The end of the fiscal year is always a good time to start brush up on fiscal law?particularly the bona fide needs rule. Contracting offices may soon face questions of fiscal law that have already been answered in Volume I, Chapter 5, of Principles of Federal Appropriations Law (GAO Red Book).
One interesting case of fiscal law, which you won't find in the Red Book, deals with funding undefinitized contract actions (UCAs) that cross fiscal years. Consider the following scenario:
A DoD activity issues a UCA in late fiscal year 2009 with a not-to-exceed price of $1,000,000. In accordance with DFARS 217.7404-4(a), the agency obligates $500,000 of the not-to-exceed price (the DFARS limit is currently 50% of the price ceiling, or 75% if the agency is in receipt of a "qualifying proposal"). The agency does not get around to definitizing the UCA until early FY 2010. When they do, the contracting officer and the contractor agree to a final contract price of $950,000. The unfunded balance is $450,000 (assuming actual costs prior to definitization were $500,000).
Assuming the contract is funded with annual appropriations, which fiscal year's appropriation must be charged to fund the additional $450,000?
Believe it or not, fiscal year 2010 funds must be used. A number of people that I have spoken to are befuddled by this, because they believe that the definitizing contract modification would be fulfilling a bona fide need of FY 2009, which would thus require the use of FY 2009 funds. However, this is incorrect.
The Comptroller General answered this question in Obligating Letter Contracts, B-197274, September 23, 1983. In that case, a procurement official from the Department of Justice requested guidance on how to fund letter contracts that crossed fiscal years. Agency practice had been to record an obligation for the amount of the price ceiling and include a clause that limited the liability of the Government to 50% of the price ceiling. In other words, they would overrecord their obligation. The procurement official described his dilemma as follows:
"GIVEN THE 'BONA FIDE NEED' RULE, THE APPLICATION OF YOUR DECISION B-197274 TO LETTER CONTRACTS UNDER THE CIRCUMSTANCES SET FORTH ABOVE PLACES CONSIDERABLE PRESSURE ON THE GOVERNMENT TO SETTLE WITH CONTRACTORS AND DEFINITIZE THESE LETTER CONTRACTS NOT LATER THAN THE END OF THE FISCAL YEAR IN WHICH THEY WERE EXECUTED. IF THE GOVERNMENT DID NOT DO SO, NEITHER FUNDS FOR THAT FISCAL YEAR NOR THE FOLLOWING FISCAL YEAR APPEAR TO BE AVAILABLE FOR DEFINITIZATION. FURTHERMORE, THE MAXIMUM GOVERNMENT COST LIABILITY SET FORTH IN EACH OF THESE LETTER CONTRACTS WOULD BECOME THE PRICE CEILING FOR A CONTRACT DEFINITIZED IN A SUBSEQUENT FISCAL YEAR. BECAUSE THIS DOLLAR AMOUNT IS GENERALLY 50 PER CENT OR LESS OF THE TOTAL ESTIMATED COST, IT IS HIGHLY UNLIKELY THAT SETTLEMENT AND DEFINITIZATION WOULD OCCUR. MOST LIKELY, THESE LETTER CONTRACTS WOULD HAVE TO BE TERMINATED, THE CONTRACTOR WOULD RECEIVE PAYMENT FOR THE WORK HE HAD PARTIALLY PERFORMED AND THE GOVERNMENT WOULD BE WITHOUT THE COMPLETED PRODUCT OR SERVICE FOR WHICH IT HAD CONTRACTED."
The Comptroller General responded as follows:
IT APPEARS THAT THE QUESTION PRESENTED ARISES FROM A MISCONCEPTION OF THE BONA FIDE NEED RULE. UNDER THAT RULE, OBLIGATIONS MAY ONLY BE INCURRED TO SATISFY BONA FIDE NEEDS OF THE PERIOD OF APPROPRIATION AVAILABILITY. THAT IS NOT TO SAY, HOWEVER, THAT THE NEEDS OF A PARTICULAR PERIOD MUST BE FULLY SATISFIED DURING THAT PERIOD. AN UNFULFILLED NEED OF ONE PERIOD MAY WELL BE CARRIED FORWARD TO THE NEXT AS A CONTINUING NEED WITH THE NEXT PERIOD'S APPROPRIATION BEING AVAILABLE FOR FUNDING.
CONSEQUENTLY, WHERE A LETTER CONTRACT AND THE SUBSEQUENT SUPERSEDING AGREEMENT ARE ENTERED INTO DURING THE SAME FISCAL YEAR, THE COST OF BOTH CONTRACTS IS OBLIGATED AGAINST THE SAME FISCAL YEAR APPROPRIATION. HOWEVER, WHEN THE LETTER CONTRACT IS ENTERED INTO DURING ONE YEAR AND THE DEFINITIZED AGREEMENT DURING THE NEXT, THEN IT IS APPROPRIATE TO OBLIGATE ONLY THE AMOUNT OF THE MAXIMUM LIABILITY WHICH MAY BE INCURRED UNDER THE LETTER CONTRACT SINCE THE UNDERLYING CONTRACT DOCUMENT SUPPORTS OBLIGATING NO MORE. ONCE THE AGREEMENT IS DEFINITIZED (WHICH IS BY NO MEANS A CERTAINTY) THE LETTER CONTRACT IS SUPERSEDED AND THE LEGAL LIABILITY OF THE PARTIES IS MERGED INTO THE NEW CONTRACT. THE DEFINITIZED CONTRACT THEN SUPPORTS OBLIGATING AGAINST THE APPROPRIATION CURRENT AT THE TIME IT IS ENTERED INTO SINCE IT IS, IN FACT, A BONA FIDE NEED OF THAT YEAR. THE AMOUNT OF THE DEFINITIZED CONTRACT WOULD ORDINARILY BE THE TOTAL CONTRACT COST LESS EITHER THE ACTUAL COSTS INCURRED UNDER THE LETTER CONTRACT (WHEN KNOWN) OR THE AMOUNT OF THE MAXIMUM LEGAL LIABILITY PERMITTED BY THE LETTER CONTRACT (WHEN THE ACTUAL COSTS CANNOT BE DETERMINED).
Following the initial example, the $450,000 to be added to the contract when the definitizing contract modification is executed covers a bona fide need of fiscal year 2010. This need was originally a bona fide need of FY 2009, but it went unsatisfied within the time period available for new obligations. As such, the bona fide need was carried forward to FY 2010.
UCAs have become a hot topic in contracting, particularly in DoD. In response to a GAO report that found a significant number of UCAs still undefinitized beyond the 180-day window imposed at DFARS 217.74, the DFARS was recently revised to include more rules pertaining to UCAs. However, I never saw any discussion about how to fund UCAs that cross fiscal years (maybe everybody already knows the rule ). Based on the GAO report, I'm willing to speculate that a good number of UCAs are left undefinitized until the fiscal year following their issuance. For UCAs funded by annual appropriations, I wonder what fiscal year's funds are being obligated when the UCAs are definitized. My guess is, in most cases, the same fiscal year's funds that were obligated for the UCA.