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GAO Implies that Severable Services Exception to Bona Fide Needs Rule Applies to Guaranteed Minimum in ID/IQ Contracts for Services

In Interagency Agreements-Obligation of funds under an Indefinite Delivery, Indefinite Quantity Contract (hereinafter Interagency Agreements), (57) the Government Accountability Office (GAO) explored the issue of whether a Department of Interior (DOI) one-year Indefinite Delivery, Indefinite Quantity (ID/IQ) contract, awarded on behalf of DOD's Personnel Security Research Center (PERSEREC) for support services, violated the Antideficiency Act's (ADA) "in advance of" (58) prohibitions when the contract specified a guaranteed minimum of $1 million over a three-year period. (59) The DOI, on behalf of DOD via an Economy Act transaction, awarded an ID/IQ contract to Northrop Grumman Mission Systems with a period of performance from 1 July 2003 to 30 June 2004. (60) The funding source was DOD Operations and Maintenance funds (O&M), which are available for a period of one year. (61) The Department of Interior Inspector General (DOI IG) reported a potential ADA violation, and opined to the GAO that "by agreeing to pay a minimum $1 million over a 3-year period at a time before Congress had appropriated funds for all 3 years,[the DOI] violated the Antideficiency Act, 31 USC [section] 1341(a)(1)(B), because it obligated funds in advance of appropriations." (62) The GAO disagreed with the DOI IG's opinion, finding that although the DOI may have violated the Antideficiency Act in executing this contract, a one-year contract with a three-year guaranteed minimum over a three-year period would not automatically violate the Antideficiency Act.63

The GAO reasoned that had DOI and DOD obligated the minimum $1 million in O&M required under the contract within the first year, even though the contract would allow three years to order the minimum, DOI "would have completely satisfied the government's initial liability under the contract. No further obligation would remain ... that would require an appropriation in a future fiscal year." (64) As a result, although DOI and DOD may have violated the Antideficiency Act by failing to obligate the minimum $1 million in O&M at the time of contract award in Fiscal Year (FY) 2003, the GAO opined that it is not a per se violation of the Antideficiency Act for the government to obligate one-year funds for a one- year ID/IQ contract which permits a three-year time period during which to order the minimum, as long as the minimum is obligated during the funds' period of availability. (65) Ultimately, the GAO ordered DOI and DOD to adjust its accounts by deobligating $955,000 in FY 2004 O&M funds and then obligating $955,000 in FY 2003 O&M funds, since $45,000 of FY 2003 funds had been previously obligated under the ID/IQ contract. (66) Thus, the GAO recommended that DOI and DOD obligate a total of $1 million in FY 2003 O&M to satisfy the minimum order under the FY 2003 ID/IQ contract. (67)

From an obligations perspective, DOD and DOI would have avoided the issues cited by GAO if they had issued a task order against the ID/IQ contract for the minimum obligation, $1 million, in the fiscal year of the contract award, FY 2003. Contracting officers and resource managers should consider executing the first task order, for the full minimum obligation, concurrently with contract award. Such a practice would ensure that the contracting officer meets the minimum obligation under the ID/IQ contract immediately, and the resource manager would ensure that the minimum obligation is charged against current year funds. This recommendation, however, assumes that the minimum obligation cited in the ID/IQ contract is actually a bona fide need of the current year.

It is curious that the GAO did not address the Bona Fide Needs (BNF) rule in its analysis. The BFN rule states that appropriated funds are available only for an agency's requirements occurring during the period of availability of those funds. (68) The severable services exception to the BFN rule, however, allows the DOD to enter into severable services contracts that cross fiscal years as long as the contracts do not exceed one year (civilian agencies like DOI have the same authority under 41 U.S.C. 253l). (69) In the instant ID/IQ contract, the initial period of performance was 1 July 2003 through 30 June 2004, with a contract option of 1 July 2004-30 June 2005. (70) The chart below shows the funds that DOD transferred to DOI, via military interagency purchase requests (MIPRs), to execute task orders on the contract: (71)

18 October 2002 $175,000
3 November 2003 $422,454
12 February 2004 $291,000
4 April 2004 $3,138,834
20 July 2004 $795,350
29 September 2004 $200,000


30 September 2003 $45,000
3 December 2003 $422,454
20 February 2004 $291,000
20 April 2004 $3,138,834
6 August 2004 $795,350
30 September 2004 $200,000

The GAO opined that the minimum obligation of $1 million should be recorded against FY2003 appropriations, even though the majority of task orders occurred in FY 2004. Does this mean that the severable services exception applies to the guaranteed minimum in ID/IQ contracts? Although the GAO left this question unaddressed, the implication of its order to record the full minimum against FY 2003 appropriation is that the severable services exception applies to the guaranteed minimum in ID/IQ contracts. (72) In this case, DOD obligated a total of $4,027,288 prior to the expiration of the contract's first period of performance on 30 June 2004, but the GAO ordered only $1 million to be charged to FY 2003 accounts. GAO's recommendation that DOD charge the $1 million minimum to FY 2003 O&M appropriations, even though $955,000 of that minimum was used to order supplies for Bona Fide Needs of FY 2004, seems to apply the severable services exception to the guaranteed minimum of the ID/IQ contract. On the other hand, the GAO did not allow obligations that exceeded the ID/IQ guaranteed minimum (the additional $3,027,288 obligated during the first year of contract performance after it had crossed into FY 2004) to be charged against FY 2003 appropriated funds; the implication is that the Severable Services Exception does not apply to obligations exceeding the guaranteed minimum that arise after the fiscal year in which the ID/IQ was awarded (FY1). Finally, obligating FY1 funds before the end of the fiscal year (30 September) to order services that exceed the minimum obligation in severable service ID/IQ contracts should be consistent with the BFN rule.

If this is the correct understanding of Interagency Agreements, then for one-year ID/IQ contract crossing fiscal years from FY1 to FY2, resource managers should continue to charge the FY1 appropriation, even during FY2, until the task orders have satisfied the guaranteed minimum. Caution is warranted, however, since it is unclear whether the GAO truly considered the Bona Fide Needs Rule and the severable services exception in Interagency Agreements, or whether they had a different rationale that led to its decision. A definitive answer to the obligations rules for severable service ID/IQs that cross fiscal years will be topic for a future Year in Review. Until then, contracting officers and resource managers may wish to avoid this thorny issue by ensuring that they order the guaranteed minimum in services ID/IQs prior to the beginning of the new fiscal year.

Government is Only Obligated to Order the Guaranteed Minimum in an ID/IQ-Even if Minimum is Based on a Negligently Prepared Annual Estimated Value of the Contract

In Transtar Metals, Inc., (73) the Armed Services Board of Contract Appeals granted the government's motion for summary judgment holding that in an ID/IQ contract, the government met its required minimum obligation to the contractor, Transtar Metals Inc. (hereinafter Transtar), when the required minimum obligation under the contract was calculated as 10% of the annual estimated value of the contract, even though the government negligently prepared this annual estimated value. (74) On 30 September 1999, the contracting officer awarded an ID/IQ contract to Transtar for delivery of aluminum products to the Defense Industrial Supply Center (DISC). (75) The total annual estimated value of the contract at award was $2,923,206.50. (76) The guaranteed minimum in both the solicitation for the ID/IQ and the award stated that "The Government guarantees that it will order under this contract. ... [s]upplies which have a dollar value of at least 10 percent of the annual estimated value...." (77) Transtar alleged that the annual estimates on which the guaranteed minimum was based on were negligently prepared by the contracting officer, because the government had not informed Transtar "that its 'annual estimated quantities' included prior sales under Regional Supplier Contracts," (78) which would remain in effect during Transtar's contract. (79) Transtar also alleged that due to the government's negligent estimates, it had incurred additional costs to service the contract in the amount of $644,349.63.80 Transtar alleged that these additional costs were incurred as a direct result of the government ordering only fifty to sixty percent of the annual estimated value of the contract. (81) For purposes of the summary judgment motion, the Board assumed that Transtar's allegations that the government negligently prepared the annual estimated value of the contract were factually correct. (82)

The Board granted the government's motion for summary judgment, and denied all of Transtar's claims. (83) The Board reasoned that under the ID/IQ contract, Transtar was guaranteed no more than ten percent of the annual estimated value of the contract, and the government had ordered amounts which exceeded the guaranteed minimum, $292,320.65.84 As a result, the government fulfilled its obligations to Transtar under this contract, even if the annual estimates were negligently prepared. (85) The Board cited Travel Centre v. Barram (86) as a case with a similar set of operative facts and cited the Travel Center Court's reasoning that "'[r]egardless of the accuracy of the estimates delineated in the solicitation, based on the language of the solicitation for the IDIQ contract, Travel Centre could not have had a reasonable expectation that any of the government's needs beyond the minimum contract price would necessarily be satisfied under this contract.'" (87) The Board reasoned that as in Travel Center, Transtar could not have reasonably expected that they were entitled to meet any of the government's needs beyond the guaranteed minimum. (88) As a result, the Board approved the government's motion for summary judgment and denied all of Transtar's claims. (89)

Major Jose A. Cora

(57) Comp. Gen. B-308969, May 31, 2007, 07-1 CPD 120.

(58) The Antideficiency Act's "in advance of" prohibition states, "An officer or employee of the United States Government or of the District of Columbia government may not ... involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law." 31 U.S.C. [section] 1341(a)(1)(B) (2000) (emphasis added).

(59) Interagency Agreements, 07-01 CPD 120.

(60) Id. at 3-4.

(61) Id. at 4.

(62) Id. at 5.

(63) Id. at 7.

(64) Id.

(65) Id.

(66) Id.

(67) Id.

(68) Modification to Contract Involving Cost Underrun, 1995 U.S. Comp. Gen. LEXIS 258 (Apr. 18, 1995).

(69) The severable services exception to the Bona Fide Needs Rule states:

(a) Authority.

(1) The Secretary of Defense, the Secretary of a military department, or the Secretary of Homeland Security with respect to the Coast Guard when it is not operating as a service in the Navy, may enter into a contract for a purpose described in paragraph (2) for a period that begins in one fiscal year and ends in the next fiscal year if (without regard to any option to extend the period of the contract) the contract period does not exceed one year.

(2) The purpose of a contract described in this paragraph is as follows:

(A) The procurement of severable services.

(B) The lease of real or personal property, including the maintenance of such property when contracted for as part of the lease agreement.

(b) Obligation of funds.--Funds made available for a fiscal year may be obligated for the total amount of a contract entered into under the authority of subsection (a).

See 10 U.S.C.S. [section] 2410a (LexisNexis 2008) (emphasis added); see also 41 U.S.C. [section] 253l (2000) (severable services exception for civilian agencies).

(70) Interagency Agreements, 07-1 CPD 120, at 2.

(71) Id. at 3.

(72) Mr. Vernon Edwards provides an excellent discussion of how the BFN rule and the Severable Services Exception might apply to the ID/IQ services contracts. Mr. Edwards identified six possibilities as to how the BFN rule might apply to severable services ID/IQs, depending on whether or not the Severable Services Exception applies to ID/IQs, whether the exception applies only to the guaranteed minimum or new obligations exceeding the guaranteed minimum, and whether at the time of the obligation, the agency is in FY1 or FY2 of a 1 year severable services contract that straddles fiscal years. See Vernon Edwards, Obligating Funds for Services Under IDIQ Contracts that Cross Fiscal Years: What Are the Rules?, NASH & CIBINIC REP., Aug 2007, 42.

(73) Transtar Metals, Inc., ASBCA No. 55039, 07-3 BCA 33,482, 165,955.

(74) Id. at 165,959.

(75) Id. at 165,957.

(76) Id.

(77) Id. at 165,956.

(78) Id. at 165,958.

(79) Id.

(80) Id.

(81) Id.

(82) Id. at 165,959.

(83) Id.

(84) Id.

(85) Id.

(86) 236 F.3d 1316 (Fed. Cir. 2001).

(87) Transtar Metals, 07-1 BCA 33,482, at 165,959 (quoting Travel Centre, 236 F.3d at 1319).

(88) Id.

(89) Id.
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Title Annotation:Contract and Fiscal Developments of 2007 - the Year in Review
Author:Cora, Jose A.
Publication:Army Lawyer
Date:Jan 1, 2008
Previous Article:Antideficiency Act.
Next Article:Appendix A: Department of Defense Legislation for fiscal year 2008: FY 2008 Department of Defense Appropriations Act.

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