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jdm843

Contract Modification, Bonafide Need, Severable Services - Award year or current year funds?

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I'm an Army 1102 tasked with awarding a modification to a services contract that affects price. I've encountered a bit of a funding dilemma and I'd appreciate anyone's input on this. My interpretation of the circumstances and the pertinent statutes/regs/rules/etc is that if the KO determines this modification is in-scope then the obligation must utilize award year money. Conversely if the KO determines that the mod is out-of-scope, then current year funds may be utilized--but there must also be a J&A documenting why the work isn't newly competed. There are differing opinions. Any thoughts?

CONTRACT DETAILS: The contract is firm fixed price for commercial, "severable" type services for a military customer. It was competitively awarded. The contract's period of performance is one base year (9/2012-9/2013) plus one option year (9/2013-9/2014) in the total amount of ~$10M (incl base + option). The base contract was awarded in Sept 2012, obligated with FY12 O&M funds. The option exercise for the additional year was exercised in Sept 2013, obligated with FY13 O&M funds.

MOD DETAILS: The mod is for new, additional work. Whether this work is in-scope or out-of-scope is still under debate. It's definitely related to the work in the original PWS but I personally I believe it's outside the scope (under the criteria cardinal change rule, material change, etc.). The contractor has proposed ~$200k for the mod. Currently, the funds provided are split 75/25 among FY14 and FY13 funds.

PERTINENT REGS, RULES, ETC.: The following references have been consulted.

  1. FAR Subpart 32.7, Contract Funding - 32.703 provides statues that permits agency heads to fund contracts crossing fiscal years with annual appropriations
  2. DFARS 32.7, Contract Funding - 232.703-3 provides 10 USC 2410a as the applicable statute.
  3. FAR Part 43 Modifications - silent on the topic
  4. DFARS Part 43 Modifications - silent on the topic
  5. FAR Part 6 - 6.001 states CICA requirements apply to mods not within the scope of the original contract
  6. 2013 FISCAL Law Deskbook - Ch. 3, Sect. VII Use of Expired Funds, Paragraph B Contract Modifications Affecting Price:
    • Subparagraph 1(a) "When a contract modification does not represent a new requirement or liability, but instead only modifies the amount of the government’s preexisting liability, then such a price adjustment is a bona fide need of the same year in which funds were obligated for the original contract." - I.E. IN-SCOPE mods mut use award year funds
    • Subparagraph 1(b )(1) “In general, increases to the quantity of items to be delivered on a contract are viewed as outside the scope of most changes clauses. Thus, a modification to increase quantity will amount to a new obligation chargeable to funds current at the time the modification is made.” - I.E. OUT-OF-SCOPE mod can use current year funds but this would require a J&A IAW FAR 6.3
    • Subparagraph 1(b )(5) “Severable Services: A modification providing for increased additional deliverable services must be charged to the fiscal year or years in which the services are rendered… Note: In dicta, GAO has suggested that an increased services modification to a contract awarded for 12 months under 2410a would relate back to the funds initially placed on the contract. See GAO Redbook, Volume I,Appropriations Law, page 5-34 (2008). - I.E. this is a gray area but it appears GAO rules that OUT-OF-SCOPE mods for severable services also require award year funds
  7. GAO Redbook - Volume I, Appropriations Law, Sect 9a (page 5-44) “10 U.S.C. § 2410a authorizes the military departments to use current fiscal year appropriations to finance severable service contracts into the next fiscal year for a total period not to exceed 1 year” - I.E. the Redbook explains the intent behind the DoD Severable Services permission but is silent whether to use award year or current year funds for an in-sope mod.
  8. WIFCON, "Bona Fide Needs Rule" - "…a within-scope price adjustment, which is requested and approved in a subsequent fiscal year [subsequent from the current contract obligation], for example, under the “Changes” clause, will... be charged against the appropriation current at the time the contract was originally executed." - I.E. IN-SCOPE mods mut use award year funds

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Guest Vern Edwards

My interpretation of the circumstances and the pertinent statutes/regs/rules/etc is that if the KO determines this modification is in-scope then the obligation must utilize award year money. Conversely if the KO determines that the mod is out-of-scope, then current year funds may be utilized--but there must also be a J&A documenting why the work isn't newly competed. There are differing opinions. Any thoughts?

If that is the only issue, then in your situation you are correct. An in-scope obligation would be a bona fide need of the year in which the contract was awarded and must use funds appropriated for that year. An out-of-scope obligation would be new work, and would be a need of the year in which the obligation is made. See the GAO Redbook, Vol. I, Ch. 5, pp. 5-33 to 5-37 for a complete discussion, because the rule can be more complicated in situations other than yours.

An out of scope modification would require competition or a J&A, assuming that you are not using simplified acquisition procedures and the acquisition is subject to FAR Part 6.

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At the risk having my own logic torn to shreds in my first post on the forum, I would propose that jdm843's situation is not necessarily so cut and dry as severable services are somewhat unique and the general argument with regard to antecedent liability may not apply, or at least not have the expected impact. There is a reasonable argument that, even if the change is in-scope, it may be properly chargeable to either year.

The Red Book states that severable services are chargeable to the year in which they are occurred except where specific statutory authority exists (i.e. DFARS 232.703-3, 10 USC § 2410a and 41 U.S.C. § 253l). The cited statutory authority states that DOD may enter into a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the contract period does not exceed one year (10 USC § 2410a). Absent the discretionary decision to exercise this authority, severable services of the type described would be chargeable to FY14 for the portion of performance that occurs in FY14.

DFARS 232.703-1 specifically authorizes contracting officers to incrementally fund firm fixed price contracts for severable services that do not exceed one year in length. As a result, one could easily envision a situation where contracting officer, for a single contract or year of performance for severable services, wholly abandons the authority provided in 10 USC § 2410a et al and funds the contract precisely according to the basic principle that severable services are chargeable to the year in which they are occurred. In this situation, I don't believe there would be any question that the modification would be chargeable to the current fiscal year. B-259274 Date: May 22, 1996 specifically held that 10 U.S.C. Sec. 2410a is an exception to the Bona Fide Needs Rule – rather than making the entirety of the period of performance of such a service (i.e. the full 12 months) a Bona Fide Need in the year in which the contract is executed, it allows full funding at the time of award as an exception to this rule.

Although the following is somewhat tangential in applicability as it specifically deals with discretionary increases to cost reimbursement contracts in excess of the limitation of cost, GAO opines in 'Environmental Protection Agency--Request For Clarification of B-195732, June 11, 1980, 59 Comp, Gen. 518' that "...application of a rule designed to permit the use in appropriate circumstances of prior year funds after their period of availability has expired to preclude use of currently available funds for otherwise appropriate ends would serve no useful purpose."

Logically, I do not see a significant difference in the reasoning necessary to conclude that although 10 USC § 2410a permits the use of funds chargeable to the year in which the contract was issued to be used for 12 months crossing fiscal years, it does not preclude the use of currently available funds for otherwise appropriate ends (i.e. performance of severable services, even if modified, in the year in which they are performed).

The bottom line is that, even if the change is in-scope, it may be properly chargeable to either year.

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mwade, I assume your reference to the Redbook is from Vol. I, Chapter 5B, Section 7 on page 5-34?

"In the case of a contract for severable services, a modification providing for increased services must be charged to the fiscal year or years in which the services are rendered, applying the principles discussed in this chapter in section B.5.20 61 Comp. Gen. 184 (1981), aff’d upon reconsideration, B-202222, Aug. 2, 1983; B-224702, Aug. 5, 1987. See also B-235086, Apr. 24, 1991. In 61 Comp. Gen. 184, for example, a contract to provide facilities and staff to operate a project camp was modified in the last month of fiscal year 1980. The modification called for work to be performed in fiscal year 1981. Regardless of whether the contract was viewed as a service contract or a contract to provide facilities, the modification did not meet a bona fide need of fiscal year 1980. The modification amounted to a separate contract and could be charged only to fiscal year 1981 funds, notwithstanding that it purported to modify a contract properly chargeable to fiscal year 1980 funds."

My read is that applies to modifications NOT WITHIN the general scope of the contract (as with the paragraphs that precede that paragraph). IN-SCOPE changes are discussed immediately after that paragraph and in the pages that follow it. One applicable excerpt:

"If the answer to [the antecedent liability] question is yes, then a within-scope price adjustment, which is requested and approved in a subsequent fiscal year, for example, under the "Changes" clause, will—with one important qualification to be noted later—be charged against the appropriation current at the time the contract was originally executed."

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Apologies for leaving that up to interpretation jdm843, I was not referring to that discussion in the Redbook, as it was not applicable to your situation. I was referring to the underlying discussion in B.5 (pp. 5-23 to 5-28). My premise is that the first question you must ask in the case of severable services is not "Is the modification in or out of scope?" but rather "What fiscal year are the underlying services chargeable to?". The answer is that, absent the authority provided by 10 U.S.C. Sec. 2410a, severable services performed in FY14 would always be chargeable to FY14, regardless of when awarded. B-259274, May 22, 1996 affirms this. As I discussed in the prior post- If you had incrementally funded these severable services, obligating FY14 funds for the later 6 months of performance, would you contemplate that the price of a change in these later 6 months would be chargebale to FY13 as a result of antecedent liability?

While a change to a requirement that was a bona fide need in the year in which the contract was awarded would always be chargeable to funds of that fiscal year, severable services are not funded as a bona fide need in that fiscal year, but rather as an exception to that rule

B-259274, May 22, 1996:

"The purpose of 10 U.S.C. Sec. 2410a is to overcome the bona fide needs rule of this Office. By making current fiscal year budget authority available in the next fiscal year when it would otherwise not be available, section 2410a is a statutory exception to the bona fide needs rule. The bona fide needs rule provides that a fiscal year appropriation may be obligated only to meet a legitimate, or bona fide, need arising in the fiscal year for which the appropriation was made. [2] For service contracts, whether an expense was properly incurred or properly made during the period of availability depends upon whether the services are severable or nonseverable. A nonseverable contract is essentially a single undertaking that cannot be feasibly subdivided. B-240264, Feb. 7, 1994. It is considered a bona fide need of the fiscal year in which the agency entered into the contract. Consequently, agencies should record nonseverable service contracts as obligations at the time of award. Service contracts, where the services are continuing and recurring in nature, such as the vehicle maintenance contract here, are severable and are chargeable to the appropriation current at the time services are rendered. See 60 Comp.Gen. 219, 221 (1981). By definition, severable services address needs of the time the services are rendered. 71 Comp. Gen. 428, 430 (1992)."

The thought exercise on the part of GAO at footnote 20 on Redbook Vol. I, Chapter 5B, Section 7 page 5-34 does not logically follow from the case it cites, B-259274, May 22, 1996. I see no compelling reason why a modification service that was not a bona fide need in the prior fiscal year but, rather, fully funded with those funds as an exception to the bona fide needs rule in accordance with 10 U.S.C. Sec. 2410a, should be exclusively chargeable to the prior fiscal year. The final sentence of this footnote is telling: "We found no case law addressing this point, however."

The discussion on the latter half of page 5-36 is indicative of the fact that antecedent liability is deeply linked with the bona fide needs rule. Absent a bona fide need in the year of the appropriation, the exception provided by 10 U.S.C. Sec. 2410a is necessary just to contemplate the use of those funds to cover the change. While I believe the question of funding in-scope changes to non-severable services and supplies is clearly a settled matter, in-scope changes to a severable service made in the second fiscal year of performance might be a question which could resonably be submitted to GAO.

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