Federal Acquisition Key Issues and Guidance

CHAPTER 1

Funding: The Availability of Appropriations and the Bona Fide Needs Rule

(FAR 32.7; Government Accountability Office, Principles of Federal Appropriations Law, Volumes I and II)

The first phase of the federal acquisition process is known as the acquisition planning phase. Understanding the rules that apply to federal appropriations is an important part of the planning phase—one that is too often neglected. Acquisition audit reports have identified many violations of the rules that pertain to federal appropriations. The audit reports indicate that some federal agencies do not adhere to the limitations on purpose, amount, and time. For example, an acquisition organization violated the purpose limitation by using a contract for computers and accessories to purchase army Humvees. Another organization violated the time and amount limitation by awarding a contract to purchase equipment for use in fiscal year 2005 with expired fiscal year 2004 funds.

It is essential, then, for every acquisition professional to understand that appropriations for federal agencies are made for specific purposes during specified fiscal years and that the funds may be obligated and expended only within the amounts appropriated by Congress. They must also understand that appropriated funds may be obligated only to meet a legitimate—or bona fide—need in the fiscal year(s) for which appropriation was made.

THE AVAILABILITY OF APPROPRIATIONS

The fiscal year for federal agencies begins on October 1 and ends on September 30 of the following year. Funds are provided to federal agencies through annual appropriations acts passed by Congress and approved by the president of the United States.

Appropriations acts make funds available to federal agencies for obligations. The funds are classified as annual, multiple-year (or multiyear), and no-year appropriations. Annual appropriations are available for obligation for one year; multiple-year appropriations are available for obligation for a certain period of time beyond one fiscal year. No-year appropriations are not limited to any fiscal year and are available for obligation for an indefinite period. The appropriations act for each agency identifies the function, amount, and purpose of the funding and the time frame for its use. Most agencies are allotted funding for functions such as operations and maintenance, procurement, research and development, and other functions within the agency.

These appropriations acts (also called appropriations bills or appropriations legislation) are supposed to be enacted by September 30 of each year so that agencies can be fully operational by October 1. Congress has not been able to pass the necessary appropriations for most civilian agencies in a timely manner for quite some time now. When appropriations acts are not passed by October 1, Congress passes a piece of legislation called a continuing resolution, which provides temporary budget authority so that agencies can continue operating until the appropriations are approved. A continuing resolution, which must be signed by the president, makes funds available until the resolution expires or annual appropriations acts are passed and enacted. During the continuing resolution period, funds are provided for one or two months at a time and at the same funding level as the previous year.

The 12 appropriations acts for fiscal year 2009 passed by Congress and signed by the president are listed in Exhibit 1-1. Federal departmental and nondepartmental agencies are listed under the 2009 appropriations acts that apply to them.

LIMITATIONS ON APPROPRIATED FUNDS

Congress retains full control over appropriated funds by imposing three limitations that are related to purpose, time, and amount. These limitations restrict the amount of appropriated funds a federal agency can spend within a specified period of time and ensure that funds are spent only for the intended purpose. Funds for each fiscal year must be legally available for obligation or expenditure before an agency may purchase supplies or services. Legally available means that all three limitations—on purpose, time, and amount—must be satisfied. An obligation or expenditure for any given item is not legal if all three are not satisfied. Of the three, the purpose and time limitations are most frequently violated by acquisition organizations.

The Purpose Limitation

The statute for the purpose element (at 31 USC 1301(a)) reads:

The statute clearly indicates that public funds may be used only for the purpose or purposes for which they were appropriated. The purpose language in an appropriations act is usually clear so that the agency can easily determine the purpose for which the funds are to be used. Nonetheless, sometimes the appropriation language is not clear or is too general to determine the purpose of the appropriation. In a situation like this, it is necessary for the agency to review both the legislation that authorized the program and the appropriations act that provided budget authority for the program to determine the purpose for which the funds may be used.

When an agency deliberately obligates funds from the wrong appropriation with the intent to later use the right appropriation, it violates the purpose statute. It is also a violation if an agency transfers funds from one program account to another without approval from Congress. (It should be noted that getting congressional approval to transfer funds is a lengthy process that may not be successful.)

The Time Limitation

Time is the second limitation with which agencies must comply. Most appropriated funds are available for a limited time, often called the period of availability, and they must be obligated within the period specified in the appropriations act, or they will expire. Any remaining balance is considered to be expired funds, unless it was obligated before the end of the period of availability. For example, if funds were appropriated for a one-year period, the agency must obligate the funds for the supplies or services within that one-year period of availability. The obligated funds are available beyond the one-year period so that payments can be made for expenditures made within that one-year period.

By placing time limits on the availability of appropriated funds, Congress maintains control and gives itself the right to review federal agencies’ funding activities. The right of Congress to limit the expenditure and obligation of federal appropriations to specific time periods is supported by the statute at 31 USC 1502(a), which reads:

This statute applies to fixed-term appropriations that are available only for payment of expenses “properly incurred” during the appropriation’s period of availability and to complete contracts “properly made” during that period. Thus, if an agency has a genuine need for certain supplies or services but does not obligate the funds before the end of the appropriation’s period of availability, the funds are no longer available to fill that need.

The limitation on the use of appropriated funds for particular times and objects goes back to an 1870 decision by attorney general Amos T. Akerman, (13 Op. Att’y Gen. 288, 292), who wrote:

The Amount Limitation

The third limitation agencies must respect is the amount limitation. An agency may not overobligate or overspend its appropriation, or it will be in violation of the Antideficiency Act (31 USC 1341). The Antideficiency Act prohibits government employees from making payments or committing to make payments in the future for the acquisition of supplies and services unless there is a sufficient amount of appropriated funds in the agency’s budget to cover the costs in full.

Depending on the severity of the violation, employees who violate the Antideficiency Act may be suspended from work without pay, removed from office, fined not more than $5,000, imprisoned for not more than two years, or both fined and imprisoned.

Of the three limitation elements, only the amount limitation is subject to the Antideficiency Act. Employees of the federal government, whether the executive, judicial, or legislative branch, would be in violation of the Antideficiency Act if they obligated funds or made payment for supplies or services in excess of funds available in their agency’s budget. For example, a violation occurred when an employee made a $200,000 payment on an invoice from the agency’s operation and maintenance (O&M) funds but only $198,000 was available.

The Antideficiency Act is applicable not only to employees of the executive, judicial, and legislative branches but also to wholly owned government corporations that receive appropriated funds and use them to operate.

THE BONA FIDE NEEDS RULE

The bona fide needs rule is one of the fundamental principles of appropriations law. It states that a fiscal year appropriation may be obligated only to meet a legitimate or bona fide need arising in, or continuing to exist in, the fiscal year for which the appropriation was made. In other words, funds may be obligated only to meet a legitimate need, and obligations must be made during the period of availability so that expenses can be charged to that period. The bona fide needs rule applies to the obligation of funds from annual and multiyear appropriations but does not apply to no-year appropriations.

The bona fide needs rule has a statutory origin and is codified at 31 USC 1502(a). What constitutes a bona fide need depends on the facts and circumstances surrounding each acquisition. However, for obligation purposes, there must be a legitimate need for the supplies or services during the period the funds are available.

The Applicability of the Bona Fide Needs Rule to Annual Appropriations

Agencies are authorized to obligate or expend their annual appropriations only for bona fide needs in the fiscal year specified in the appropriations acts. For example, the appropriation for a certain agency’s O&M activities is available for a one-year period. To obligate these funds for supplies or services, the agency must have a bona fide need for the supplies or services during that one-year period. If the funds are obligated within the one-year period, they will remain available for new obligations or payments of invoices for all supplies or services acquired during that period.

The Applicability of the Bona Fide Needs Rule to Multiyear Appropriations

Based on past Government Accountability Office (GAO) decisions, the bona fide needs rule applies to multiple-year appropriations (Comp. Gen. B-232024, Jan. 4, 1989; Comp. Gen. B-235678, July 30, 1990). Multiyear appropriations may be used for bona fide needs arising at any time during the period the funds are available. Although the funds can be used to acquire supplies or services at any time during the period of availability, the bona fide needs rule for the last year of the appropriation applies in the same way as the bona fide needs rule for annual appropriations. For example, if an agency obligates funds from its three-year appropriations in the last month of the third year, it must ensure that the obligation satisfies a bona fide need for the third year and not the following year.

Continuing Needs under Multiyear Appropriations

A need that arises in one fiscal year and continues to exist in the following year may be a bona fide need for both fiscal years. If the agency does not obligate the funds in the first year even though the need exists at the time, and the need extends into the next fiscal year, it is chargeable to the second year’s funds, not the first year’s (B-197274, September 23, 1983). For example, if the boiler in a high-rise office building must be repaired to operate more efficiently, but it is not repaired until the second year funds are available, the obligation is properly chargeable to the second-year funding.

The Applicability of the Bona Fide Needs Rule to No-Year Appropriations

No-year funds have no fiscal year limitations and are available until expended. In 1965, GAO determined that the bona fide needs rule did not apply to no-year appropriations (43 Comp. Gen. 657 and 661, 1964). Federal agencies have an advantage under no-year appropriations because they have the flexibility to use their appropriations when they need the funds most. Congress, however, is at a disadvantage under no-year appropriations because it has no control over the funds from year to year.

Even though GAO determined that the bona fide needs rule does not apply to no-year appropriations, care should still be taken when obligating and expending taxpayer dollars.

The Applicability of the Bona Fide Needs Rule to Supply Contracts

A 1901 comptroller general decision (8 Comp. Gen. 346 and 348) reads:

Based on this decision, an agency would be in violation of the bona fide needs rule if it obligated funds for supplies at the end of a fiscal year, but it did not need those supplies until the next fiscal year.

Consumable supplies ordered through supply contracts must fill a bona fide need, whether they are to be used immediately or gradually over a period of time. In a 1921 decision, the comptroller general made a distinction between consumable supplies used gradually over time and those that can be used immediately (1 Comp. Gen. 115). In this case, an agency placed an order for gasoline three days before the end of the fiscal year. The gasoline was to be delivered in monthly installments in fiscal year 1922. The comptroller general determined that because the contract for the gasoline purchase was awarded near the end of the fiscal year, the gasoline, as a consumable supply item, could not have been purchased to meet a need for fiscal 1921. Delivery would have been impossible before the start of the new fiscal year.

Based on this decision, agencies must obligate funds that are current and available in the fiscal year in which the consumable supplies are to be used in order to fulfill the bona fide needs rule. On occasion, agencies will order consumable supplies in one fiscal year and receive them in the next fiscal year. For this to be legal, the order must represent a legitimate bona fide need in the year it was ordered, and the delayed delivery must be beyond the agency’s control.

Agencies may order supplies in one fiscal year even if they will not be used until the next fiscal year, but only for the purpose of maintaining a certain level of necessary supplies. Agencies must ensure that they are not stockpiling supplies that exceed their normal supply level.

The Applicability of the Bona Fide Needs Rule to Service Contracts

As a general rule, service contracts, like supply contracts, must address a bona fide need for the fiscal year in which the services are provided (B-277165, January 10, 2000). Service contracts can be severable or nonseverable. The general rule mandating that service contracts fulfill a bona fide need for the fiscal year in which the services are provided does not apply to nonseverable service contracts.

Severable Service Contracts

Severable service contracts can be separated into components and can meet separate needs of the government. To determine whether a service contract is severable or nonseverable, one must analyze the statement of work carefully. The type of contract may sometimes help determine whether a service contract is severable or nonseverable, but it should not be used as the only determining factor. Questions that may be helpful in determining whether a service contract is severable include:

•  What kind of service is being provided?

•  What is the nature of the work?

•  Is the objective or goal expressed in definitive terms?

•  Are there options in the contract?

•  Does the contract have incremental elements of performance (e.g., a contract with tasks divided into components such as research, development, testing, and evaluation)?

•  Does each incremental element result in a benefit?

•  Is the work based on tasks or time?

•  When will the work be completed?

Janitorial and lawn maintenance service contracts for recurring and continuing services are examples of severable contracts. These services are time based, and the government will receive some value on a daily basis. Contracts for management services and clerical services also provide recurring services that often extend into the next fiscal year. These are also considered to be severable. The portion of the contract that extends into the next fiscal year is chargeable to the funds that were obligated in the year the funds were available.

In general, severable service contracts must fulfill bona fide needs for the fiscal year in which the services are performed. Until recently, severable service contracts could not cross fiscal years, but two new statutes for both civilian (41 USC 2531) and military (10 USC 2401) agencies authorize agencies to enter into service contracts that cross fiscal years. The period of performance may not exceed 12 months.

Nonseverable Service Contracts

A nonseverable service contract produces a single outcome. It may not be divided into components, and it may not meet separate needs in different fiscal years. Nonseverable contracts may not cross fiscal years. Therefore, funds for these types of contracts must be obligated at the time the contract is awarded and must cover the entire period of performance.

An example of a nonseverable service contract is a firm fixed-price contract for a research study that requires a final report of the findings. The research study may not be divided into components, and the government receives nothing of value until it receives the final report. The final report is the single outcome.

Contracts for training courses also are considered to be nonseverable and may be funded in full even if the services extend into the next fiscal year. For example, agencies may fully fund training contracts that cover a two-year period as long as there is a legitimate need. Federal agencies may also obligate funds from prior-year appropriations for training courses that begin shortly after the beginning of the next fiscal year if the scheduling of the courses is beyond their control. This can be done only if the time elapsed between the award of the contract and the performance start date is not excessive (B-238940, February 25, 1991).