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Appropriated Funds & Federal Contracting

Updated: Jan 19

We hear about the Government’s spending sprees as the sprint toward September 30th and the Government’s end of fiscal year (EOFY). I know all about it, intimately. I lived through it for decades, sitting in the office until midnight every September 30th waiting to see if any last-minute money would show up that had to be spent. It was brutal. But there are reasons behind it. And it’s not lack planning but exactly the opposite. It’s pre-positioning for the possibility that we can accomplish more work and projects that aid the warfighter and the public than we planned. But, for agencies, it’s not as simple as having money left to spend. The question is always “Can it be spent?” Not all Government funds are created equal.

The origin and types of funds dictate what, how, and by when funds can be used, the expiration dates for the purposes of obligation of funds (i.e., obligating the use of specific funds source to a contract), and by when funds it must be expended (i.e., paid out to the contract) or returned to the Treasury. There are several possibilities for EOFY funding:

  • Funds are obligated on a contract action (i.e., contract, task order, purchase order).

  • Funds are consolidated and spent for the purchase of products or services for the official Government use of an agency (e.g., new laptops, office supplies, copy machines, office furniture).

  • Funds are sent back to the agency headquarters budget office and are subject to reprogramming where they were originally intended for one purpose but not authorized to be used for a different purpose (as was the case with the southern border wall construction during the last administration).

  • Funds are returned to the Treasury unused either because they were not obligated on a contract or they were not paid out as part of the purpose of products or completion of services (i.e., orders were cancelled, services completed early, etc.).

What are Appropriated Funds? The most common type of funding used on Federal contracts. The process of allocating these funds involves Congress passing an appropriations bill, which outlines the authorized amount of money for each Government department or agency. The allocation is usually for a specific FY, and the funds are only to be used for the intended purpose.

How are Appropriated Funds Categorized? Based on their nature and purpose. The primary general categories are:

  • Annual Appropriations (aka “One-Year Money”): One-year money in federal contracting refers to funds that are allocated for specific projects or programs within a single fiscal year. It means that the funding is available for obligation and expenditure only within that particular year. If the funds are not fully utilized during the fiscal year, they generally expire and cannot be carried over to the next year.

  • Multi-Year Appropriations (aka “Multi-Year Money”): These funds may be allocated for more than one fiscal year, usually with limitations and subject to availability. Agencies can carry these funds over from one fiscal year to the next. This provides more flexibility for projects and contracts that may require longer timelines for completion.

It is essential to understand that types of appropriated funds are not interchangeable. Using one type of the purposes of the other violates fiscal law unless funds are re-programmed for a different use through a formal budgetary process.

What is the Bona Fide Need Rule? Use of appropriated funds is subject to the Bona Fide Need Rule, one of three major fiscal law provisions (the Anti-Deficiency Act and the Purpose Statute (or “Misappropriation Action”) being the others). U.S. Code, Title 31, Section 1502 states,

“(a) The balance of an appropriation or fund limited for obligation to a definite period is available only for payment of expenses properly incurred during the period of availability, or to complete contracts properly made within that period of availability and obligated consistent with section 1501 of this title. However, the appropriation or fund is not available for expenditure for a period beyond the period otherwise authorized by law.

(b) A provision of law requiring that the balance of an appropriation or fund be returned to the general fund of the Treasury at the end of a definite period does not affect the status of lawsuits or rights of action involving the right to an amount payable from the balance. (Pub. L. 97–258, Sept. 13, 1982, 96 Stat. 928.)"

Examples of exceptions to the Bona Fide Need Rule:

Services: Generally, services are a bona fide need of the fiscal year in which the services are performed. Thus, service contracts would not seem to be permitted to cover a period which involves two different fiscal years. However, two important exceptions exist to this general rule:

  • Nonseverable services exception: If the services produce a single or unified outcome, product, or report, the services are considered to be nonseverable, and the Government may fund the entire effort with budget available for obligation at the time the contract is awarded - even if the contract execution crosses fiscal years. A nonseverable contract is essentially a single undertaking that cannot feasibly be subdivided (Comp. Gen. Decision B-259274, 22 May 1996). The basic concept is that the government does not receive value from the service rendered until that service is completed.

  • Severable services contract exception: The FY98 Defense Authorization Act amended Title 10 of the U.S. Code (Section 2410a) to permit authorized DoD agencies to obligate funds available at the time of contract award to finance a severable service contract with a period of performance not to exceed 12 months at any point during the fiscal year. For example, a DoD agency may obligate FY2023 funds for a 12-month severable service contract that begins anytime during FY2023 and continues into FY2024. This provision of the statute provides greater flexibility to DoD agencies and allows for a better distribution across the year for the workload of Contracting Officers. However, a DoD Service or Defense Agency has the discretion to limit application of this exception and require subordinate activities to budget for and execute this type contract on a strictly fiscal year basis or a period less than the 12 months. This severable services contract exception only applies to contracts funded with single-year appropriations (e.g., Operations & Maintenance (O&M) funds).

Supplies: Generally, bona fide need is determined by when the government actually requires (i.e., will be able to use) the supplies being acquired. As such, supply needs of a future year are considered to be the bona fide need of the year in which they are required, unless an exception applies:

  • Lead-time exception: Agencies are permitted to consider normal lead-time in determining bona fide need for a purchase. For example, if the normal lead-time for an item is 30 days, the government may obligate FY2023 funds for an item required on or before 30 Oct 23.

  • Stock level exception: Agencies may use current year funds to replace stock consumed in the current fiscal year, even though the replacement stock will not be used until the following fiscal year. However, fiscal year-end stockpiling of supplies, in excess of normal usage requirements and regardless of price, is prohibited.

What is the Life Cycle of Appropriated Funds? The life cycle has three phases: the current period, the expired period, and the cancelled period.

Current Period: Also known as “period of availability”, this starts once funds have been appropriated by Congress for execution and released for agency use. During this period, funds are used for new obligations (e.g., new contract actions), adjustments (e.g., contract mods), and expenditures (e.g., contract payments). The length of the current period varies by the fund use.

  • Operations and Maintenance (O&M) has a one-year current period.

  • Research, Development Test and Evaluation (RDT&E) appropriations have a two-year current period.

  • Procurement appropriations have a three-year current period (Procurement for Navy Shipbuilding/Conversion has a five-year current period).

  • Military Construction (MILCON) appropriations have a five-year current period.

Expired Period: Takes place after the current period for each appropriation. Funds are available for obligation adjustments (i.e., modifications, change orders, claims), and expenditures (i.e., payments), but no new obligations. Whereas the current period duration varies per appropriation, the expired period duration is five years and is the same for all appropriations. All outstanding contract claims must be settled before the end of the expired period.

Cancelled Period: Takes place after the five-year expired period for each appropriation. Regardless of appropriation category, funds are unavailable for obligations, obligation adjustments, and expenditures. Payments for legitimate invoices cannot be paid with the appropriated funds in the cancelled period. Only appropriated funds within the same appropriation account that are in the current period can be used (if allowable) or the agency must obtain formally reprogrammed funds (if possible and available). Although funds within the cancelled period can no longer be utilized, the funds are still tracked for accounting and financial execution purposes and typically returned to the Treasury if all outstanding actions have been settled.

How Is the EOFY Impacted? There is a constant accounting and review of all appropriated funds that continues until right up until the clock strikes twelve on the night of every September 30th to ensure funds are fully utilized. Starting at 12:01am on October 1st, no contracts can be signed until the books are balanced and the agency opens them for the next FY. This “ritual dance” has a direct effect on when projects are solicited, and which contracts are awarded. It’s why in August you might hear, “Sorry, there are no funds available,” on a project but by mid-September the solicitation is a “go” and you’re jumping through hoops to get a proposal submitted. It’s a constant review and shuffle between competing schedules, competing priorities, and competing budgetary requirements and constraints. Funding is the one area where the Government must get it right all the time. Federal finance, program, and contracting staff are charged with abiding by appropriation law and—

  • obligating the appropriate funds,

  • on the appropriate contracts,

  • for the appropriate purpose,

  • in the appropriate amount,

  • during the appropriate period for expenditure, and

  • within the appropriate time frame.

And that’s an appropriate place to leave the topic of appropriated funds…until next FY.


Reference: U.S. Government Accountability Office (GAO), Principles of Federal Appropriations Law (aka “The Red Book), 4th and 5th editions.

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