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deobligation of obligated funds not yet expended

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What is the proper FAR authority to support the deobligation of unexpended obligated funds that are about to expire? I see a mod from last year and it has the changes clause FAR 52.243-1 and I disagree with that authority. I was leaning toward FAR 43.103(a).

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Guest carl r culham

To clarify is the contract being closed out or will contract performance continue?

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Performance will continue, there are FY04 funds which expire on 30 Sep 2009.

Assume this is a Cost Plus contract and you are waiting for final indirect rate adjustment invoices?

Just went through this with a vendor and after explaining multiple times that when they eventually get their actuals, they will be paid with current year funds but these funds are good to no one come 1 Oct. Took about 3 times to explain it to the folks but they eventually understood.

Another joy of the DCAA backlog - vendors being so far behind in getting the final rates that the funds have cancelled.

If not a Cost Plus contract or cost-reimbursement CLIN, then just closing out a particular contract year - not sure what the right ctation is though

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Performance will continue, there are FY04 funds which expire on 30 Sep 2009.

I recently processed some de-obs to active FFP service contracts. When originally asked to do so my first train of thought was:

"I can't do that, the funds are obligated for this service. The contract says this money is there for the entire year of service and we cant take it off before then. You don't de-obligate money because the customer wants to free it up during end of year to use it somewhere else"

My suspiscions were never addressed because I was told to do them anyway. The reasoning was that the money being de-obligated was against CLINs for an "Emergency" or for a portion of the contract that was funded but not going to be used. The customer said they weren't going to use the funds and they needed them back.

We used 52.212-4 ( c ) for the authority and put a release of claims statement in the extended description of the modification. Contractors signed and returned them and every one was happy. I'm still not sure if what happened was entirely legit.

Anyone have any thoughts on this situation?

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Consman,

If the modification deleted work (i.e., the Emergency Work), reduced the contract price, and deobligated funds, then I do not see a problem. However, if the modification merely reduced the amount shown on the contract as being obligated, no work was deleted, and the price stayed the same, then I see a problem. Which was it?

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Consman,

If the modification deleted work (i.e., the Emergency Work), reduced the contract price, and deobligated funds, then I do not see a problem. However, if the modification merely reduced the amount shown on the contract as being obligated, no work was deleted, and the price stayed the same, then I see a problem. Which was it?

The work was on a CLIN of its own, which was zeroed out. The CLIN remained in the contract, however as a result of the modification there is no longer any funding on it. The total cost of the contract did decrease for the amount de-obligated. Would it have been better to do a partial T4C for the CLINs that weren't going to be used?

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The work was on a CLIN of its own, which was zeroed out. The CLIN remained in the contract, however as a result of the modification there is no longer any funding on it. The total cost of the contract did decrease for the amount de-obligated. Would it have been better to do a partial T4C for the CLINs that weren't going to be used?

I assume, then, that the contract no longer requires the contractor to perform, or the Government to pay for, the work described in the CLIN. I guess the CLIN stayed in the contract in case you want to order the performance of emergency work at a later date, at which time you will provide funding.

I don't see a problem with the modification from a fiscal law perspective. However, I wonder about the original obligation for the emergency work.

At the time the contract was entered into, did the contract specify any emergency work that the contractor was required to perform? Or, was the emergency work to be defined at a later date, as it materialized?

Regarding your question about a partial T4C, I don't quite understand. Would a partial T4C have been better in what way?

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I assume, then, that the contract no longer requires the contractor to perform, or the Government to pay for, the work described in the CLIN. I guess the CLIN stayed in the contract in case you want to order the performance of emergency work at a later date, at which time you will provide funding.

I don't see a problem with the modification from a fiscal law perspective. However, I wonder about the original obligation for the emergency work.

At the time the contract was entered into, did the contract specify any emergency work that the contractor was required to perform? Or, was the emergency work to be defined at a later date, as it materialized?

Regarding your question about a partial T4C, I don't quite understand. Would a partial T4C have been better in what way?

No, the CLIN for emergency work wasn't defined. It was money set aside in case something happened. If no emergency ever occured the contractor wasn't under any obligation for that CLIN.

I thought a T4C might have been a better vehicle for de-obligating the emergency CLINs. Our customers did say they no longer required the work b/c of the end of fiscal year. However after reading your reply it makes more sense to me to leave the CLIN in, just in case.

Thanks for answering my questions on this!

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No, the CLIN for emergency work wasn't defined. It was money set aside in case something happened. If no emergency ever occured the contractor wasn't under any obligation for that CLIN.

I thought a T4C might have been a better vehicle for de-obligating the emergency CLINs. Our customers did say they no longer required the work b/c of the end of fiscal year. However after reading your reply it makes more sense to me to leave the CLIN in, just in case.

Thanks for answering my questions on this!

Consman,

One last comment. If, at contract award, the contractor was not required to perform any work under the CLIN (and likewise the Government was not liable for payment), then an obligation was not created. If Government's liability was contingent on some future event, which in this case was the materialization of an emergency requirement, then you have what is called a contingent liability. Contingent liabilities are not obligations and may not be recorded as such. See pp. 7-55 to 7-57 of the GAO Red Book for a good discussion on contingent liabilities. When a contracting officer records an obligation to cover the amount of a contingent liability, he/she has not created an obligation for that amount--he/she has just overrecorded the amount of the Government's obligation. This violates the Recording Statute (31 USCA ? 1501), which requires that the amount of the obligation recorded equal the amount of the obligation created. In your case, it sounds like the amount of the Government's obligation was overrecorded at contract award and your modification made things right. For a discussion on the difference between recording an obligation and creating an obligation, the GAO Red Book states the following at p. 7-8:

It is important to emphasize the relationship between the existence of an obligation and the act of recording. Recording evidences the obligation but does not create it. If a given transaction is not sufficient to constitute a valid obligation, recording it will not make it one. E.g., B-197274, Feb. 16, 1982 (?reservation and notification? letter held not to constitute an obligation, act of recording notwithstanding, where letter did not impose legal liability on government and subsequent formation of contract was within agency?s control). Conversely, failing to record a valid obligation in no way diminishes its validity or affects the fiscal year to which it is properly chargeable. E.g., B-226782, Oct. 20, 1987 (letter of intent, executed in fiscal year 1985 and found to constitute a contract, obligated fiscal year 1985 funds, notwithstanding agency?s failure to treat it as an obligation). See also 63 Comp. Gen. 525 (1984); 38 Comp. Gen. 81, 82?83 (1958).

Not everyone understands this and, as a result, overrecording of obligations is fairly common. I've seen it and heard about it mostly in repair contracts that contain over and above work clauses. Some agencies will obligate funds to cover over and above work when the contract is awarded--before any over and above work has been identified or over and above work orders issued. I also suspect that it is common in some construction contracts because on several occassions I've explained the rules about recording obligations to students engaged in construction contracting and was asked "if that's true, then how do we fund contingencies?"

Probably more than you wanted.

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Deleted - pulled the trigger too soon...

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Consman,

One last comment. If, at contract award, the contractor was not required to perform any work under the CLIN (and likewise the Government was not liable for payment), then an obligation was not created. If Government's liability was contingent on some future event, which in this case was the materialization of an emergency requirement, then you have what is called a contingent liability. Contingent liabilities are not obligations and may not be recorded as such. See pp. 7-55 to 7-57 of the GAO Red Book for a good discussion on contingent liabilities. When a contracting officer records an obligation to cover the amount of a contingent liability, he/she has not created an obligation for that amount--he/she has just overrecorded the amount of the Government's obligation. This violates the Recording Statute (31 USCA ? 1501), which requires that the amount of the obligation recorded equal the amount of the obligation created. In your case, it sounds like the amount of the Government's obligation was overrecorded at contract award and your modification made things right. For a discussion on the difference between recording an obligation and creating an obligation, the GAO Red Book states the following at p. 7-8:

Not everyone understands this and, as a result, overrecording of obligations is fairly common. I've seen it and heard about it mostly in repair contracts that contain over and above work clauses. Some agencies will obligate funds to cover over and above work when the contract is awarded--before any over and above work has been identified or over and above work orders issued. I also suspect that it is common in some construction contracts because on several occassions I've explained the rules about recording obligations to students engaged in construction contracting and was asked "if that's true, then how do we fund contingencies?"

Probably more than you wanted.

Is this contingency no longer necessary?

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Consman,

One last comment. If, at contract award, the contractor was not required to perform any work under the CLIN (and likewise the Government was not liable for payment), then an obligation was not created. If Government's liability was contingent on some future event, which in this case was the materialization of an emergency requirement, then you have what is called a contingent liability. Contingent liabilities are not obligations and may not be recorded as such. See pp. 7-55 to 7-57 of the GAO Red Book for a good discussion on contingent liabilities. When a contracting officer records an obligation to cover the amount of a contingent liability, he/she has not created an obligation for that amount--he/she has just overrecorded the amount of the Government's obligation. This violates the Recording Statute (31 USCA ? 1501), which requires that the amount of the obligation recorded equal the amount of the obligation created. In your case, it sounds like the amount of the Government's obligation was overrecorded at contract award and your modification made things right. For a discussion on the difference between recording an obligation and creating an obligation, the GAO Red Book states the following at p. 7-8:

Thanks for that explanation Don. My old agency, like many others, were recording the wrong amount then for obligations. I also never saw the coverage in the Red Book.

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Don,

There is a difference between a contingent liability, as discussed in the red book, and contingencies which may be allowable. FAR 31.205-7 ©(1) allows for the inclusion of contingencies in estimating future costs if those cost 1) arise from known and exisiting conditions and 2) the effects are forseeable and can be estimated with reasonable limits of accuracy. Escalation on multi-year efforts is a contingency. Scrap rates on production is a contingency. Most construction estimates include contingency for scrap and rework. If the estimated amount of contingency meets the FAR requirements, it should be included in the negotiated cost/price and funding obligated to cover the negotiated contract value.

FAR 31.205-7©(2) excludes contingencies that arise from unknown conditions or known conditions where the effects can not be measured precisely enough for equitable results to the contractor and the government.

Under example given, I agree that undefined emergencies probably don't meet the critieria for inclusion in the contract price and should not have been funded, but I've had the arguement with too many government folks that assume all contingency is unallowable to not provide clarification.

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carol,

Yes, I know. One has to do with obligations and the other has to do with cost estimating What my students were calling contingencies were more like the emergency work that Consman described--work that the contractor wasn't required to do unless some future event occurred. They weren't using the word in the context of cost allowability.

I also feel your pain regarding allowable v. unallowable contingencies. Government folks seem pre-programmed to disallow contingencies. James Nagle wrote a good article on the subject in the March 2006 Nash & Cibinic Report titled "CONTINGENCY COSTS: Why All The Confusion?" (20 NO. 3 Nash & Cibinic Rep. ? 12). It opens with the following:

In Fraser Construction Co. v. U.S., 384 F.3d 1354 (Fed. Cir. 2004), the U.S. Court of Appeals for the Federal Circuit concluded that an extremely rapid flow of water could be expected to occur with a 20% frequency, or every five years, over the period of June, July, and August. As a result, the court affirmed the Court of Federal Claims, 57 Fed. Cl. 56 (2002), which concluded that an event with such a likelihood of occurrence is certainly one that the dredging contractor should be charged with ?foreseeing and protecting against.? One such way for the contractor to protect itself is to include the costs as a contingency. So far so good. But when I discussed the Fraser case with a group of Government contracting personnel earlier this year, I asked them how many would agree to that cost in any negotiations. Out of a couple of 100 contracting personnel, not a single one would have agreed to that. All of them would have tossed it as impermissible.

Nor is that group alone. A few years ago, I was an expert witness in a criminal case in which the Government had just indicted the contractor for including contingency costs in a services contract. The assistant U.S. attorney and the Contracting Officer were both laboring under the opinion that contingency costs, of whatever type, were illegal. Fortunately, I was able to explain the regulation that specifically allowed such costs.

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