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Seminar: Funding Policies

Seminar: Funding Policies. Program Management Office Course PMT 352B. Version 2.4, 2-6-14. Funding Policies. Annual Funding – O&M, MILPER appropriations - Exception Incremental Funding – RDT&E - Exceptions * 9, 15, and 18 month exception Full Funding – Procurement, MILCON

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Seminar: Funding Policies

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  1. Seminar: Funding Policies Program Management Office Course PMT 352B Version 2.4, 2-6-14

  2. Funding Policies • Annual Funding – O&M, MILPER appropriations • - Exception • Incremental Funding – RDT&E • -Exceptions • * 9, 15, and 18 month exception • Full Funding – Procurement, MILCON • - Exceptions to Full Funding • * Advance Procurement • * Multiyear Procurement

  3. These costs are considered “expenses” Source: DoD 7000.14-R, Vol 2A, Chap 1, Section 010201C Applies to O&M and MILPER Appropriation Categories Annual Funding Policy • Prepare annual budget request on basis of funding needed to operate and maintain DoD activities and pay personnel for a 12month budget period (i. e., normally the fiscal year) • Intent of policy: To provide only those funds required to pay expenses associated with “normal” operations of DoD activities for a 12 month period

  4. Annual Funding Policy Service Contract Exception • Exception to budgeting for “Fiscal Year” period • U.S. Code, Title 10, Section 2410a provides DoDauthority to budget for and obligate funds for severable service contracts for periods crossing fiscal years provided the contract period does not exceed 12 months • Funds made available for a given fiscal year may be obligated for the total amount of that contract References: (1) Title 10, U.S. Code, Section 2410a (2) Comptroller General Decision B-259274 (22 May 96)

  5. FY 1 FY 2 FY 3 FY 4 Expense $ 25 K $ 35 K $ 27 K $ 29 K Simple Application – O&M Appropriation Annual Funding Policy Expenses by Fiscal Year $ 520 K $ 531 K $ 510 K Civ Pay $ 500 K Supplies $ 30 K $ 40 K $ 35 K $ 40 K TDY $ 40 K $ 50 K Service Contract 12 Month Budget Request $ 645 K $ 585 K $ 582 K $ 600 K Period when expenses are being incurred)

  6. Source: DoD 7000.14-R, Vol 2A, Chap 1, Section 010214 Applies to RDT&E Appropriation Category Incremental Funding Policy Costs can be considered either “expenses” or “investments” • Prepare annual budget request on basis of incrementalfunding required to cover only those costs expected to be incurred for work to be done during a given fiscal year • Rationale for budgeting on incremental funding basis: • Government will obligate funding only for work to be performed during a given fiscal year • Contractor will perform work required by contract • Contractor will incur costs to perform that work • Contractor will submit invoice to receive payment for that work • Government will pay for work performed that fiscal year with that year’s appropriated funds • Intent of policy: To achieve effective “rationing” of scarce funds among research programs

  7. “Unique” Exceptions to Budgeting for 12 Months Incremental Funding Policy 9 - Month Exception Generally, the program office should budget only for a 9 – month or lesser period in first year of a New Start Program; thereafter, budget for 12 months until last year of effort. 15 - Month Exception Service or Defense Agency Comptroller must approve extensions of up to 3 months beyond end of the fiscal year for which funds are requested. 18 - Month Exception There are circumstances where a R&D requirement can not logically be divided; where it is unfeasible to limit the contract to a short period in the second year; or where the planned technical effort is such that no responsible contractor would accept a contract for a “less-than-completion” increment. For these type efforts that take longer than 12 months but less than 18 months, the Service or Defense Agency Comptroller may approve financing the total requirement in one fiscal year. Reference: DoD 7000.14-R, Vol 2A, Chap 1, Section 010214

  8. FY 1 FY 2 FY 3 FY 4 Task Cost $ 100 M $ 100 M $ 50 M TASK 1 $ 250 M $ 25 M $ 100 M $ 25 M TASK 2 $ 150 M $ 50 M $ 40 M $ 10 M TASK 3 $ 100 M Simple Application – RDT&E Appropriation Incremental Funding Policy Cost Incurred by Contract by Fiscal Year Budget Request $ 50 M $135 M $250 M $65 M Planned Period of Performance (i.e, planning for costs to be incurred)

  9. Source: DoD 7000.14-R, Vol 2A, Chap 1, Section 010202A Full Funding Policy Applies to Procurement and MILCON Appropriation Categories Costs are considered “investments” • Prepare annual budget request to cover total estimated cost for a specific quantity of militarily usable end items deliverable in a 12 month funded delivery period. • Governing Concepts: - Total Estimated Cost - To inform OSD, Congress and Public. - Usable End Items - No piecemeal procurement of systems allowed - Funded Delivery Period - Time period (12 month maximum) during which contracted items are planned to be delivered, starting with planneddelivery of the first item. • Intent of policy - To provide total funding for investment items to satisfy an approved 12 month requirement

  10. Reference: DoD7000.14-R, Vol 2A, Chap 1, Section 010202 Two Separate – but Related – Views of Policy Full Funding Policy DOD Financial Management Regulation Requirement DODI 5000.02 Requirement • Full funding (i.e., having an approved current (and projected) resource stream to execute the acquisition program) requires that program funding and manpower be included both in the budget and in the out-years of the Future Years Defense Program (FYDP) sufficient to cover the current and future efforts described in the acquisition strategy. • Full Funding Certification to the Component Cost Position – Required at Milestones A, B, C, and FRPD. • From the outset of a procurement program, identification of the total estimated cost of that program is required so “Congress and the public can be fully aware of the dimensions and cost when the program is first presented in the budget”. • For budgeting purposes, funding for each fiscal year shall be sufficient to procure complete, usable end items (i.e., the item cannot depend on funding in a future year to make it usable for its intended purpose). Reference: DoDI 5000.02, Enclosure 10, Paragraph 2.f, and Reference: DoDI 5000.02, Enclosure 1, Table 2 (page 50) Each production contract action has proper amount in the budget It is a “fully funded” program?

  11. Full Funding PolicySimple Application - Procurement Appropriation FY 1 FY 2 FY 3 FY 4 FY 5 Lot Cost $ 400 M K-Award LOT 1 10 ITEMS 2 2 3 3 = 10 $ 600 M K-Award LOT 2 20 ITEMS 5 5 5 5 = 20 $ 900 M K-Award LOT 3 40 ITEMS 8 10 12 10 Budget Request $ 400 M $ 600 M $ 900 M - 0 - - 0 -

  12. Full Funding Policy Re-Cap of “What it is and What it is not” • This policy applies to: • programming and budgeting actions • required quantities on a “year-to-year” basis • quantities that can be delivered during a future 12 month period (as a maximum period) • each separate fiscal year as an independent action This policy does notrequire the total procurement quantity desired over the entire life of the program to be budgeted in any one single fiscal year.

  13. 5 5 5 5 LOT 2 Production Lead Time 12 Months from delivery of 1st item in lot 8 10 LOT 3 6 Months from delivery of 1st item in lot Production Lead Time Funded Delivery Schedule Example of Proposed Delivery Schedule to Avoid FY 1 FY 2 FY 3 FY 4 FY 5 Funded Delivery Schedule 2 2 3 3 5 5 5 5 8 10 LOT 1 Contract Award Defer to later fiscal years 12 Months from delivery of 1st item in lot Production Lead Time Separate contract award or option exercised on basic production contract

  14. Exceptions to Budgeting Under Full Funding Full Funding Policy • Advance Procurement Exception • Related to Long Lead-time Items in procurement appropriations where: • Lead-time of the item is greater than life of the appropriation, or • Lead-time of the item is greater than other components, parts, and material of the same end item, or • Efforts must be funded in an advance procurement timeframe to maintain a planned production schedule. • Why an exception? Procurement action is not for a usable end item. • Multiyear Procurement (MYP) Exception • Associated with Economic Order Quantity (EOC) of components, parts or materials of the end item • Why an exception? Contracted deliveries will exceed the 12 month funded delivery period. Congress normally appropriates on a year-to-year basis without committing to a program’s acquisition quantity. Reference: DoD 7000.14-R, Vol 2A, Chap 1, Section 010202

  15. Advance Procurement for Long Lead-time Items • Exception to Full Funding Policy • Shown in Acquisition Strategy • Approved in Milestone Decision • Circumstances that justify use: • When necessary to maintain (protect) planned production schedule • Lead-time of component greater than life of the appropriation • Lead-time of component significantly longer than remainder of end item • Budgetary Implications: • Minimum amount budgeted = termination liability of total cost of long lead-time items being procured • Budgeted amount generally requested one fiscal year in advance of related end item contract • Budgeted amount is shown as a separate line entry on various budget exhibits (e.g., P-1 form) EXAMPLE: 2014 Draft NDAA Sec 141—advance procurement associated with the ground-based interceptors (MDA)

  16. Advance Procurement Application with Procurement FY 1 FY 2 FY 3 FY 4 LOT 3 ($400M) 20 Items LOT 4 ($700M) 38 Items BA Adv Proc BA System BA Total (FY) $ 400M $ 700M 12 Month Advance Procurement - $ 15M - $ 10M $ 390M $ 685M + $ 10M + $ 15M $ 685M $ 10M $ 405M $ - 0 - * Separate Budget Line Line Item one fiscal year in advance of associated production contract

  17. Source: FMR DoD7000.14-R, Vol 2A, Chap 1, Section 010203 Multiyear Procurement (MYP) Exception to Full Funding Policy • A single contract for a specific quantity of usable end items to be delivered over a period of time greater than one year but not more than five years • After initial MYP approval by Congress, the Service requests – and Congress appropriates – required budget on a “year by year” basis to obligate against the contract F/A-18 as a recent example

  18. Continued Multiyear Procurement • Advantages • Lower costs. • Stabilizing contractor plans and work forces. • Continuity of production, avoiding annual startup and phase out costs, etc. • Provides incentives for contractors to improve productivity. • Reduced administrative burden. • Broaden competitive bases - firms not otherwise willing or able to compete for lesser quantities, especially if high startup costs. • Potential problems • Government liable for a penalty (in a decreasing amount) for early cancellation of contract • Can not budget for that cancellation/termination liability • Controversial concept (both in Congress & OSD) http://www.acq.osd.mil/dpap/pacc/pa/multiyear_procurement.html

  19. Multiyear Procurement Criteria(10 U.S.C. 2306b(a)) Viable candidate for a MY Procurement Contract must satisfy the following: • Substantial savings compared to annual contract buys • Stable funding • Stable design • Stable requirement • Realistic estimates of contract cost and savings • Promote national security of the United States Not easy to touch all of these bases • Requires Congressional approval if MY will be $500M or more. • Congress makes tradeoff decision: • do advantages outweigh disadvantages ofloss of flexibility in future budget years, and committing future Congresses. • Notification if cancellation ceiling exceeds $100M, etc. http://www.acq.osd.mil/dpap/pacc/pa/multiyear_procurement.html

  20. Cancellation Costs Ceiling for Multiyear Procurement Contracts A “risk” in Multi-Year Procurement • Cancellation Costs may cover: • Non-recurring Costs • Recurring Cost (with approval of Agency Head and USD (C)) • Cancellation Ceiling is: • Negotiated along with other provisions of the contract • A decreasing amount each year • Not an additional amount to be budgeted • Recent Multiyear Procurement Authority: • FY2013 NDAA: Arleigh Burke-Class Destroyers and Virginia-Class Submarine Program • Draft FY 2014 NDAA: E-2D aircraft, C-130J aircraft, Ground-based interceptors (MDA), Tactical Wheeled Vehicles

  21. Low Rate Initial Production (LRIP) Primary Purposes and Proper Appropriation PurposeAppropriation Permit an orderly increase in production ramp-up Procurement Establish an initial production base Procurement RDT&E is default, but . . . . Provide production configured or representative articles for operational test RDT&E * Articles destroyed or not going into operational inventory Procurement (also appropriate) * Articles scheduled to go into operational inventory

  22. Product Improvements Changes to a Fielded System • Two types of Product Improvements • One that increases performance (i.e., “enhances the performance envelope”) • One that does not increase performance • Three types of activities to be funded • Determine how to do the modification (i.e. research and test possible alternatives) • Purchase the “Modification Kit” to improve the product • Install the “Modification Kit” on the fielded system

  23. Funding for Product Improvements Funding Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? NO IF . . . . NO YES YES SYSTEM IN PRODUCTION? THEN . . . . YES NO Fund the Development and Testing with . . . (including MOD Kits used for Testing) RDT & E PROCUREMENT O & M AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . PROCUREMENT

  24. Reprogramming • The “realignment of budget authority from a purpose for which • appropriated to finance another (usually emergent) requirement.” • Only funds “currently available” for obligation can be • “reprogrammed.” • Funds identified in the FYDP can be “shifted” or “moved.” • A “Transfer” occurs when a reprogramming action results in • movement of budget authority From one appropriation to • another (i.e., O&M Army to O&M Navy, Aircraft Procurement • USAF To RDT&E USAF)

  25. Reprogramming • Types of Reprogramming Actions • Congressional Prior Approval • Procurement quantity increase • Affects item of “special Congressional interest” • Exceeds specific $$ thresholds (i.e., SECDEF general transfer authority or BTR threshold) • Establishes a new program – or • Involves the termination of an approved program • Usually done by Services as part of an annual omnibus • reprogramming submission

  26. Reprogramming • Types of Reprogramming Actions • Internal • Requires approval of USD (C) • No change in purpose • Documents realignment of funds to a different line item • May be used to correct mistakes in appropriations • Does “not” mean “internal to a program”

  27. Reprogramming • Types of Reprogramming Actions • Congressional Notification • Requires 30-day notification to Defense Committee • No action until 30 days after such notification • Establishes a new program • Est. new “procurement” program, including mods costing • <$20M for the entire effort • Est. new development effort costing <$10M for the entire • effort • Initiation of safety modifications of <$20M • Termination of programs falling below BTR amounts

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