developmental and initial operational test, but rather a facility to test parts or systems that have been repaired in which case AF 3400 would be the appropriate funding source. However, if the test facility is a Government-Owned, Contractor-Operated (GOCO) facility, it will place into question yet again if the equipment is a government asset or not.
Conclusion: Since the Background of this question does not provide vital specific details about the scenario, this conclusion is based on a number of assumptions that may, or may NOT, be accurate. However, by utilizing the Decision Tree at FMR, Volume 2A, Chapter 1, paragraph 010201, section F, the determination of whether Procurement, AF 3600, or AF 3400 is appropriate will be easier to make and defend.
Note: The most appropriate method for handling this type of scenario would have been to have the contractor purchase the equipment, then capitalize it and charge the annual depreciation as part of the overhead rate per FAR 31.205-11. Given that treatment of the equipment cost, the increased overhead rate would be paid as part of the AF 3400 work.
Suggestions: Read DoD Financial Management Regulation 7000.14-R, Volume 2A, Chapter 1, paragraph 010201 paying particular attention to sections C. 1 through 4, D. 1 through 3, and F, and paragraph 010224 for a definition of Centralized Item Management and Asset Control. In addition, we most strongly recommend that you contact your local comptroller organization, and legal counsel for more information and their policy interpretation of this issue.