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rios0311

3 Questions: Multiyear Contracts and Use of No-Year Funds

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First Question: I've been a little confused for some time about what consitutes a multiyear contract. In general terms, I understand that buying more than one year's requirements without the use of options is considered multiyear contracting. However, how does that apply to multiple-year appropriations or no-year funds? In other words, if I award a contract for severable services and fund it with no-year funds or a multiple-year appropriation (such as two-year funds) with an 18 month period of performance (or even a 24-month POP), does this meet the definition of a multiyear contract and does it require establishing a cancellation ceiling?

I know that the example contract I just described, if awarded with an annual appropriation, would meet the definition of a multiyear contract and thus be subject to the required approvals and the requirement for a cancellation ceiling. But does this apply to contracts funded with no-year appropriations or multiple-year appropriations? Keep in mind that I'm only discussing contracts for severable services.

I ask this question because I've encountered conflicting information. I distincltly recall reading (either in GAO Redbook or the FAR) that an agency can have authority to enter into multiyear contracts by authority granted to it (or perhaps agency policy?) or it can have multiyear contracting authority by the type of appropriation it receives (multiple-year or no-year). Futher, if using the authority provided by the type of appropriation, the agency must obtain the same approvals required by multiyear contracting on the basis of authority granted to the agency.

Second question: There is a statutory exception allowing contracts funded with annual appropriations to cross fiscal years, provided that the total period of performance does not exceed 12 months. This limits our ability to use annual funds remaining on contracts to extend those contracts using the the option to extend services clause, when doing so would result in a total period of performance that exceeds the 12-month statutory limit. But does this restriction apply to contracts funded with no-year funds or multiple-year appropriations? In other words, if I awarded a contract with a one-year period of performance, and funded it with no-year funds or a multiple-year appropriation, assuming that at the end of month 12 I have excess funds on the contract, can I exercise the option to extend services clause and fund the extension with the unused funds? Or do I need to de-obligate the funds and reobligate them for the extension?

I'm not inquiring about scope issues here. I'm interested only in understanding the correct method of using these funds without consideration of scope issues for the moment.

Third Question: Can I exercise an option in August (FY13) that begins next year (October FY14) using this year's (FY13) no-year appropriation? All the research that I've done states that the Bona Fide Needs rule does not apply to no-year funds, so the timing of the obligation does not matter. But I'm getting a lot of push-back on my interpretation from individuals who are in positions to know this better than I do. Have I misinterpreted the Redbook and the numerous decisions I've read? If this is an appropriate use of no-year funds, can anyone provide a link or a citation to a decision or text that would support taking this action?

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Your post is long winded and disorganized. You asked a lot more than three questions. Count the question marks. You take others' time unnecessarily when you don't take your own time to write a succinct, coherent post.

You can get all of the information you need to answer your questions by reading the Redbook, Volume I, Chapter 5, and doing some thinking. It's one thing to research, think, reach a conclusion, and then seek confirmation or correction. It's another thing entirely to lazily "recall" something you read and then engage in stream of consciousness question asking.

We 1102 types must be keenly aware of and eager to hone our communication skills, oral and written. I tried to teach you that. I know you, and I know your educational background, and you have no excuse for a post like that.

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Please, Vern; be frank with me! In all seriousness, that's what I get for posting after a 12 hour work day. I was trying to get all the information in before running down to catch the Metro home. Thanks for the feedback; I'll be more mindful next time. Let me give it another shot and I’ll leave out all the superfluous information.

Question 1: Does the following action result in a multiyear contract and does it require establishing a cancellation ceiling? Awarding a contract for severable services with a period of performance that exceeds 12 months, and funding it with no-year funds.

Question 2: Is it permissible to use an unliquidated (residual) no-year obligation to fund a six-month extension on a contract for severable services when doing so will cause the total period of performance of the contract to exceed 12 months?

Question 3: Is it permissible to exercise an option during the current fiscal year on which performance beings in the following fiscal year, by funding it with a current no-year appropriation?

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Much better.

1. Read Redbook, Vol. I, Ch. 5, Sec. 8. See also FAR 17.103, 17.104( b ) and 17.106-1( c )(1). Check your agency supp.

2. Read Redbook, Vol I, Ch. 5, Sec. 9a and think about the applicability of the bona fide needs rule to no year funds. THINK.

3. Read Redbook, Vol I, Ch. 5, Sec. 2c, first sentence, et seq.

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QUESTION 1: You will want to read GAO appropriations decision (not bid protst decision) no. B-322455, dated Aug. 16, 2013 (only 12 days ago). Yes, a federal executive agency can award a severable services contract for a period of 18 months or 24 months (your question) or even for five years (GAO example), and fund the entire period up-front at time of contract award. This decision is written from an appropriations law perspective, not a contracting practioner's perspective. FAR Subpart 17.1 is the implementation of the statutory authority discussed in the GAO decision. You also need to carefully read the definition of multi-yar contract in FAR 17.103. There, you will discern that a multi-year contract might or might not be fully funded up front -- but if not, then a cencellation payment has to be provided for in the contract. Anyway, just because you can (and the GAO says you can), your agency's budget staff may not understand these principles and might say no.

QUESTION 2: 41 USC 3902 and 3903 provide two different authorities for crossing a fiscal year with severable services -- Section 3902 covers the 12-month rule; Section 3903 covers the 5-year rule. Are you talking about a six-month extension or a six-month option that serves to extend? They're different, you know.

QUESTION 3. from the GAO decision: "Regardless of the contracting vehicle, an agency must have a bona fide need arising in that fiscal year when it incurs an obligation, not a mere need to use up remaining dollars before the end of the fiscal year." However, the application of the bona fide need rule to no-year appropriations is different than for annual or other fixed-term appropriations. Your agency's budget staff should be able to help you understand your flexibilities [i say this hopefully (they "should be able to help") rather than factually (they "will be able to help")]. Maybe you can help persuade them.

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Much better.

1. Read Redbook, Vol. I, Ch. 5, Sec. 8. See also FAR 17.103, 17.104( b ) and 17.106-1( c )(1). Check your agency supp.

2. Read Redbook, Vol I, Ch. 5, Sec. 9a and think about the applicability of the bona fide needs rule to no year funds. THINK.

3. Read Redbook, Vol I, Ch. 5, Sec. 2c, first sentence, et seq.

Vern, thanks for the references. Let me clarify that now I'm working for a small, independent agency that only receives no-year appropriations.

The section of the Redbook to which you referred me for question 1 answered my question. A contract for severable services that buys more than one year's services (without the use of options) is a multiyear contract. A cancellation ceiling is required only if the full amount of the contract is not obligated at time of award.

The section of the Redbook to which you referred me to for question 3 states clearly what I already know: "A no-year appropriation is available for obligation without fiscal year limitation." I've also seen language that states that the bona fide needs rule does not apply to no-year funds and other similar language. However, I'm having difficulty convincing our budget people that my interpretation is correct. That's why I raised the question in the first place. So I was hoping to elicit a response, such as "yes, you are correct", or "no, what the heck is wrong with you". In short, something I could take back to them.

However, the section of the Redbook to which you referred me for question 2 did not provide me with a clear answer to my question. I have contracts funded with no-year funds. Sometimes as the end of a 12-month POP nears there are unused funds remaining on the contract and a need for the services to continue (not simply for the sake of using the funds). I use the option to extend services clause to extend the contract for up to 6 months. What I'd like to know is whether or not I can use the residual funds to fund the extension. I believe this is permissible with no-year funds, but I have not been able to confirm whether or not my understanding is correct.

I've referred to and read this section of the Redbook quite often, but other than this forum, I don't have anywhere to verify whether or not my understanding of what I've read is correct.

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ji20874, thank you for your feedback and for the references. I'll look up USC 3902 and 3903. Regarding the extension, I was referring to a six-month extension. I think our budget people don't understand the principles and for that reason prefer treating our no-year appropriations as annual appropriations. It's really frustrating and makes our job more difficult.

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Rios:

I don't think that 41 USC 3902 and 3903 have any bearing on your problem. First, you are not using annual (fiscal year) appropriations, so 3902 is not applicable. Second, I'm not sure that your contract is, in fact, a multi-year (multiyear) contract. If it is not, then 3903 is not applicable.

The idea behind a multi-year contract is to allow an agency to obligate the government for the requirements of more than one program year even when it does not have funds for all the years. The purpose is to permit the parties to take advantage of economies of scale by allowing the contractor to order needed products (materials, parts) for all years instead for each year in turn. The parties are protected by cancellation (as opposed to termination) terms in case funds for program outyears do not become available.

A multi-year service contract would have a period of performance of more than one year, with (1) performance in the second and further years contingent upon availability of funds and (2) cancellation terms. Does your contract have a period of performance of more than one year, or does it have a one-year period of performance and extension options? If the latter, then it is a multiple year contract, not a multi-year contract. See FAR 17.103.

As to your question number 3:

Sometimes as the end of a 12-month POP nears there are unused funds remaining on the contract and a need for the services to continue (not simply for the sake of using the funds). I use the option to extend services clause to extend the contract for up to 6 months. What I'd like to know is whether or not I can use the residual funds to fund the extension. I believe this is permissible with no-year funds, but I have not been able to confirm whether or not my understanding is correct.

If I understand you correctly, no-year funds have been obligated for current contract performance, but you will not expend them all. Some will be excess ("residual"). You want to deobligate the excess funds and reobligate them on a contract modification exercising an extension option. Right? If so, then I say that you can use the excess funds to pay for the option period. There are two reasons for that conclusion: First, the funds are no-year and, if deobligated, would be available for reobligation. Second, there are no bona fide needs issues with no-year funds.

The severable services (12-month) rule (FAR 32.603-3 and 37.106) comes from 41 USC 3902, which is an exception to the bona fide needs rule for severable services. It applies only when an agency is using annual (fiscal year) appropriations, which is when an agency needs the exception. Your agency is not using annual funds and so does not need the exception. That may be something that your budget office does not understand. While the GAO decision cited by ji20874 is interesting, a better one (more to the point) is Severable Services Contracts, GAO B-317636, Apr. 21, 2009:

The bona fide needs rule is derived from the so-called time statute, 31 U.S.C. sect. 1502(a). B–308010, Apr. 20, 2007. Section 1502(a) provides that-

“an appropriation ... limited for obligation to a definite period is available only for payment of expenses properly incurred during the period of availability.... However, the appropriation ... is not available for expenditure for a period beyond the period otherwise authorized by law.”

Section 1502(a) applies to appropriations limited to a definite period, and no-year funds are not so limited. Thus, neither it, nor the bona fide needs rule derived from it, applies to no-year funds.

Since the bona fide needs rule does not apply to no-year funds, the 12 month rule in 41 USC 3902 does not apply to contracts for severable services funded with no-year appropriations. Thus, it should be clear that you can deoblgate the funds and reobligate them to fund the option period. I cannot think of any reason why that would not be the case, but maybe your budget office knows something that I don't.

The problem is: How are you going to convince your budget office? You have to understand the bases for their concerns and address them. You have to figure out what they have read or heard and what they think that has lead them to conclude that you cannot use the excess funds for the option period. You then must show them that their concerns are, in fact, groundless. The key facts are in your favor are: (1) the no-year funds will remain available for reobligation after deobligation, (2) there are no bona fide needs issues, and (3) the 12 month rule does not apply.

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  • The idea behind a multi-year contract is to allow an agency to obligate the government for the requirements of more than one program year even when it does not have funds for all the years.
  • A multi-year service contract would have a period of performance of more than one year, with (1) performance in the second and further years contingent upon availability of funds and (2) cancellation terms.
  • Does your contract have a period of performance of more than one year, or does it have a one-year period of performance and extension options?
  • If I understand you correctly, no-year funds have been obligated for current contract performance, but you will not expend them all. Some will be excess ("residual"). You want to deobligate the excess funds and reobligate them on a contract modification exercising an extension option. Right? If so, then I say that you can use the excess funds to pay for the option period. There are two reasons for that conclusion: First, the funds are no-year and, if deobligated, would be available for reobligation. Second, there are no bona fide needs issues with no-year funds.
  • Since the bona fide needs rule does not apply to no-year funds, the 12 month rule in 41 USC 3902 does not apply to contracts for severable services funded with no-year appropriations. Thus, it should be clear that you can deoblgate the funds and reobligate them to fund the option period.

Vern, thank you very much for the information you provided. I quoted a few items you discussed that I would like to comment on or inquire further about.

  • The idea behind a multi-year contract is to allow an agency to obligate the government for the requirements of more than one program year even when it does not have funds for all the years.
  • A multi-year service contract would have a period of performance of more than one year, with (1) performance in the second and further years contingent upon availability of funds and (2) cancellation terms.

Before your response I understood that any contract for severable services with a POP that exceeds 12 months is a multiyear contract (buying more than one year's services without the use of options), regardless of whether or not they've been funded fully at time of award. The difference between the two being that a cancellation ceiling must be established if the entire amount of the contract is not funded at the time of award. However, you seem to suggest that only contracts for severable services with a POP that exceeds 12 months AND that are not funded fully at time of award are considered multiyear contracts. Is that what you intended to convey?

  • Does your contract have a period of performance of more than one year, or does it have a one-year period of performance and extension options?

I was only referring to contracts for severable services with periods of performance of more than one year, without the use of extension options. I'm clear on the distinction between multiyear and multiple year contracts.

  • If I understand you correctly, no-year funds have been obligated for current contract performance, but you will not expend them all. Some will be excess ("residual"). You want to deobligate the excess funds and reobligate them on a contract modification exercising an extension option. Right? If so, then I say that you can use the excess funds to pay for the option period. There are two reasons for that conclusion: First, the funds are no-year and, if deobligated, would be available for reobligation. Second, there are no bona fide needs issues with no-year funds.
  • Since the bona fide needs rule does not apply to no-year funds, the 12 month rule in 41 USC 3902 does not apply to contracts for severable services funded with no-year appropriations. Thus, it should be clear that you can deoblgate the funds and reobligate them to fund the option period.

You understood me correctly. However, am I required to deobligate the residual (no-year) funds prior to using them for the extension, or can I just leave them on the contract and execute a modification without additional funds (assuming the existing funds will cover the cost of my continuing need)?

Again, thanks for the lesson!

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Rios:

Gosh, this is getting to be a lot of work for me.

Here is how FAR defines multi-year contract:

“Multi-year contract” means a contract for the purchase of supplies or services for more than 1, but not more than 5, program years. A multi-year contract may provide that performance under the contract during the second and subsequent years of the contract is contingent upon the appropriation of funds, and (if it does so provide) may provide for a cancellation payment to be made to the contractor if appropriations are not made.

Here is how GAO defines it in the Redbook:

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... [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.

Those definitions are essentially the same. If your contract meets one of those definitions, then it is a multi-year (multiyear) contract. According to GAO in the Redbook:

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… 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.

Multi-year contracting as discussed in FAR Subpart 17.1 is for those situations in which an agency has annual funding and wants to enter into a contract for the requirements of more than one program year, e.g., one ship a year for three years. My comments about the purpose of multi-year contracting pertained to those cases. If your contract is for more than one year's requirements and does not use options then you have a multi-year contract.

You said that you want to use the funds for an extension option. In my experience, such options are usually separate contract line items. If that is the case, then you should deobligate the funds from the line item they're on now and reobligate them for the new line item. But are you talking about a 52.217-8 option? Are you just adding time to the current line item? if so, then you should not have to deobligate and reobligate, but you're going to have to document why the new obligation is not accompanied by more money.

Will your extension option result in a contract that is more than five years long?

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You said that you want to use the funds for an extension option. In my experience, such options are usually separate contract line items. If that is the case, then you should deobligate the funds from the line item they're on now and reobligate them for the new line item. But are you talking about a 52.217-8 option? Are you just adding time to the current line item? if so, then you should not have to deobligate and reobligate, but you're going to have to document why the new obligation is not accompanied by more money.

Will your extension option result in a contract that is more than five years long?

Vern, it is a 52.217-8 option for which we are adding time only. It is an extension of time for the same line item. And no; the option will not result in a contract that is more than five years long. However (and I write this with some trepidation), FAR 17.204(e) leads me to believe that exceeding 5 years (through the use of options) might be permissible on an IT contract, but I'll research that before making a definite conclusion.

Thanks for your valuable time. This has helped me a lot!

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