We're buying 10 units of something, and units 1-5 have been produced and delivered to the end user. We then determine we need to do an ECP and contract mod for the remaining 5 units to correct a problem we've found. Units 1-5 will require an In-Service Boat Alteration to correct the problem. Should that be funded by the PM's OPN (that was used to purchase the boats) or should the end user use their OMN to fund the corrective boat alt?
To determine the correct type of appropriation for any modification, the DoD Financial Management Regulation 7000.14-R (FMR), Volume 2A, Chapter 1, paragraph 010213, section C.7 provides guidance. Since the FMR can be difficult to interpret, DAU translated the guidance into an easy to follow Product Improvement Funding Decision Tree found at https://www.dau.edu/tools/t/Funds-Management-Platinum-Card. The Decision Tree is in the middle of the right column on Page 2.
There are three key questions.
The FIRST question is: Is the purpose of the modification to increase performance? If the answer to this first question is YES, then the modification “related development, test and evaluation effort, will be financed in RDT&E.” Given that you’re fixing a problem, it sounds like the answer might be “NO” for your program. Now we proceed to the second question.
The SECOND question is: Is developmental testing (DT) or operational test and evaluation (OT&E) by an independent operational test agency required? “If DT or OT&E by an independent test agency is required, RDT&E finances the improvement.” The background provided doesn’t clearly indicate what testing might be required after the modification. The FMR states, “In both cases (2) and (3) above, the determination that the improvement is “within the current performance envelope” and that “no development testing (DT) or operational test and evaluation (OT&E) by an independent operational test and evaluation agency is required” should be determined after formal coordination with the Director, Operational Test and Evaluation.”
If no DT or OT&E by an independent operational test and evaluation agency is required, the THIRD question is: Is the weapon system still in production? The FMR states, “Engineering services or related manufacturing efforts applied to an out-of-production, but still operational item to extend its useful military life within the current performance envelope should be financed by O&M appropriations as long as no development testing (DT) or operational test and evaluation (OT&E) by an independent operational test and evaluation agency is required.” The background provided doesn’t indicate if your program is still in production or not.
Your answers to the three questions will help determine the correct appropriation to be used for the development and testing of a weapon system modification. However, after modification development, “Costs of fully developed and tested modification kits and associated installation costs should be financed from Procurement appropriations.” So, regardless of the appropriation used to fund the development and test of the modification (could be RDT&E, Procurement, or O&M depending on your answers), you will need Procurement funds to buy and install the modification kits.