This issue comes up often in my line of work and I have never been able to obtain a solid answer. The answer always seems to depend on who I ask. I work in the intelligence community. My program often sends funding to working capital funded labs in order to perform exploitation work on a weapon system. We are appropriated with RDTE funds. Often requirements come up late in the 2nd year of availability. For example we have a new project as of May, FY20. We were given FY19 RDT&E money to fund the project. The project will take a year to accomplish and is non-severable. When the funding office sent the funds to the lab, the lab's funding office came back and said they can only accept the amount they can expend by 30 Sept 2020 (when the obligation period expires). Depending on who I ask, some financial offices tell me this is accurate and others say they have 5 years to expend the funds as long as its obligated by 30 Sept 2020.
The solution to the above question was settled by sending the FY19 RDTE funds on a project order with a PoP end date in FY21. The lab said they could accept that funding document if it was sent that way and expend the funds in FY21. That said, I was told other funding offices that they couldn't even send RDT&E on a Project Order. I'm just trying to wrap my head around which office is correct as this occurs on a yearly basis. It seems like the rules change based on who you ask which I know can't be the case. Thanks for your help.
There are some nuggets of truth to what each of the organizations that you have talked to have told you. The dilemma is that none of them have provided you with the complete picture of how RDT&E funds can be obligated and expended. We are certain that there is no nefarious intent to what they have told you. They either do not understand the full picture or more likely they are speaking from a standpoint of what their organizations believe and have done in the past. Those believes come about either due to misinformation regarding, or misinterpretation of, the RDT&E funding rules and policies. Or, they are working from organizational policies that have not been updated, or revoked, as funding rules change. As organizations, and human beings, it is often difficult to change our mindsets regarding processes and procedures when we do not have the most current and accurate information.
Therefore, while it will probably be longer than you had hoped for, this AAP Answer will attempt to breakdown what you have been told and overlay it with the bigger picture regarding how RDT&E funds can be obligated and expended. We will separate this AAP Answer into four (4) parts: 1.) The intended way to budget RDT&E funds, 2.) Allowance of RDT&E funds to be obligated for projects that cross fiscal years, 3.) Use of FY19 RDT&E funds for a FY20 requirement, and 4.) Utilization of RDT&E funds while they are in their expired phase.
First, RDT&E funds are budgeted for using what is called the Incremental Funding Policy. As detailed in the DoD Financial Management Regulation (FMR) 7000.14-R, Volume 2A, Chapter 1, Paragraph 010214, Section C.1.a, the theory behind the Incremental Funding Policy is that only funds required to pay for costs expected to be incurred for work in a given fiscal year shall be included in the RDT&E budget request for that fiscal year. Thus, we fund RDT&E efforts incrementally for work in each fiscal year of the project. FMR, Vol 2A, Ch. 1, Paragraph 010214, Section C.1.a has more detail, but that is the gist of the Incremental Funding Policy for RDT&E funding.
Second, in this AAP Question you state, “…the lab's funding office came back and said they can only accept the amount they can expend by 30 Sept 2020 (when the obligation period expires).” That position most probably comes from their understanding of the Incremental Funding Policy. However, as with most DoD rules, the FMR delineates an exception to the Incremental Funding Policy for RDT&E funding. DoD FMR 7000.14-R, Volume 2A, Chapter 1, Paragraph 010214, Section C.1.b states, “There are requirements in which there is no logical way to divide the work; it is clearly unfeasible to limit the contract to a shorter period; or the planned technical effort is such that no responsible contractor can be found who will accept a contract for a less-than-completion increment. For these type efforts that take longer than 12 months but less than 18 months, the Service or Defense Agency Comptroller may approve financing the total requirement in one fiscal year.” Only one of these criteria needs to be present for this exception to the Incremental Funding Policy to be utilized.
Since this AAP Question says that, “The project will take a year to accomplish and is non-severable,” we think that it is safe to assume that there is “no logical way to divide the work” and that the “effort take longer than 12 months but less than 18 months.” Thus, it falls within the exception to the Incremental Funding Policy and you are allowed to obligate, and the lab in question is allowed to accept, FY19 RDT&E funds for work that extends beyond their 30 September 2020 expiration date.
Third, some organizations may tell you that they are unable to obligate FY19 funds for “a new project as of May, FY20.” This position comes from organizations’ understanding of the Bona Fide Need Rule (31 U.S. Code §1502 and 1552). They believe that since the new project is a bona fide need of FY20, only FY20 RDT&E funds can be obligated for it. This is a very common stance, particularly with Navy financial managers. However, on January 4, 1989, The Comptroller General of the United States released a Decision on a Defense Technical Information Center—Availability of Two Year Appropriations case (B-232024). In that decision The Comptroller General states, “The Defense Technical Information Center does not violate the bona-fide needs rule by charging purchases to a two-year appropriation during the second year of its availability. Requisitions by the Defense Technical Information Center represented bona fide needs arising within the two-year period for which the appropriation was intended and obligations may be made to the extent funds remain available.” Thus, any requirement that comes up in either FY19 or FY20 is a legitimate bona fide need of the FY19 RDT&E funds.
Finally, the answer to your actual Question: Utilization of RDT&E funds while they are in their expired phase. The Office of Management and Budget (OMB) specifically addresses this issue for all Federal Agencies in their Circular No. A-11, Section 20.4.c (Page 17 of Section 20). DoD has taken the OMB guidance and put forth their own policy regarding Expired funds in FMR, Vol 2A, Ch 1, Paragraph 010107, Section B.25. In that Section it states, “Expired Appropriation. An appropriation whose period of availability for incurring new obligations has expired but the appropriation is not closed (canceled). During this period, the appropriation is available for adjustment to, or payment of, existing obligations. Appropriations remain in an expired status for 5-years as shown in the table below. At the end of the five-year expiration period, the appropriation is closed (canceled) and is no longer available for the payment of unliquidated obligations. (See Closed (Canceled) Appropriations.).”
RDT&E obligations for new projects have to be made by 30 September of the second fiscal year of the fund’s availability. That two year period for RDT&E funds is known as its Current (Unexpired) Phase. During that Current Phase, besides being able to obligate for new projects, or adding funds to a project for out-of-scope (new) work, the funds can be used (expended) to pay bills that were incurred during those first two years.
On 01 October of the third fiscal year the RDT&E funds enter their 5-year Expired Phase. During the Expired Phase, the funds retain their identity (Fiscal Year, Appropriation, and Program Element) and unobligated amounts are controlled at the Service level. During the Expired Phase the RDT&E funds can be used (expended) to pay bills that were incurred during years three through seven on existing obligations. In addition, during the Expired Phase, RDT&E funds, with the same identity, can be obligated for upward adjustments for in-scope, NOT new out-of-scope, work of the existing project. Upward adjustments could be caused by unanticipated increases in labor, material, or indirect costs.
On 01 October of the eighth fiscal year the RDT&E funds enter their Cancelled (Closed) Phase. During the Cancelled Phase, the funds are no longer available for obligations, or expenditures, of any kind. If bills arise from work that was funded with the now Cancelled RDT&E funds, those bills must be paid using RDT&E funds that are in their Current Phase.
In this Question, you say that, “Depending on who I ask, some financial offices tell me this is accurate and others say they have 5 years to expend the funds as long as it’s obligated by 30 Sept 2020.” Per both OMB Circular A-11 and FMR, Vol 2A, Ch 1, Paragraph 010107, Section B.25, the second group who says they have 5 years to expend the funds as long as it’s obligated by 30 Sept 2020 is correct.
Note: Services, and organizations, are allowed to promulgate policies that are more stringent than the “rules” but at least you now know what the DoD rules with regard to RDT&E are.
Suggestions: First, read DoD Financial Management Regulation 7000.14-R, Volume 2A, Chapter 1, paying particular attention to paragraphs 010213 and 010214. Second, read the other references cited in this Answer: OMB Circular A-11, Section 20, and The Comptroller General of the United States B-232024 case. Finally, 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.