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Federal fiscal operations and maintenance funding rules: what contract managers need to know; Maintaining vigilance in O & M funding issues and sharing knowledge among the agency's management and employees is a necessity--not an option.

It is essential for contract managers to know the intent and application of the federal fiscal operations and maintenance (O & M) funding.

Processes have been put in place to ensure proper obligation and tracking of the O & M one-year funding. This "color of money" has invoked various interpretations and applications that sometimes leave a contract manager asking, "Where do I go from here?" Learning in-depth about O & M funding will help you then make prudent decisions that support the government agency's requirements.

Legal Basis

The U.S. Constitution Article I Section 9 Clause states, "No money shall be drawn from the treasury but in consequence of appropriations made by law." All fiscal law flows from this authority. Subsequent statutes came into being because the agencies abused the appropriations they were given--for example, spending in excess of their appropriations. Agencies would go to Congress for a "deficiency" appropriation to meet their obligations--hence the name, Anti-Deficiency Act (ADA).

Besides appropriation law provisions, fiscal law includes other legal applications, such as public laws, U.S. Code, regulations, and opinions. Agencies apply the fiscal law to ensure that appropriated federal funds are used properly. As stipulated in the fiscal law, appropriated funds are to be applied using three major rules: (1) an appropriation may only be expended for the stated purpose; (2) one cannot obligate the government in excess or in advance of the appropriation (the ADA); and (3) a fiscal year appropriation may be obligated only to meet a bona fide or legitimate need arising in the fiscal year for which the appropriation was made.

These major rules were seen as clear and easily understood--at least that is what Congress thought when the promulgated law was implemented. Then, why do good contract managers ponder over the many U.S. General Accounting Office's (GAO) legal decisions regarding federal contractual funding before obligating their agency's funding?

Historically, the United States has gone through economic evolutionary phases such as wars, depression, inflation, global trade deficits, and any other phenomenon that affect Congress's purse. In turn, the appropriations reflect these changes as to how the budget is approved and disbursed among the federal government agencies. Congress embedded flexibility within the law, realizing that the congressional budget cannot be put in stone.

Exceptions were approved that address the different "color of money" applications to maintain the agency's support and continuity of the mission. The congressional objective was that as long as the three major rules are followed and approved "exceptions" were in place, this should avoid discrepancies and ADA violations within the federal government procurement process. We still see GAO reports, however, that clarify the use of federal funding. Accounting Office has developed and maintained the Principles of Federal Appropriations Law that was later termed the "Red Book," due to the red-colored hard covers that bind the pages. The third version was recently released (January 2004), which includes the updates of GAO case law and processes. In reviewing the Red Book Chapter 2, there is information about "two appropriations available for the same purpose," and "reprogramming." At this juncture, the reader begins to realize the flexibility that is provided to agencies; but the reader can also realize the room that is still left open for misinterpretation or need for clarification of the law, which has required GAO's decisions and possible intervention. Chapters 4 and 5 provide the detail needed to fully understand the "availability of appropriations (purpose and time)." In these two chapters, operations & maintenance (O & M) funding is prevalent and more detailed information on this topic begins.

O & M Funding

This type of funding is one of the multiple "colors of money" that has always been the highest expenditure within the federal government. When reviewing GAO cases involving funding, O & M funding application appears to be the most controversial and the most transformed. The acquisition private and public sectors need to be knowledgeable and current on this transformation to standardize the use of O & M expenditures. Although the Red Book is explicit and well documented, further in-depth research is necessary to fully understand the transformation of O & M funding.

To make procuring officials aware of the changes that have occurred in O & M appropriations and fiscal law, the Red Book includes GAO cases that have profoundly affected O & M funding determinations. To understand the terms and conditions of O & M expenditures--and for the purpose of this article--knowledge is required of the following nomenclature: (1) non-severable (ref. Department of Defense Federal Acquisition Regulations (DFARS) Part 204.7101), "a deliverable item that is a single-end product or undertaking, entire in nature, that cannot be feasibly subdivided into discrete elements or phases without losing its identity;" (2) "Bona Fide" rule, 31 U.S.C. 1502(a) (i.e., appropriations "for the good or service of the present year"); and (3) Anti-Deficiency Act (i.e., funding is sufficient for contract obligation amount).

Bona Fide rule applications evolved and were continually redefined throughout the years by Congress in order to improve procurement process flexibility. These revisions were necessary to respond to the dynamics of U.S. economical changes. The Bona Fide rule became a key tool used to baseline the amount of flexibility allowed by law while fulfilling the agency's mission. Also, a severable versus non-severable determination is a major factor in the Bona Fide application. GAO's cases promote caution to the procurement community to remain current and be aware of present fiscal law boundaries. Table 1 on p. 59 includes GAO's cases involving O & M appropriation expenditures and are representative of this "color of money" transformation.

Looking at these GAO cases, it appears that applying the Bona Fide rule and the non-severability definition to O & M procurements can depend on the specific good or service, the duration of any necessary time lag, and that prior old cases can be overturned by the comptroller general as deemed necessary. As the years pass in the acquisition world, more cases will be brought forth to the comptroller general, and agencies will make arguments that fit their mission's needs.

GAO's Red Book provides the optimum rationale on hand today. As the economy and government budget circumstances change, however, it will be the agencies' responsibility to apply the most current fiscal law and GAO decisions, using a logical approach. Agency interpretation and challenges of the fiscal law stems from "what makes sense," as they perform a balancing act between the needs of the mission and maintaining the accountability process as established by Congress.


By definition, O & M appropriations have expanded in purpose and time to meet the needs of our nation. Through the O & M transformation era, Congress may willingly limit oversight, and GAO may relax prior interpretations to the law. Until these changes take place, however, agencies will go forward with prudent decisions and supporting justifications of their positions. Maintaining vigilance in O & M funding issues and sharing knowledge among the agency's management and employees is a necessity--not an option.

As O & M funding is changing, a good contract manager is also transforming into a skilled business manager. This inherent business role is based on "doing what makes sense," while challenging the cultural norm--but during this transformation of duty, let us never forget the intent of the constitutional law.
GAO                           GAO        Issue
Case No.       Date           Case Cite

B-130815       Sept. 3, 1957  37 Comp.   Atomic Energy Commission (AEC)
                              Gen. 155   claimed to have general
                                         procurement authority (to meet
                                         the mission) to contract for
                                         out-ward years for supplies and
                                         to be funded with present O & M
B-217722       Mar. 18, 1985  64 Comp.   National Institutes of Health
                              Gen. 359   Research Grants considered O &
                                         M funding effort for research
                                         as non-severable to fulfill the
B-219829       Jul. 22, 1986  65 Comp.   The Veterans Admin. (VA)
                              Gen. 741   purchased an assessment study
                                         of Vietnam-era veterans (final
                                         report) based on P.L. 98-160,
                                         which would not be completed in
                                         the obligating year and thereby
                                         non-severable. Present O & M
                                         funding used for outward years
                                         until study was completed.
B-235678       Jul. 30, 1990  N/A        The Navy Space and Naval
                                         Warfare Systems Command
                                         (SPAWAR) said the Bona Fide
                                         need rule only applies to
                                         annually-funded contracts (O &
                                         M) and not R & D multi-year
                                         contracts level-of-effort (LOE)
                                         that has been considered
                                         severable (65 Comp. Gen. at
B-238940       Feb. 25, 1991  60 Comp.   Dept. of Agriculture wanted to
                              Gen. 455   use current O & M
                                         appropriations for a training
                                         course that could not begin
                                         until the following fiscal
B-259274       May 22, 1996              The U.S. Air Force staggered
(also ref.                               performance periods of a fixed
10 USC 2410a)                            price service contract options
                                         to maintain continuity of
                                         meeting the requirements and
                                         retained funding availability.
                                         In the 3rd Option Year, the POP
                                         was shortened to 31 August 1994
                                         and the 4th Option Year began
                                         01 September 1994 using FY1994
                                         funding. The 4th Option Year
                                         was for one year, ending 31
                                         August 1995. The FY 1994 fiscal
                                         year funds were only sufficient
                                         to cover 4 months of the 4th
                                         Option. There were 2 issues:
                                         (1) Did the AF violate the
                                         Anti-Deficiency Act when the
                                         4th Option requirement was not
                                         fully funded, and (2) Can the
                                         FY 1994 funding be used for FY
                                         1995, when the effort is
                                         severable from FY 1994.

Case No.       Decision

B-130815       Comp. Gen. ruled AEC's attempt to use current
               appropriations for out-year needs violated Bona Fide
               rule, and therefore it could not contract for out-year
B-217722       Comp. Gen. ruled that effort was year-to-year & the
               requirements are severable which violates the Bona Fide
B-219829       Comp. Gen. ruled that the service requiring a final
               report is non-severable. The agency was in compliance of
               the Bona Fide need rule when funding for outward years.
B-235678       GAO clarified level-of-effort versus completion contract
               (FAR Sec. 16.306(d)(1), (3).) and LOE is not defined by
               severability. The severable/non-severable determination
               was based on the components being separated versus a need
               for a specified whole end product within the estimated
               costs and time. Thus, the Bona Fide need rule applied to
               both annual & multi-year contracts.
B-238940       Comp. Gen. ruled that since the time lag between the
               procurement and performance (training) was not excessive
               during two (2) fiscal years involved, the agency complied
               to the Bona Fide need rule.
B-259274       Comp Gen. ruled, by definition, the service contract was
(also ref.     severable; AF complied with the Bona Fide rule; the need
10 USC 2410a)  is recurring and it began for a 12-month period only. 10
               USC 2410a is a statutory exception to the bona fide needs
               rule (FY funds are made available for the following FY.)
               The AF did not violate the ADA based on GAO's decision
               A-60589, July 2, 1935--GAO expressly declined to overrule
               at this time. Contract contains availability of funds
               clause--no financial exposure to the government.

Table 1.

About the Author

JANICE SMETS, CPCM, FELLOW, is a member of the NCMA Antelope Valley Chapter and a contract specialist for the U.S. Air Force Los Angeles Air Force Base. Send comments on this article to
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Author:Smets, Janice
Publication:Contract Management
Date:Jul 1, 2005
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