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    According to the ADA training materials "Deobligations and reobligations occur as funds are moved from CLIN to CLIN" but I have found no case law or specific regulatory guidance specifically supporting this determination from the ADA training materials. Can we modify the funding on existing CLINS using the funds already obligated on the contract - take away FY 08 funds from CLINS which now will not complete until after 30 Sep 2014 and add the freed-up FY 08 funds to cover the cost increases in the CLINS that will complete prior to 30 Sep 2014?


    Answer

    1. This matter should be discussed with the command comptroller, legal counsel and the contracting officer. Entering into a firm fixed price RDT&E contract for items that require design, development, manufacturing and delivery requiring a seven year period of performance is not in compliance with the incremental funding policy for RDT&E funding. The rule governing budgeting of RDT&E funds is the incremental funding policy. As stated in the FMR, the incremental funding rule is:"…only those funds required for work in a given fiscal year shall be included in the RDT&E budget request for that fiscal year for most classes of effort." The “funds required for work in a given fiscal year” portion of that quotation is further translated to mean “costs expected to be incurred during that fiscal year”. Thus, for purposes of developing a budget for RDT&E funding, it is necessary to estimate when we expect costs to be incurred. A “better” course of action in this case would have been to award a two–three year development contract for design and prototypes. The work was apparently so complex (three years plus to Design Concept Review (FY08-FY11)) that the FFP was clearly the wrong contract type. Once satisfactory prototypes have been successfully demonstrated, purchasing the various lots could then commence, allowing appropriate year funds to be used.

     

    2. The contract was awarded in Jul 2008 for approximately $3.1M and modified in Mar 2011 (Machining Modification) and Jun 2011 (adding Clin 012 Technical support through Design Concept Review and adding Clin 013 for Technical support from Design Concept Review through submittal of proposal). The estimated price increase, as provided in additional information is $1.9M i.e. "We have estimated the amount to be in the neighborhood of $1.9M which would include the increases to the price of the existing lots (none of which have been delivered) as well has the cost of retooling and reengineering. In meetings with our Procurement office, a number of scenarios for modifying the contract have been discussed including taking FY 08 funds away from CLINS that will not deliver until after 30 Sep 2014 and using those funds for the cost increases on the Lots that will deliver prior to that date and for the costs of re-tooling and reengineering. Then we would use the FY 11 funds to fund those items that will not deliver until after 30 Sep 2014." This approach to funding the 1.9M price increase is not recommended.

     

    Since the new estimated price for the original scope of work is greater than had been originally budgeted, the government has basically two alternatives: (1) increase funds to meet the adjusted most likely price for the original scope of work, or (2) reduce contract work scope to meet current and projected funding available for the effort. If additional funds are requested and obtained, at the appropriate time they should then be obligated against the contract. Attempting to fund the cost overrun associated with an expired account with currently available dollars is not a recommended course of action. Using current year funds (FY11 RDT&E) for items that are not needed and will not be delivered until FY15 or later depending on the progress of the contractor is clearly a violation of Bona Fide Need rule. U.S. Code, Title 31, Section 1502(a) states that, "The balance of an appropriation or fund limited for obligation to a definite period is available only for payment of expenses properly incurred during the period of availability, or to complete contracts properly made within that period of availability and obligated consistent with section 1501 of this title." Simply stated, the Bona Fide Need rule (law) requires appropriated funds be used only for goods and services for which a need arises during the period of that appropriation’s availability for obligation. Strict interpretation of the law – combined with appropriation act language – means that the need may arise anytime during the period the appropriation act states the funds are available (e.g., two years for RDT&E). In your activity’s request for FY11 funds, was Congress advised that FY11 funds were needed to fund a $1.9M overrun on an FY08 FFP contract?

     

    3. The estimated $1.9M cost overrun on the Firm Fixed Price contract is approximately 60% of the original obligated amount. FY 08 funds are now expired. Once appropriated funds have gone into the “expired” status, they are no longer available for new obligations or increased scope of work on existing contracts. During the five year expired status period, which is the same for all Defense appropriations, only limited uses can be made of those expired appropriations. According to US Code, Title 31, Section 1553, during this “expired” status period, the appropriation account “retains its fiscal year identity and remains available for recording, adjusting, and liquidating obligations properly chargeable to that account”. Further explanation of this requirement is contained in the FMR (Volume 3, Chapter 10, Paragraph 100213F), which states “the level of detail required to be maintained for expired accounts is the same as that required to be maintained for current accounts. The level of detail facilitates cost determinations and program assessment and evaluation, while permitting visibility over expired accounts, providing an appropriate audit trail, and meeting the objectives of the closing accounts legislation.” From an operational perspective this means that during the expired status period, any obligation adjustment (upward or downward) or payment against the original obligation fund cite will be made to that fiscal year fund cite. Otherwise, it would not be possible to maintain proper administrative control of that fiscal year’s appropriation (i.e., to ensure there is not either an obligation or outlay of an amount greater than has been allotted to the organization).

     

    4. When a valid, certified invoice or other “bill” from a vendor or supplier arrives at the paying finance office during the fiscal year(s) the appropriation is in an “expired” status (FY10 - FY 14 in this case), determination of the fiscal year funds to be used for payment should be relatively simple but is often misunderstood: pay the certified invoice with the fiscal year funds cited for the original contract or other obligation document. To appropriately fund the contract cost overrun (obligation adjustment) prior to fund cancellation, the office will most likely need to request FY08 funding assistance via the AF Comptroller.

     

    5. Useful reference material can be found in DOD Financial Management Regulation 7000.14-R, Vol 3 Chapter 8, "Standards for Recording and Reviewing Commitments and Obligations" and Vol 3 Chapter 10, "Accounting Requirements for Expired and Closed Accounts". Properly planning and budgeting RDT&E is provided in Vol 2A Chapter 1 "General Information". Air force and Command financial regulations and policy guidance for contract and obligation adjustments should also be reviewed and followed.

     

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