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The Bona Fide Needs Rule

B. 8.  Multi-Year Contracts

a.  Introduction

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Any discussion of multiyear contracting must inevitably combine the bona fide needs rule with material from Chapter 6 on the Antideficiency Act and from Chapter 7 on obligations.

The term “multiyear contract” has been used in a variety of situations to describe a variety of contracts touching more than one fiscal year. To prevent confusion, we think it is important to start by establishing a working definition. A multiyear contract, as we use the term in this discussion, is a contract covering the requirements, or needs, of more than one fiscal year.22 A contract for the needs of the current year, even though performance may extend over several years, is not a multiyear contract. We discuss contracts such as these, where performance may extend beyond the end of the fiscal year, in sections B.4 and B.5 of this chapter. Thus, a contract to construct a ship that will take 3 years to complete is not a multiyear contract; a contract to construct one ship a year for the next 3 years is.

Multiyear contracting, like most things in life, has advantages and disadvantages. Some of the potential benefits are:23

  • Multiyear contracting can reduce costs by permitting the contractor to amortize nonrecurring “start up” costs over the life of the contract. Without multiyear authority, the contractor may insist on recovering these costs under the 1-year contract (since there is no guarantee of getting future contracts), thus resulting in increased unit prices.
     
  • Multiyear contracting may enhance quality by reducing the uncertainty of continued government business and enabling the contractor to maintain a stable workforce.
     
  • Multiyear contracting may increase competition by enabling small businesses to compete in situations where nonrecurring start-up costs would otherwise limit competition to larger concerns.

However, the situation is not one-sided. Multiyear contracting authority also has potential disadvantages:24

  • Competition may decrease because there will be fewer opportunities to bid.
     
  • A contractor who is able to amortize start-up costs in a multiyear contract has, in effect, a government-funded competitive price advantage over new contractors in subsequent solicitations. This could evolve into a sole-source posture.
     
  • Being locked into a contract for several years is not always desirable, particularly where the alternative is to incur cancellation charges that could offset initial savings.

An agency may engage in multiyear contracting only if it has (1) no-year funds or multiple year funds covering the entire term of the contract or (2) specific statutory authority. Cray Research, Inc. v. United States, 44 Fed. Cl. 327, 332 (1999); 67 Comp. Gen. 190, 192 (1988); B-171277, Apr. 2, 1971 (multiyear contract permissible under no-year trust fund). An agency may enter into a multiyear contract with fiscal year appropriations (or for a term exceeding the period of availability of a multiple year appropriation) only if it has specific statutory authority to do so. See 71 Comp. Gen. 428, 430 (1992); B-259274, May 22, 1996. Most agencies now have some form of multiyear contracting authority, as we will describe in the next section.

b. Multiple Year and No-Year Appropriations

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(As of 3/12/15)

 

 

 

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If an agency does not have specific multiyear contracting authority but enters into a multiyear contract solely under authority of a multiple year or no-year appropriation, the full contract amount must be obligated at the time of contract award. See, e.g., B-322160, Oct. 2, 2011; B-195260, July 11, 1979. This is also true for revolving funds, which authorize expenditures without fiscal year limitation. Revolving funds must have sufficient budget authority against which to record the entire amount of long-term contracts at the time of the obligation. 72 Comp. Gen. 59, 61 (1992). A revolving fund may not count anticipated receipts from future customer orders as budget authority. B-288142, Sept. 6, 2001. See also U.S. General Accounting Office, The Air Force Has Incurred Numerous Overobligations In Its Industrial Fund, AFMD-81-53 (Washington, D.C.: Aug. 14, 1981).

However, there have been some circumstances under which GAO approved the incremental funding of a multiyear contract using no-year funds. For example, 43 Comp. Gen. 657 (1964) involved a scheme in which funds would be made available, and obligated, on a year-by-year basis, together with a “commitment” to cover maximum cancellation costs. The cancellation costs represented amortized start-up costs, which would be adjusted downward each year. Thus, funds would be available to cover the government’s maximum potential liability in each year. See also 62 Comp. Gen. 143 (1983) (similar approach for long-term vessel charters under the Navy Industrial Fund); 51 Comp. Gen. 598, 604 (1972) (same); 48 Comp. Gen. 497, 502 (1969) (either obligational approach acceptable under revolving fund).26 (As we will see later, this type of arrangement under a fiscal year appropriation presents problems.)

If an agency has neither multiple year or no-year funds, nor uses multiyear contracting authority, a multiyear contract violates statutory funding restrictions, including the Antideficiency Act (prohibiting obligations in advance of an appropriation for that fiscal year, 31 U.S.C. § 1341(a))27 and the bona fide needs statute (prohibiting the obligation of an appropriation in advance of need, 31 U.S.C. § 1502(a)). See Cray Research, Inc. v. United States, 44 Fed. Cl. 327,332 (1999). E.g., 67 Comp. Gen. 190 (1988); 66 Comp. Gen. 556 (1987); 64 Comp. Gen. 359 (1985); 48 Comp. Gen. 497 (1969); 42 Comp. Gen. 272 (1962); 27 Op. Att’y Gen. 584 (1909). Multiyear commitments were found illegal in various contexts in each of these cases, although each case does not necessarily discuss each funding statute.

In 42 Comp. Gen. 272, for example, the Air Force, using fiscal year appropriations, awarded a 3-year contract for aircraft maintenance, troop billeting, and base management services on Wake Island. Because an agency typically incurs an obligation at the time it enters into a contract, and must charge that obligation to an appropriation current at that time,28 the Air Force contract raised two issues: (1) whether the services to be provided in the second and third years of the contract constituted a bona fide need of the Air Force’s fiscal year appropriation, and (2) if not, whether the Air Force had incurred an obligation in the first fiscal year for the needs of the second and third years in advance of appropriations for those 2 years. The Air Force contended that no funds were obligated at time of contract award; instead, the Air Force argued that it had a “requirements” contract, and that it incurred no obligation unless and until it issued requisitions, thereby exempting the contract from the statutory funding restrictions. However, the Comptroller General refused to adopt this characterization of the contract. Although the contractor had expressly agreed to perform only services for which he had received the contracting officer’s order, GAO found that there was no need for an administrative determination that requirements existed since the contract services were “automatic incidents of the use of the air field.” Id. at 277. Only a decision to close the base would eliminate the requirements. Consequently, the contract was found to be an unauthorized multiyear contract—the Air Force, using fiscal year appropriations, had entered into a contract for its needs of subsequent fiscal years in advance of appropriations for those years.

c. Fiscal Year Appropriations

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(As of 3/12/15)

 

 

 

 

 

 

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(As of 3/12/15)

If an agency is contracting with fiscal year appropriations and does not have multiyear contracting authority, one course of action, apart from a series of separate fiscal year contracts, is a fiscal year contract with renewal options, with each renewal option (1) contingent on the availability of future appropriations and (2) to be exercised only by affirmative action on the part of the government (as opposed to automatic renewal unless the government refuses). Leiter v. United States, 271 U.S. 204 (1926); 66 Comp. Gen. 556 (1987); 36 Comp. Gen. 683 (1957); 33 Comp. Gen. 90 (1953); 29 Comp. Gen. 91 (1949); 28 Comp. Gen. 553 (1949); B-88974, Nov. 10, 1949. The inclusion of a renewal option is key; with a renewal option, the government incurs a financial obligation only for the fiscal year, and incurs no financial obligation for subsequent years unless and until it exercises its right to renew. The government records the amount of its obligation for the first fiscal year against the appropriation current at the time it awards the contract. The government also records amounts of obligations for future fiscal years against appropriations current at the time it exercises its renewal options. The mere inclusion of a contract provision conditioning the government’s obligation on future appropriations without also subjecting the multiyear contract to the government’s renewal option each year would be insufficient. Cray Research, Inc. v. United States, 44 Fed. Cl. 327, 332 (1999). Thus, in 42 Comp. Gen. 272 (1962), the Comptroller General, while advising the Air Force that under the circumstances it could complete that particular contract, also advised that the proper course of action would be either to use an annual contract with renewal options or to obtain specific multiyear authority from Congress. 42 Comp. Gen at 278.

In a 1-year contract with renewal options, the contractor can never be sure whether the renewal options will be exercised, thereby preventing the contractor from amortizing initial investment costs. To protect against this possibility, contractors occasionally seek a contract termination penalty equal to the unamortized balance of initial investment costs if the government fails to renew the contract for any fiscal year. However, the Comptroller General has held that these provisions contravene the bona fide needs rule:

“The theory behind such obligations (covering amortized facility costs unrecovered at time of termination) has been that a need existed during the fiscal year the contracts were made for the productive plant capacity represented by the new facilities which were to be built by the contractor to enable him to furnish the supplies called for by the contracts. After thorough consideration of the matter, we believe that such obligations cannot be justified on the theory of a present need for productive capacity.

“ …The real effect of the termination liability is to obligate the Commission to purchase a certain quantity of magnesium during each of five successive years or to pay damages for its failure to do so. In other words, the termination charges represent a part of the price of future, as distinguished from current, deliveries and needs under the contract, and for that reason such charges are not based on a current fiscal year need.”

36 Comp. Gen. 683, 685 (1957). See also 37 Comp. Gen. 155 (1957).

Attempts to impose penalty charges for early termination (sometimes called “separate charges”) have occurred in a number of cases involving automated data processing (ADP) procurements. In one case, a competitor for a contract to acquire use of an ADP system for a 65-month period proposed to include a provision under which the government would be assessed a penalty if it failed to exercise its annual renewal options. The Comptroller General noted that the penalty was clearly intended to recapitalize the contractor for its investment based on the full life of the system in the event the government did not continue using the equipment. Accordingly, the Comptroller General concluded that the penalty did not reasonably relate to the value of the equipment’s use during the fiscal year in which it would be levied. The penalty charges would, therefore, not be based on a bona fide need of the current fiscal year and their payment would violate statutory funding restrictions. 56 Comp. Gen. 142 (1976), aff’d in part, 56 Comp. Gen. 505 (1977). See also 56 Comp. Gen. 167 (1976); B-190659, Oct. 23, 1978.

One scheme, however, has been found to be legally sufficient to permit the government to realize the cost savings that may accrue through multiyear contracting. The plan approved by the Comptroller General in 48 Comp. Gen. 497, 501–02 (1969) provided for a 1-year rental contract with an option to renew each subsequent year. If the government completed the full rental period by continuing the contract on a year-by-year basis, it would be entitled to have monthly rental credits applied during the final months of the rental period. The Comptroller General noted that:

“Under this arrangement the Government would not be obligated to continue the rental beyond the fiscal year in which made, or beyond any succeeding fiscal year, unless or until a purchase order is issued expressly continuing such rental during the following fiscal year. In effect, the company is proposing a 1 year rental contract with option to renew. Also, under this proposal rental for any contract year would not exceed the lowest rental otherwise obtainable from [the contractor] for one fiscal year. We have no legal objection to this type of rental plan for ADP equipment.”

Another course of action for an agency with fiscal year money to cover possible needs beyond that fiscal year is an indefinite- delivery/indefinite-quantity (IDIQ) contract. An IDIQ contract is a form of an indefinite-quantity contract, which provides for an indefinite quantity of supplies or services, within stated limits, during a fixed period. 48 C.F.R. § 16.504(a). Under an IDIQ contract, actual quantities and delivery dates remain undefined until the agency places a task or delivery order under the contract. When an agency executes an indefinite-quantity contract such as an IDIQ contract, the agency must record an obligation in the amount of the guaranteed minimum purchase. At the time of award, the government commits itself to purchase only a minimum amount of supplies or services and has a fixed liability for the amount to which it committed itself. See 48 C.F.R. §§ 16.501-2(b)(3) and 16.504(a)(1). The agency has no liability beyond its minimum commitment unless and until it places additional orders. An agency is required to record an obligation at the time it incurs a legal liability. 65 Comp. Gen. 4, 6 (1985); B-242974.6, Nov. 26, 1991. Therefore, for an IDIQ contract, an agency must record an obligation for the guaranteed minimum amount at the time of contract execution. See, e.g., B-318046, July 7, 2009 (in the absence of reliable historical usage data, an agency may use $500 as the guaranteed minimum for IDIQ contracts, which amount must be obligated at the time of award).  In B-302358, Dec. 27, 2004, GAO determined that the Bureau of Customs and Border Protection’s (Customs) Automated Commercial Environment contract was an IDIQ contract. As such, Customs incurred a legal liability of $25 million for its minimum contractual commitment at the time of contract award. However, Customs failed to record its $25 million obligation until 5 months after contract award. GAO determined that to be consistent with the recording statute, 31 U.S.C. § 1501(a)(1), Customs should have recorded an obligation for the contract minimum of $25 million against a currently available appropriation for the authorized purpose at the time the IDIQ contract was awarded. 

In establishing the guaranteed minimum quantity in an IDIQ contract, an agency must consider both contracting and appropriations law principles. The guaranteed minimum must not only constitute sufficient consideration to make the contract binding, but also reflect the bona fide needs of the agency at the time of execution of the contract. B-321640, Sept. 19, 2011, at 6.

d. Contracts with No Financial Obligation

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Multiyear arrangements may be permissible, even without specific statutory authority, if they are structured in such a way that the agency, at time of contract award, incurs no financial obligation. Without a financial obligation, the agency does not violate the Antideficiency Act or the bona fide needs rule. In 63 Comp. Gen. 129 (1983), the Comptroller General considered the General Services Administration proposal to use 3-year “Multiple Award Schedule” (MAS) contracts for Federal Supply Schedule items. There was no commitment to order any specific quantity of items. Rather, the commitment was for an agency with a requirement for a scheduled item to order it from the contractor if the contractor has offered the lowest price. If an agency found the item elsewhere for less than the contract price, it was free to procure the item from that other source without violating the contract. Since entering into the MAS contracts did not require the obligation of funds, there was no violation of statutory funding restrictions. Obligations would occur only when agencies placed specific orders, presumably using funds currently available to them at the time. Another example is a 1935 decision, A-60589, July 12, 1935, which concerned a requirements contract for supplies in which no definite quantity was required to be purchased and under which no financial obligation would be imposed on the government until an order was placed. In order to retain the availability of the vendor and a fixed price, the government agreed not to purchase the items elsewhere. See also B-259274, May 22, 1996.

Also, contracts that do not require the expenditure of appropriated funds are not subject to the same fiscal year strictures. E.g., 10 Comp. Gen. 407(1931) (no legal objection to multiyear leases or contracts for the operation of concessions on federal property).

Footnotes 22 This is essentially the same as the definition in the Federal Acquisition Regulation, “a contract for the purchase of supplies or services for more than 1, but not more than 5, program years.” 48 C.F.R. § 17.103.  (BACK)

23 S. Rep. No. 98-417, at 4–8 (1984). This is a report by the Senate Committee on Governmental Affairs on a bill (S. 2300) designed to extend limited multiyear contracting authority to civilian agencies. That legislation was not enacted. Ten years later, in 1994, Congress enacted the Federal Acquisition Streamlining Act, permitting civilian agencies to use fiscal year appropriations to enter into contracts for as many as 5 years. Pub. L. No. 103- 355, § 1072, 108 Stat. 3243, 3270 (Oct. 13, 1994), codified at 41 U.S.C. § 254c. We discuss the Federal Acquisition Streamlining Act in section B.9.b of this chapter.  (BACK)

24 H.R. Rep. No. 97-71, pt. 3, at 21 (1981) (report of the House Committee on Government Operations on the 1982 Defense Department authorization bill).  (BACK)

25 [When an agency uses multiyear or other contracting authorities, such as the Federal Acquisition Streamlining Act, that authority may permit the agency to obligate its appropriations differently. We discuss the Federal Acquisition Streamlining Act and other examples of multiyear contracting authorities in section B.9 of this chapter.]  (Note:  In the 3/13/14 revision, this footnote was omitted in the text but there was no clear mention about the footnote.  I am placing it in brackets because I don't know what GAO's intent is.)  (BACK)

26 While 43 Comp. Gen. 657 had used the somewhat cryptic term “commitment,” the three subsequent decisions require the actual obligation of the cancellation costs.  (BACK)

27 We discuss the Antideficiency Act in Chapter 6.  (BACK)

28 We discuss the concept of obligations in Chapter 7.  (BACK)

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