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Myth-Information: Obligating the Minimum in IDIQ Contracts
Posted by Don Acquisition,
29 January 2009
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1,985 views
If the preconceived notions that our students are bringing to the classroom is any indication, there's a good deal of myth-information being spread regarding indefinite-delivery indefinite-quantity (IDIQ) contracts. The one belief that I want to focus on today deals with obligating the contract minimum upon award of an IDIQ contract.
This belief usually stems from a fundamental misunderstanding of the difference between creating and obligation and recording an obligation. The difference is explained in Chapter 7 of the GAO Redbook (p. 7-8):
[Bold added].
When a contracting officer awards an IDIQ contract, she has obligated the Government to purchase the contract minimum. She has created an obligation. When that same contracting officer cites a long line of accounting (containing the appropriation citation) and a dollar amount on the award document, she has recorded an obligation (when she distributes the award document to her accounting office, they will record the obligation in the agency's books).
Let's say that the contracting officer awards the IDIQ contract, but does not record the amount of the Government's obligation on the award document. What has happened? An obligation has been created, but has not been recorded. Is there a problem with that? (Yes, go back and read the bolded sentence in the citation that I provided above). The problem is that the contracting officer has caused her agency to violate the ?recording statute,? 31 USCA ? 1501, which sets forth the criteria for recording an obligation as follows:
In the second example I provided, there exists a binding document that meets the criteria of (1)(A) and (B.) (the IDIQ contract), but no obligation would have been recorded. The agency would have underrecorded its obligations. That's bad. Chapter 7 of the GAO Redbook (p. 7-6) states the following regarding under- and overrecording of obligations:
I always urge my students to take a course in Federal Appropriations Law at some time in their career--the sooner the better. Unlike Federal Acquisition Law, where the acquisition team is permitted to "assume if a specific strategy, practice, policy or procedure is in the best interests of the Government and is not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority", there is very little flexibility when it comes to applying the rules Federal Appropriations Law.
QUOTE
You don't have to obligate the minimum when you award an IDIQ contract. You can wait until you issue an order to make obligations.
This belief usually stems from a fundamental misunderstanding of the difference between creating and obligation and recording an obligation. The difference is explained in Chapter 7 of the GAO Redbook (p. 7-8):
QUOTE
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).
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).
[Bold added].
When a contracting officer awards an IDIQ contract, she has obligated the Government to purchase the contract minimum. She has created an obligation. When that same contracting officer cites a long line of accounting (containing the appropriation citation) and a dollar amount on the award document, she has recorded an obligation (when she distributes the award document to her accounting office, they will record the obligation in the agency's books).
Let's say that the contracting officer awards the IDIQ contract, but does not record the amount of the Government's obligation on the award document. What has happened? An obligation has been created, but has not been recorded. Is there a problem with that? (Yes, go back and read the bolded sentence in the citation that I provided above). The problem is that the contracting officer has caused her agency to violate the ?recording statute,? 31 USCA ? 1501, which sets forth the criteria for recording an obligation as follows:
QUOTE
(a) An amount shall be recorded as an obligation of the United States Government only when supported
by documentary evidence of?
(1) a binding agreement between an agency and another person (including an agency) that is?
(A) in writing, in a way and form, and for a purpose authorized by law; and
(B.) executed before the end of the period of availability for obligation of the appropriation or fund used
for specific goods to be delivered, real property to be bought or leased, or work or service to be provided?..
by documentary evidence of?
(1) a binding agreement between an agency and another person (including an agency) that is?
(A) in writing, in a way and form, and for a purpose authorized by law; and
(B.) executed before the end of the period of availability for obligation of the appropriation or fund used
for specific goods to be delivered, real property to be bought or leased, or work or service to be provided?..
In the second example I provided, there exists a binding document that meets the criteria of (1)(A) and (B.) (the IDIQ contract), but no obligation would have been recorded. The agency would have underrecorded its obligations. That's bad. Chapter 7 of the GAO Redbook (p. 7-6) states the following regarding under- and overrecording of obligations:
QUOTE
The overrecording and the underrecording of obligations are equally improper. Both practices make it impossible
to determine the precise status of the appropriation and can lead to other adverse consequences. Overrecording
(recording as obligations items that are not) is usually done to inflate obligated balances and reduce unobligated balances
of appropriations expiring at the end of a fiscal year. Underrecording (failing to record legitimate obligations)
may result in violating the Antideficiency Act. 31 U.S.C. ? 1341.
to determine the precise status of the appropriation and can lead to other adverse consequences. Overrecording
(recording as obligations items that are not) is usually done to inflate obligated balances and reduce unobligated balances
of appropriations expiring at the end of a fiscal year. Underrecording (failing to record legitimate obligations)
may result in violating the Antideficiency Act. 31 U.S.C. ? 1341.
I always urge my students to take a course in Federal Appropriations Law at some time in their career--the sooner the better. Unlike Federal Acquisition Law, where the acquisition team is permitted to "assume if a specific strategy, practice, policy or procedure is in the best interests of the Government and is not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority", there is very little flexibility when it comes to applying the rules Federal Appropriations Law.
The statement the author debunked ("You don't have to obligate the minimum when you award an IDIQ contract. You can wait until you issue an order to make obligations.") is incorrect except in the very limited circumstance in which the minimum order is issued concurrently with the award of the basic contract. In the situation where 1) the initial order will meet or exceed the contract's guaranteed minimum, and 2) the initial order will be issued concurrently with the basic award, I do not believe there is any violation of the "recording statute."
Chapter 7 of the GAO Redbook (p 7-17) states "In a variable quantity contract (requirements or indefinite-quantity), any required minimum purchase must be obligated when the contract is executed..." That requirement is fulfilled by the concurrent issuance of the first order meeting the minimum; note that the GAO does not explicitly state that the minimum must be obligated to the contract, only that it must be obligated when the contract is executed. Presumably, if the GAO intended to make the former statement, it would have.
Also reference Federal Electric Corporation, ASBCA 11726, 68-1 BCA 6834, and Federal Electric Corporation v. United States, 486 F.2d 1377 (1973). There, the Air Force mailed an official acceptance of the contractor's proposal and issued the first delivery order for the minimum quantity on the same day. The ASBCA ruled that the contract was enforceable, having come in to effect when the minimum order was placed. From Formation of Government Contracts, 3rd ed, pages 1239-1240, "...the Court of Claims upheld the board decision but stated that the contractor was bound to the contract because the minimum quantity had been ordered at the same time the parties entered into the contract." (bold added)
The alternative is silly - obligate the minimum to the award, issue the first order meeting the minimum five minutes later, then deobligate the award five minutes after that. I can't imagine that ten minute obligation serves any legitimate purpose. I agree with the author, however, that unless an order sufficient to meet the contract's minimum is issued concurrently with the award, the minimum must be obligated to the contract. There is no acceptable alterrnative.