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Multiyear Procurement

ABUS 049

DAU GLOSSARY DEFINITION

A method of competitively purchasing up to 5 years of requirements in one contract, which is funded annually as appropriations permit. If it is necessary to cancel the remaining quantities in any year, the contractor is paid an agreed-upon portion of the unamortized non-recurring start-up costs. Must be approved by Congress.

General Information

A multiyear procurement (MYP) is a vehicle for acquiring multiple years of requirements for systems or subsystems with a single contract action, usually up to a maximum of five years. The purpose of a multiyear procurement is to reduce program cost growth and introduce stability into the acquisition process. In theory it does so by making a commitment to the contractor to procure a specific quantity of a weapon system over several years to be funded on a year-by-year basis. The contractor is thus incentivized to realize savings, particularly through economic order quantity (EOQ) purchases (i.e., bulk purchases), and investment in productivity enhancements. This strategy can also broaden the industrial base by enticing smaller suppliers to participate in acquisitions with large start-up costs.

 

Even though the Government is authorizing the execution of the entire contract scope at contract award, the contract is still funded and budgeted on an annual basis. The funding of EOQ buys associated with a multiyear procurement is considered an exception to the full funding policy in that whole end items may not be financed in a given year and the 12 month maximum delivery period is exceeded. Funding for EOQ procurements is included in advance procurement budget requests unless an exception is granted by USD (Comptroller). While the typical use of advanced procurement is to purchase one year of parts or subsystems lead time ahead of the full funding year, EOQ allows the purchase of multiple years of parts or subsystems if bundling provides substantial cost savings. Although a multiyear procurement can benefit the government, it can also entail certain risks. Accordingly, in Public Law 97-86 (10 USC Sec. 2306b.), the Congress established criteria that multiyear procurement candidates must meet to limit those risks. Further refinement by the GAO, OSD and the congressional committees has resulted in the current criteria.

 

  1. Substantial savings -The multiyear procurement should achieve "significant" savings compared to annual procurement of the same quantities to compensate for the reduction of future budget flexibility and added program risk. There is no officially defined “significant” percentage or dollar value of savings for a multiyear procurement. However, a benchmark of 10% has been a starting point. Very costly programs have been able to obtain approval for a multiyear procurement with less than this due to the high dollar value of the savings. The savings between MYP and annual procurement must be based on present value analysis.
  2. Continuing/stable requirement - A stable requirement means that the minimum need for the item will not vary significantly (particularly downward) over the term of the multiyear contract. Decreases in procurement quantities or procurement rate can cause increases in unit cost and subsequently reduce savings.
  3. Funding availability and stability -There should be a reasonable expectation that program funding at the required level for the procurement will be available throughout the multiyear contract period. Both DoD and the Congress must be committed to ensuring that sufficient funds are provided to complete the multiyear contract at planned production rates.
  4. Design stability - System or subsystem design should be stable before initiating a multiyear procurement. Test and evaluation should be completed and demonstrate that the system or subsystem is operationally effective. A program should be judged mature and stable only after research and development and one or two production runs have been successful.
  5. Realistic cost estimates - Estimates should be based on historical cost data for the same or similar item. Savings are calculated as the difference between cost estimates, proposals, or negotiated prices for the multiyear contract and the cost of procuring the same quantities in the same time frame with successive annual contracts. For this reason, MYP contract shall be fixed price type contracts (Firm Fixed Price, Fixed Price Incentive, or Fixed Price with Economic Price Adjustment. DoD programs have an added restriction that the program in question not have had a critical cost breach (USC 2433(a)(5)) within 5 years of the proposed award date of the MYP contract.
  6. National security enhancement - The use of a multiyear contract should promote the national security of the United States.

 

Authority to enter into MYP contracts must be included in the component's budget submission for the fiscal year in which in which the multiyear contract will be initiated. If the requirement is not known when the budget is submitted, the request must be in a budget amendment submitted by the President or a written request to the congressional defense committees. Multiyear procurement contracts cannot be initiated for over $500 million unless specifically provided for in an appropriations act and an act other than an appropriations act. Congress has mandated the following requirements: (1) proposed multiyear contract costs must be provided for with the President’s budget submission or as a budget amendment and (2) the House and Senate Armed Services and Appropriations Committees must be notified at least 30 days in advance of a proposed contract award that employs advance procurement or economic order quantity procurement in excess of $20 million in any one year of the contract or an unfunded contingent liability of over $20 million. In addition, thirty days prior to a contract award, SECDEF must certify to Congress that the support costs associated with a multiyear procurement of over $500 million are fully funded in the FYDP. The certification letter must be then approved and signed by the defense committees.

 

"Cancellation ceiling" is a term that applies to multiyear procurements only. It represents protection to the contractor in the event that the government cannot continue the contract due to lack of funds. It is designed to reimburse the contractor for those costs that have been incurred as a result of ordering material in advance, or investing and facilitizing for the procurement. There is a cancellation ceiling associated with each fiscal year and it decreases in dollar value in the later years of the contract. An exception must be approved by USD(C) to award a multiyear procurement contract with an unfunded cancellation ceiling. Congress must be notified a minimum of 30 days prior to awarding a contract with a cancellation ceiling in excess of $100 million.

 

Because actual savings are not known until the contract is negotiated, estimates are used for the initial review process. However, obtaining both annual and multiyear procurement proposals during the source selection process provides the basis for the final analysis of savings and benefits. It also reduces delays that might be incurred if it is decided that MYP is not in the Government's best interest.

 

Congress and DoD have several concerns regarding multiyear procurement. The first is the amount of budget authority necessary to initiate a multiyear program. Due to the provisions for expanded advance buy and the cancellation ceilings, multiyear programs require more budget authority in the first year and have a large cancellation ceiling in the early years. Another facet of this is what to do with the advance purchased items if the design changes or we no longer plan to procure the end item.

 

The second concern is reduced flexibility. It is expensive to cancel a multiyear procurement contract; therefore, once it is started it is generally wise to finish it. The budget is thus less flexible because large amounts of budget authority are now tied up for multiyear programs and are not available to be used somewhere else. Congress dislikes making commitments in the current year which have outyear consequences. DoD also likes to retain as much flexibility as possible to respond to changing requirements. Because of the high cancellation penalties, MYP contracts cannot be terminated without a 10 day prior notification to the congressional defense committees.