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A few of us have been discussing change orders and supplemental agreements with respect to fiscal law and one scenario we've found to be difficult. Suppose a change order is issued pursuant to 52.243-1 but the supplemental agreement can't be done for several weeks. This is an additive change order that undoubtedly will require an increase to the firm fixed price.

Is there an Anti-Deficiency Act violation until the supplemental agreement is finalized? We felt that with cost-type/T&M contracts there would not be as the Government's obligation is limited to the estimated cost or ceiling in the contract but a firm fixed price contract operates differently.

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If it is early in the performance period, a contracting officer can issue a change order under the Changes clause and deal with the price increase later, after receipt of the contractor's proposal and the funds certification required by FAR 43.105. However, if the funds do not materialize, the contracting officer will be forced to pay for the change by reducing some other work on the contract. So in a way, the funds already obligated on the contract are sort of a cushion to delay an ADA situation.

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Guest Vern Edwards

The GAO requires that an obligation be recorded at the time that it is made. See Principles of Federal Appropriations Law 3d, Vol. II, Ch. 7, Section B, "Criteria for Recording Obligations," pages 7-7 to 7-8. The issuance of a change order that is expected to increase the costs of performance constitutes an obligation. Because of that, the CO must ensure that he or she has funds and must record an obligation by putting the estimated amount of the change on the change order document and distribute a copy to the finance office.

The procedure described by ji20874 might prevent a violation of the Anti-deficiency Act, but it does not satisfy the GAO's requirement to record an obligation at the time it is made. That's why FAR 43.105 says what it does. The CO cannot issue a change order and then wait until after receipt of the contractor's proposal to get funds certification. They can do that only if they are skipping a change order and waiting until after they've signed a supplemental agreement to perform in accordance with the change.

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If it is early in the performance period, a contracting officer can issue a change order under the Changes clause and deal with the price increase later, after receipt of the contractor's proposal and the funds certification required by FAR 43.105. However, if the funds do not materialize, the contracting officer will be forced to pay for the change by reducing some other work on the contract. So in a way, the funds already obligated on the contract are sort of a cushion to delay an ADA situation.

Ji, I agree with Vern. You can't jjust deal with the situation "later".

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unless there is an exception

43.105 (a) (2) Contain a limitation of cost or funds clause (see 32.704).

32.704 (b ) Under a cost-reimbursement contract, the contracting officer may issue a change order, a direction to replace or repair defective items or work, or a termination notice without immediately increasing the funds available. Since a contractor is not obligated to incur costs in excess of the estimated cost in the contract, the contracting officer shall ensure availability of funds for directed actions. The contracting officer may direct that any increase in the estimated cost or amount allotted to a contract be used for the sole purpose of funding termination or other specified expenses.

it appears that the procedure that Ji is recommending may be feasible.

If the requirements of 43.105, 37.204 and 52.232-20/22 is included, then the guidance at GAO B-300480 and page 7-9 of the Principles of Fed approp, vol II ch7 will need to be adhered to. "As more precise data on the liability becomes available, the obligation must be periodically adjusted, that is, the agency must deobligate funds or increase the obligational level as the case may be. "

Section B.1. f of the PoFA, page 7-23 also states that "However, for many types of obligations, the precise amount of the government’s liability cannot be known at the time the liability is incurred. As summarized in our preliminary discussion of 31 U.S.C. § 1501(a), some initial amount must still be recorded."

for the purpose of this, I argue that an intial amount was recorded and that they have met the intent, and as more specific information is available (perJi discussion) the obligation will be adjusted up or down.

edited to try and remove smiley face

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Edited by airborne373
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Would you say, then, that the effective meaning of FAR 43.105(a) is as follows?

43.105 Availability of funds.

(a) The contracting officer shall not execute a contract modification (or issue a change order under the changes clause*) that causes or will might cause an increase in funds without having first obtained a certification of fund availability...

*Or a stop work order under the Stop-Work Order clause, a product substitution under the Government Property clause, and so forth...

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Guest Vern Edwards

Quite right. If the contract contains either of the "limitation" clauses or the availability of funds clause, then an obligation need not be recorded at the time a cost-increasing change order is issued. However, under a cost-reimbursement contract, if a cost-increasing change order is issued, and if the estimated cost is not increased at that point in time, which would increase the government's obligation, the parties need to take measure to document the file so as to avoid the impression that a cost overrun has occurred, instead of a cost growth.

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Guest Vern Edwards

ji20874: Isn't a change order a contract modification? Why do you say "or" issue a change order? And shouldn't a CO determine before issuing a change order whether it is likely to cause a cost increase?

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Would you say, then, that the effective meaning of FAR 43.105(a) is as follows?

43.105 Availability of funds.

(a) The contracting officer shall not execute a contract modification (or issue a change order under the changes clause*) that causes or will might cause an increase in funds without having first obtained a certification of fund availability...

*Or a stop work order under the Stop-Work Order clause, a product substitution under the Government Property clause, and so forth...

FAR Part 43 provides for the KO to issue such directives as modifications or to follow up with a confirming mod ASAP.

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unless there is an exception

43.105 (a) (2) Contain a limitation of cost or funds clause (see 32.704).

32.704 (b ) Under a cost-reimbursement contract, the contracting officer may issue a change order, a direction to replace or repair defective items or work, or a termination notice without immediately increasing the funds available. Since a contractor is not obligated to incur costs in excess of the estimated cost in the contract, the contracting officer shall ensure availability of funds for directed actions. The contracting officer may direct that any increase in the estimated cost or amount allotted to a contract be used for the sole purpose of funding termination or other specified expenses.

it appears that the procedure that Ji is recommending may be feasible.

If the requirements of 43.105, 37.204 and 52.232-20/22 is included, then the guidance at GAO B-300480 and page 7-9 of the Principles of Fed approp, vol II ch7 will need to be adhered to. "As more precise data on the liability becomes available, the obligation must be periodically adjusted, that is, the agency must deobligate funds or increase the obligational level as the case may be. "

Section B.1. f of the PoFA, page 7-23 also states that "However, for many types of obligations, the precise amount of the government’s liability cannot be known at the time the liability is incurred. As summarized in our preliminary discussion of 31 U.S.C. § 1501(a), some initial amount must still be recorded."

for the purpose of this, I argue that an intial amount was recorded and that they have met the intent, and as more specific information is available (perJi discussion) the obligation will be adjusted up or down.

edited to try and remove smiley face

.

This topic concerns FFP changes. That's what I was responding to earlier.

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I commonly issue change orders by letter and follow-up later with a modification.

For unpriced change orders, my usual practice is to record an obligation only after the contractor asserts its right to an equitable adjustment and submits the required proposal, and after we agree on the amount and other terms. If I raise the contract price and obligate the funds before the contractor makes its assertion, well, that's not good business practice.

I wish we had a way of recording obligations and potential liabilities privately on the books of the agency (and visible only within the Government) without raising the contract price -- in the old days, we did, with pencil entries in ledgers, so to speak -- but now, with our contract-writing systems, if I record the obligation (estimated amount) in the change order modification then I have also raised the contract price (actual price) (a failure in our automated systems).

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The GAO requires that an obligation be recorded at the time that it is made. See Principles of Federal Appropriations Law 3d, Vol. II, Ch. 7, Section B, "Criteria for Recording Obligations," pages 7-7 to 7-8. The issuance of a change order that is expected to increase the costs of performance constitutes an obligation. Because of that, the CO must ensure that he or she has funds and must record an obligation by putting the estimated amount of the change on the change order document and distribute a copy to the finance office.

In DoD, the CO would only be allowed to obligate 50% of the not-to-exceed amount, which may or may not be equal to the estimated amount of the change. From DFARS:

243.204-70-4 Limitations on obligations.

(a) The Government shall not obligate more than 50 percent of the not-to-exceed price before definitization. However, if a contractor submits a qualifying proposal before 50 percent of the not-to-exceed price has been obligated by the Government, the limitation on obligations before definitization may be increased to no more than 75 percent (see 232.102-70 for coverage on provisional delivery payments).

(B) Obligations should be consistent with the contractor’s requirements for the undefinitized period.

Note that this policy applies to unpriced change orders exceeding $5 million.

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Guest Vern Edwards

I commonly issue change orders by letter and follow-up later with a modification.

For unpriced change orders, my usual practice is to record an obligation only after the contractor asserts its right to an equitable adjustment and submits the required proposal, and after we agree on the amount and other terms. If I raise the contract price and obligate the funds before the contractor makes its assertion, well, that's not good business practice.

When a CO issues a change order he or she obligates the government whether he or she records the obligation or not.

When I worked for the Air Force and later for the Department of Energy and issued change orders, I got a not to exceed cost agreement from the contractor prior to issuing the change order. When I issued the change order I put a fund citation and a dollar amount on the SF 30. I usually obligated less than the NTE cost agreement on the basis of a government estimate of the prospective settlement. I whited out the dollar amount on the contractor's copy, so it could not see how much I expected the change to cost. When I definitized the change order by supplemental agreement I made an adjustment as necessary to the original obligation. This was standard operating procedure, done in order to comply with the requirements of the Comptroller General. I believe that DOD contracting offices do something like that today.

It is not good business practice to issue a change order without recording an obligation at the time of issuance, because (1) GAO says it's contrary to law and (2) it could result in an ADA violation. However, it would not surprise me to learn that some COs do not do so, since many COs are clueless about appropriations law.

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  • 1 year later...

Vern/Joel,

With all due respect, it seems as though you may be placing unprecedented priority on FAR 43.105 - Availability of Funds, over the Changes and other clauses of the regulation. Particularly in firm fixed price construction contracts, which contain the limitation of funds and variation in estimated quantity clauses. As ji20874 has stated, the clause addresses certification of fund availability prior to executing a modification only. The clause does not discuss providing direction, instruction, or interpretation, or determination. In many instances, the CO may provide direction without a modification "...written or oral order (which, as used in this paragraph b, includes direction, instruction, interpretation, or determination) from the CO that causes a change shall be treated as a change order..." under the Changes Clause, "...provided that the contractor provide written notice that they regard the order as a change order." The work is often already performed and then a modification is executed later or the contractor does not constitute the direction as a change. In addition, there are many instances when a contractor may perform contract work as described in the drawings and/or specifications and as permitted by the variation in estimated quantity clause that causes an increase in funds to the contract which is modified at a later date. The existing contract funds may be used to provide progress payments for this work and the contract modified to add funds at a later date or other work may be removed from the scope of the contract altogether.

It is prudent and good business practice to obtain certification of funds which obligates additional funding to the project to cover an increase and to avoid an insufficiency of funds on a contract at the time of the action. However, it is not necessary for work that is within scope and or prior to the CO providing direction, clarification, instruction, and/or determination. Vern's statement that "It is not good business practice to issue a change order without recording an obligation at the time of issuance, because (1) GAO says it's contrary to law and (2) it could result in an ADA violation. However, it would not surprise me to learn that some COs do not do so, since many COs are clueless about appropriations law." isn't fair to ji20874, is not realistic, and not accurate. In my experience, this strict interpretation of FAR 43.105, as it relates to providing CO direction, seems to stem from a misunderstanding and/or fear of violating the Anti-Deficiency Act. However, as the CO, providing direction under the terms of the contract is not likely to be a violation of the ADA, even if an insufficiency occurs, as long as the government has properly entered into a contract using appropriated funds intended for that purpose. This includes contract modifications and contingent or indefinite liabilities. In fact, the GAO seems to agree as referenced in Formation of Government Contracts, Third Edition, Page 54 - 57, specifically as follows:

"Generally, contract modifications that are found to be within the scope of the original contract are considered bona fide needs of the fiscal year when the original contract was made. Thus, the funds used on the original contract have been properly used to fund changes issued under the Changes clause, 23 Comp. Gen. 943 (B-41903) (1944)..." and continuing with "This rule is premised on the theory that these clauses do not create new liabilities but simply make existing ones certain." and finally "A strict interpretation of the Anti-Deficiency Act would require agencies to obligate an amount sufficient to cover the total possible liability. However, neither the Comptroller General nor the House Committee on Appropriations has read the Act so strictly. See 34 Comp. Gen. 418 (B-121982) (1955) permitting a substantial amount of flexibility in determining the amount to be recorded as obligations for contracts involving liabilities that are indefinite in amount."

Therefore, ji20874 response is perfectly acceptable, legal, has precedence and in most Government agencies, the only timely mechanism for providing timely direction to the contractor. Currently, in my agency, the approval of new funds ("certification") is between 1 week and two months. Surely, you do not suggest that the Government reject a contractor's invoice for contract quantities that have been verified to be installed and are in excess of the estimated quantity, until certification of availability of funds and execution of a contract modification? Or risk delaying the contractor during an important government power outage or water delivery that has a limited window, at the risk of have to extend the contract the following year because you haven't certified that funds are available? Where is our responsibility for acting timely and diligently pursuing our contractual commitments?

Respectfully,

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Guest Vern Edwards

mtbyme76:

You have posted to a thread that died in mid-February, more than four months ago. I can't remember what it was about, and I don't have the time to go back and refresh my memory. So I must decline to read and respond to your post.

Best regards.

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I've had to clean up contracts after KO's and sloppy ACO's that issued oral or written change orders then left or failed to follow up or lost control of the situation. All I will say to such nonsensical practice is that it is PPP. Period.

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The thread actually died a year and four months ago, but I like the topic so I'll bite.

mtbyme76,

Assume that a contracting officer issues the type of change described in FAR 52.243-4 and the change will increase the cost of performance. Has the contracting officer created an obligation?

You don't have to write everything you're thinking, just ponder the question and answer yes or no.

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Good. Does your agency financial management regulation require that obligations be recorded within a certain amount of time of their creation? For example, DoD has a Ten-Day Rule (Volume 3, Chapter 8, 080301, of the DoD FMR):

"Ten-Day Rule. Obligations shall be recorded in the official accounting records at the time a legal obligation is incurred, or as close to the time of incurrence as is feasible. In no instance shall obligations be recorded any later than 10 calendar days following the day that an obligation is incurred (to include obligations incurred when invoices are overpaid or duplicate payments are made). Every effort shall be made to record an obligation in the month incurred. Notwithstanding the 10-day rule, obligations of $100,000 or more--per fund citation or accounting line on the obligation document--shall be recorded and included in the official accounting records in the same month in which the obligation is incurred. If an obligation is not recorded within the specified timeframe, the guidance in section 0813 shall be followed."

Also, if you anticipate needing more funds during performance for changes, why doesn't your agency commit funds? You wouldn't have to wait for certification--it would have already happened.
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My agency procedures call for securing a PR prior to issuance of a change. However, my point is that the funds obligated for the original contract are properly used for changes within scope and to fund variations permitted by the VEQ clause. No further funding certification is required at the time of the obligation. Unfortunately, our government procedures often get in the way of correctly administering the contract. If fund certification wasn't so bogged down by bureaucratic procedures (my agency in particular) then it would be good business practice to secure funds for the increase at the time. However, it isn't required. Again, my examples are specific to firm fixed price construction contracts, but the principle is sound. Not giving timely CO direction, ultimately resulting in a delay cost, is not good business practice either and the same as obligating the governments money to pay for the cost of the delay.

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mtbyrne76,

You wrote:

"my point is that the funds obligated for the original contract are properly used for changes within scope and to fund variations permitted by the VEQ clause."

I don't understand. Let's say you award a FFP construction contract for $1 million. You would record an obligation of $1 million, correct?

Now, let's say that during contract performance, the CO issues a change order that increases the cost of performance by $100,000. How are the $1 million in obligated funds "used for the change"? Wouldn't you have to adjust the original obligation upward?

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