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HHS Reference Tool for Contract Funding, Formation and Appropriations Law Compliance

Case Study - Long-Term Severable Services: Contract Formation Alternatives


The Program Support Center (PSC) has been asked to award a contract for information technology (IT) services for a period of 8 years in support of a newly developed system. The required start date for these services is August 1, 2010. The services will include needed upgrades, user training, and assistance in preparing system documentation. The Contracting Officer (CO) and the Project Officer (PO) agree that these represent severable services, i.e., they stand on their own and would meet a separate and ongoing need of the government in each period of the 8 years. The PO has funding available from the fiscal year 2010 appropriation sufficient to cover an 18-month period S/He wants to know what can be funded at the outset and wants to be able to document potential budget needs for future years for his/her management and any successor Contracting Officer’s Technical Representative.


  1. There are several potential alternatives to consider in structuring a contract for severable IT services: the use of options, with or without incremental funding, or a fully funded multi-year contract.
  2. A fully funded multi-year contract for severable services under the authority of 41 U.S.C. 254c* would not be appropriate as it is limited to 5 years and is better suited to allow economic buying of quantities than it is to acquisition of services. Further, the PO does not have the full funding available.
  3. There also are several potential alternatives concerning contract type when using options—fixed-price, time and materials (T&M), labor-hour, or cost-reimbursement.
  4. HHSAR 332.703-72 permits the use of incremental funding in fixed-price, T&M or labor-hour contracts provided that the base period or any option period:
    1. Is for severable services;
    2. Does not exceed 1 year; and,
    3. Is funded using the appropriation in effect on the date the funds are obligated.
  5. While the use of a cost-reimbursement contract also is possible, it presents a few significant disadvantages:
    1. Eliminates the use of GSA’s Federal Supply Schedules; and,
    2. May remove viable competitors (particularly among the small-business sector) from the competition due to the accounting system requirements [see FAR 16.301-3(a)(1)].
  6. Although incremental funding may be used as outlined above, the Department has a policy preference [HHSAR 332.702-70(b)] for the use of options over incremental funding. In addition, HHSAR 332.703-72(e) establishes a policy preference to fully fund fixed-price, T&M, or labor-hour contracts upon award. If incremental funding is used, full funding is required as soon as funds become available.
  7. Given the above, the use of fully funded options under a T&M or labor-hour contract is the most viable method to fund this 8-year contract for severable IT services. However, the contract could not fund a base period of 18 months (i.e., to equate to the funding currently available). When using a 1-year appropriation, funding of severable services (base period or any subsequent option period) is limited to a maximum of 12 months.
    1. The contract should be structured with a base period, not to exceed 12 months, and seven 1-year options. The options must be identified in the solicitation, their pricing and terms must be evaluated as part of the award determination, and the options must be included in the contract award.
    2. Based on an authority provided by the Federal Acquisition Streamlining Act [implemented by FAR 32.703-3(b)], the base period (and, subsequently, each option year) can be fully funded from the current fiscal year appropriation for a not-to-exceed 12-month period that crosses fiscal years (in this case, August 1−July 31). However, options for severable services cannot be forward funded, i.e., a bona fide needs test must be applied to each option period. Therefore, the PO cannot use the additional 6 months of funding that s/he may have available at the time of award for either the base period or the initial option.

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    * Re-codified as 41 U.S.C. 3903 by Public Law 111-350, January 4, 2011. This new citation is not yet available as a hyper-link in the United States Code web site maintained by the Office of the Law Revision Counsel, U.S. House of Representatives.