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    Our Agency went into a 12 month non severable contract in June 2019 using FY19 O&M. Due to Coronavirus outbreak, the contractor is unable to proceed with work for the next 2 months, and asked for a 2 months of no cost extension modification (till August). Could we process a 2 month no cost extension, keeping it within FY19 O&M funding in this case? Our concern is that it would be a 14 months of O&M funding (with 2 months break) with the modified Period of Performance. It is an unprecedented pandemic situation, and surely we are not the only ones facing this dilemma. Please help!


    Answer

    We are certain that yours is not the only Department of Defense organization facing this dilemma.  In addition, O&M is not the only appropriation that may be involved.  Because of their associated funding policies, RDT&E (incremental funding) and Procurement (full funding) could also be impacted.

    To be clear up front, this is more of a contracting process issue than a financial management question.  Here’s why:

    First, we have to make one assumption when providing an answer, but because of the explanation provided, we feel safe in making it.  That assumption is that your Agency followed all applicable laws and regulations when originally obligating the FY19 O&M funds.  Put another way, we assume that your Agency did not originally plan on a 14-month Period of Performance. For example, obligating enough funds for 14 months, but contracting for a 12-month Period of Performance and then during execution of the work said, “Oops our bad, guess we need to do a no cost extension.”

    We know that the extension of the Period of Performance is due exclusively to an unforeseeable delay in the contractor’s ability to complete the work that is already on contract and not due to a change in the scope of work that is being done.  Therefore, it is reasonable to assume that the work still falls within the bona fide need rule for the funds that are on contract.  Thus, using the FY 2019 O&M funds would be appropriate.

    Second, the DoD Financial Management Regulation (DoD 7000.14-R) Volume 3, Chapter 10, Paragraph 100201, Part A states, “For 5 years after the time an appropriation expires for incurring new obligations, both the obligated and unobligated balances of that appropriation must be available for recording, adjusting and liquidating obligations properly chargeable to that account.”  All appropriations have five years after they expire for obligation to be expended.  Therefore, FY19 O&M funds that have been properly placed on contract prior to 30 September 2019 have until 30 September 2024 to be expended (invoiced) by the contractor.

    Finally, since the funds have expired for obligation, there is no way to obligate additional funds on the contract for new work, which a funded (i.e. cost) extension of the Period of Performance would be.  However, funds that are already on the contract can be used to pay for work that satisfies the bona fide need rule.  Funds that have expired for obligation should not be removed from the contract because if they are taken off of the contract they cannot be obligated again and will be removed from the Program Office.  Instead, a contract mod can be done by the procuring contracting officer (PCO) to extend the Period of Performance for Contract Line Item Numbers (CLINs) that already have sufficient FY19 O&M funds on them. 

    Summary: From a financial management perspective, since additional FY19 funds do not need to be added to the contract, the only limit on doing a no cost extension of a contract’s Period of Performance is ensuring that all of the work is completed and invoiced by the contractor prior to the funds cancelling for expenditure on 30 September 2024.  From a contract management perspective, it must be ascertained that sufficient FY19 O&M funds remain on the contract to cover the work to be done since it is not possible to add more of the funds that have expired for new work obligation purposes.   In addition, the PCO will have to verify that the work to be done fulfills the bona fide need rule for the type and year of the funds in question.

    However, recognize that doing an extension to the contract Period of Performance will lower expenditure percentages when compared to the OSD goals and could potentially draw questions from higher authorities.

    Suggestions:  It is most strongly recommended that you contact your PCO, your local financial comptroller organization, and acquisition legal counsel for more information and their policy interpretation of this issue.  In addition, ensure that your Agency retains any and all documents related to the no cost extension of the Period of Performance. With those records, the Agency will be able to answer any questions that may arise later.

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