In order to understand why USAID is having the budget woes, which throw the development community into an annual frenzy fest of opinion and blame, it is important to understand how the appropriations work and how the agency is supposed to use those appropriations to effectively manage its procurement AND assistance needs. This article intends to accomplish this purpose from a layman’s point of view, which refrains from quoting the entire GAO Red Book and every legal opinion on how it should be interpreted.
First, Congress makes appropriations of funds, which have various periods of availability. Period of Availability means the time during which funds remain available for obligation as follows:
- “Fixed year” or “Multiple-year” funds have a defined period of availability (e.g., one-year, two- year, etc.)
- “No-year” funds remain available until expended (or rescinded – taken back – by Congress)
- In appropriations acts, unless explicitly stated otherwise, funds are “one-year”
- Once the period of availability has lapsed, the funds are said to “expire” and cannot be used for new obligations
Over a century ago, the Comptroller of the Treasury stated, “An appropriation should not be used for the purchase of an article not necessary for the use of a fiscal year in which ordered merely in order to use up such an appropriation.” 8 Comp. Dec. 346, 348 (1901). The bona fide needs rule is one of the fundamental principles of appropriations law: A fiscal year appropriation may be obligated only to meet a legitimate, or bona fide, need arising in, or in some cases arising prior to but continuing to exist in, the fiscal year for which the appropriation was made.
What is the bona fide needs rule?
The bona fide needs rule is a rule of appropriations law. It mandates that a fiscal year’s appropriations only be obligated to meet a legitimate-or bona fide-need arising in (or sometimes before) the fiscal year for which the appropriation was made. It restricts this year’s appropriated funds from being used to fund next fiscal year’s requirements. Annual funds appropriated for Fiscal Year 2018(FY2018) are to be used to fund a legitimate or genuine FY2018 need … and are not to be used to fund a need the agency won’t genuinely have until FY2019.
What is the applicability of the rule?
The rule applies not only to contracts, but to all federal government activities carried out with appropriated funds, including contract, grant, and cooperative agreement transactions. It is applicable to both annual and multi-year funds. Annual funds are funds appropriated for a specific fiscal year, while multi-year funds are available for obligation for a definite period of time that exceeds one fiscal year.
How does the bona fide need rule apply to services that cross fiscal years?
Basic rule says: It depends upon whether the services are considered “severable” or “non-severable.”
Severable services are services that are continuing and recurring in nature—such as IT support, janitorial services, or security services—where an agency realizes a benefit at the time that services are provided, even if the contract has not been performed to completion. Services are considered severable if they can be separated into components that independently provide value to meet an agency’s needs. Severable services, which are recurring in nature, are bona fide needs at the time the service is completed, and obligations for severable services should be charged to appropriations current at that time. These services must be funded with the annual appropriations or multi-year appropriations of the year in which the services are completed, and the period of performance of such contracts may not exceed the period of availability of appropriated funds used to fund them.
Consequently, an agency using a multiple year appropriation would not violate the bona fide needs rule if it enters into a severable services contract for more than 1 year, as long as the period of contract performance does not exceed the period of availability of the multiple year appropriation.
Non-severable (or “entire”) services represent a single undertaking that cannot be feasibly subdivided. If the services produce a single or unified outcome, product, or report, the services are considered non-severable. An example would be consulting study, conducted over several months, but culminating in the delivery of a final report. For a non-severable service (think “consulting study”), agencies may obligate the funds of this fiscal year to cover the services to be performed under the full contract even that portion of the services that will be performed next year. The entire non-severable service is considered a bona fide need of the fiscal year in which the agency entered into the contract (not when service is delivered). It cannot be incrementally funded, and, must be obligated in full by the appropriation with the period of availability covering the year in which the contract is awarded.
Bona Fide Needs Rule – Statutory Exception – FASA
Federal Acquisition Streamlining Act (FASA) relaxed the rules as follows:
1. For Severable Services Contracts, 31 U.S.C. § 3902 agencies may procure severable services beginning prior to funds’ expiration and extending beyond, so long as performance (excluding option years) is one year or less (i.e. up to 2-year contracts or obligations)
2. Multi-year Contracts Authority, 31 U.S.C. § 3903 states that agencies may procure severable services for more than one, but no more than 5 years IF:
- Agency obligates cost for full term of contract or the first year plus termination costs and then obligates annually or periodically (with multi-year or no year funds) using Cancellation Ceilings (for annual obligations) or Limitation of Funds Clause (for incremental periodic)
- Agency determines need is reasonably firm and continuing over term of the contract, and
- Contract serves the best interests of the Government
The term “multiyear contract” has been used in a variety of situations to describe a variety of contracts touching more than one fiscal year. To prevent confusion, it is important to start by establishing a working definition. A multiyear contract is a contract covering the requirements or needs, of more than one fiscal year and is, in case of services contracts, normally for severable services (think landscaping services, needed annually).
A contract for the known need of the current year, which is an “entire” need (i.e. non-severable), even though performance may extend over several years, is not a multiyear contract. Thus, a contract to create a working Public Financial Management System, which will take 5 years to complete, is not a multiyear contract; a contract to deliver IT services to maintain a customer support desk each year for the next 5 years is a multi-year contract.
Non-Severable Five Year Contracts – Because five-year non-severable contracts are technically not multi-year contracts, they do not fall under FASA exception and therefore should be funded in full with those annual or multi-year appropriations, which have a period of availability covering the year in which such contract is awarded. So, if the agency awards a CPFF Completion contract to build a functional Public Financial Management System in country A, which is considered an entire undertaking to be completed over the next 5 years, the total contract ceiling must be obligated in full and charged to the available appropriations at the time of award.
See GAO discussion on the subject of similar CPFF Completion contracts and how they should be funded here GAO B-317139 2009
Multiyear Severable contracts funded with Fiscal Year (Annual) Appropriations – In case where a multi-year severable services contract is funded with annual appropriations, Cancellation Ceilings must be established to compensate the contractor for a) upfront cost, which are normally amortized over total contract years and/or b) accrued liabilities (e.g. severance) . These contracts must also have at least first year obligation (+ termination costs) recorded at the time of award. In case where subsequent annual appropriation is not available, the contract is cancelled (at a pre-determined notice period, e.g. 8/1/2019 with the end date of 9/30/2019) and no additional costs are paid except for costs estimated under Cancellation Ceilings (which decrease every subsequent contract year). If the contract is terminated for convenience, even though funds are available (let’s say in the middle of first year), then the termination is under the regular FAR Termination for Convenience clauses and termination costs are recoverable independent of the Cancellation Ceiling amounts.
Multiyear Severable Contracts Funded Incrementally with various types of Appropriations – Such contracts use Limitation of Funds Clause (LOF Clause) FAR 52.232-22 to notify the Government of contractor’s reaching 75% – 85% of the allotted amount in the next 60-85 days, and, allowing the Government to commit more funds, or, if funds are not available, allowing the contractor to ask for termination for convenience, with termination costs payable up to the obligated amount (i.e. contractor must accrue potential termination costs and liabilities within the amounts included in the Limitation of Funds Notice). See this case for unpleasant consequences of not accruing for termination under LOF clause contracts ASBCA 57409
So, what about USAID?
So far so good. The above pertains to most agencies and it is pretty straight forward.
Enter USAID. As most of us agree, USAID’s contracts and the types of services that the agency buys are often cosmically different from any other agency. Because USAID programs are tied to foreign policy objectives, they are subject to many unknowns and therefore tend to be a lot more fluid in scope and performance metrics.
It is my opinion, however, that the majority of USAID performance-based contracts can and should be classified as non-severable in nature, even though the chosen contract types may suggest otherwise – i.e. CPFF Term or T&M.
If a CPFF Term contract (which is, basically, a cost type version of a T&M contract) does not simply buy labor in specified categories (e.g. 20 Economists Per Year providing services as needed or FT), but requires and rates the performance of the contractor on how those days of labor accomplish a specified 5-year objective, then the nature of the work is non-severable and the contract is a non-severable 5-year contract.
GAO Appropriations Law (Red Book) describes this situation in Chapter 5. […] level-of-effort” contracts may be severable or non-severable. A level-of- effort contract is a type of cost reimbursement contract in which the scope of work is defined in general terms, with the contractor being obligated to provide a specified level of effort (e.g., a specified number of person-hours) for a stated time period. FAR 48 C.F.R. § 16.306(d)(2). The bona fide needs determination is based not on the contract type but on the nature of the work being performed and is, in the first instance, the responsibility of the contracting agency. B 235678, July 30, 1990. A 1985 case, 65 Comp. Gen. 154, had implied that all level-of- effort contracts were severable by definition (id. at 156), and to that extent was modified by B-235678. But See also B-277165, Jan. 10, 2000 (cost-plus-fixed- fee contracts are presumptively severable unless the actual nature of the work warrants a different conclusion).
Having said the above, there are two main issues as we talk about USAID contracts:
1. How do we define non-severable services in a USAID contract?
2. Can USAID use FASA Multiyear Contracting Authority to fund non-severable contracts incrementally for 5 years, without sacrificing quality or failing to accomplish sustainable results?
1. CPFF Completion, Incentive and Award contracts, which accomplish entire deliverables at the end of a 5-year period (e.g. build a functional system; re-write constitution; transition country to a specific standard) are not multi-year contracts, but, simply, non-severable 5-year contracts, and should be funded, in full, with the appropriations of the year in which they are awarded, because the need for the completed result is determined in that specific year.
2. There is a GAO decision (which I cannot currently link), which says that multiyear contracts may (in contradiction to the original intent of the multiyear authority), be used for non-severable services and, hence, funded incrementally, IF such non-severable services represent a known requirement over the next 5 years, but do not necessarily deliver a specific result which takes 5 years to complete.
Example: when USAID is funding capacity building contracts, which are providing (technically) non-severable services (i.e. building blocks), and the need for such services is known/expected over the next 5 years, but the need may change based on the external circumstances not known at the time of award. The services are non-severable, because, ostensibly, if you stop after one year, you may not have the desired capacity, but you may be able to accomplish desired capacity any time over the next 4 years. Therefore, USAID is using multi-year contracts with interim results and incrementally funds them, depending on the appetite and changing requirements of the foreign policy, existence of new conflicts, Presidential orders etc. This saves money, since the multi-year incrementally funded contracts obligate USAID to pay only up to the maximum of the obligated amount (+ fee), without worrying about excessive termination for convenience costs up to the total contract ceiling.
Analyzed properly, perhaps this makes sense. But… The problem with the above, which is the real point of this article is –
USAID’s Ability to Incrementally Fund is not being used efficiently (or for the right reasons) and may even being used for the types of contracts, which do not allow incremental funding.
Even though using Termination for Convenience under a fully funded contract may be more expensive, the contracts, which truly require specific entire results , i.e. results which will move the needle for that specific country’s Journey to Self-Reliance, should be funded in full to allow USAID and Tax Payers to truly measure how effective our foreign aid interventions are.
Funding such contracts incrementally may not only be a violation of the appropriation laws, but is a waste of money, which, coincidentally, is the reason why it is a violation of the appropriation laws.
Capacity Building or Technical Assistance Services contracts, which represent known requirements for multiple years (severable or not), which are not “entire” in their delivery, could continue to be funded/allotted incrementally to reduce the need to record the total contract ceiling as an obligation in case of termination.
This brings me to the last point. Grants & Cooperative Agreements should be funded in full at award….. There is a considerable abundance of decisions on this subject.
Bona Fide needs rule applies to assistance awards as well as contracts.
In his presentation during Department of Commerce Financial Management Conference in 2017, training for financial managers, Nick Kornegay, Chief, General Law Division Office of the Assistant General Counsel for Administration and Transactions stated clearly that “Regardless of the term of performance, if the agency has a need to make an award, it represents a bona fide need of the year the grant or cooperative agreement is awarded”
Incrementally funded Co Ags make little sense from the intent to accomplish a public purpose. Plus in USAID’s case, neither 2 CFR 200 nor 2 CFR 700 provide for a fair ability to terminate and handle termination costs, in case the annual funding does not get appropriated, even though 2 CFR 700 attempts to add that remedy in a round about way (violation of law). This creates an uncertainly in the kind of assistance instruments that USAID administers, contrary to purpose. Although, this is a much longer topic…..
This post originally appeared on LinkedIn on August 30 2019