HHS Reference Tool for Contract Funding, Formation and Appropriations Law Compliance
Frequently Asked Questions
The answers provided for the Frequently Asked Questions (FAQs) listed below are based on the following assumptions:
- All contract actions discussed meet the bona fide needs test and represent a valid obligation of the fiscal year involved.
- Unless otherwise indicated, all contract actions are funded from an annual appropriation source, the most common type of appropriation used by HHS.
Definitions of key terms used elsewhere in the Reference Tool are not restated; they are hyperlinked to the relevant portion of the Tool. The FAQs also contain hyperlinks to external points of reference (FAR, HHSAR, GAO, etc.).
If you select one of the hyperlinks and then wish to return to the FAQ page, use the return arrow in the upper left-hand corner of your web browser or press the backspace key.
- How do I determine whether to use options or incremental funding when structuring contracts to acquire severable services that will extend beyond 1 year?
- Can incremental funding be used when contracting for non-severable services?
- Is there a difference between a multiple-year contract and a multi-year contract?
- Is it possible to use an annual appropriation to award a contract for severable services in the current year and continue their performance into the next fiscal year without additional funding?
- In deciding whether to approve a no-cost extension, does it matter if the services being acquired are severable or non-severable?
- If a contract was awarded in one fiscal year and terminated for default in the next fiscal year, are those funds available to the agency, for use in a replacement contract? Would the answer be different if the contract were terminated for convenience?
- How long are appropriated funds available for obligation? What about the availability to make payments/disbursements (resulting from a proper obligation)?
- Are there any restrictions on the total performance period of a contract for non-severable services?
- What happens if a final cost audit, indicating that additional reimbursement is due the contractor, is received after the source appropriation account has been closed? Is there any appropriation source that may be used to obligate the funds necessary to reimburse the contractor?
- What HHSAR provisions and clauses must I include in my solicitation and resulting contract if I plan to award a:
- Are any special determinations or approvals required before I may award a multi-year contract pursuant to FAR Subpart 17.1?
- What is the proper use of the clause in FAR 52.217-8, Option to Extend Services?
- Can individual task orders under an indefinite-delivery/indefinite-quantity (ID/IQ) contract be structured as multi-year requirements pursuant to FAR Subpart 17.1 and HHSAR Subpart 317.1?
- In early September 2010, after completing source selection, but prior to contract award, one of the unsuccessful offerors filed a protest with the Government Accountability Office (GAO). Accordingly, award of the pending contract was postponed until after resolution of the protest, which is not expected until after September 30, 2010. We had planned to fund this contract from the FY 2010 appropriation, which will expire on September 30, 2010. Once the protest is resolved, does my agency have to commit new funding from the then-current year’s appropriation to fund the contract award?
- Can one contract contain options and also permit the use of incremental funding?
Frequently Asked Questions
1. How do I determine whether to use options or incremental funding when structuring contracts to acquire severable services that will extend beyond 1 year?
When severable services will cover more than 1 year, it is HHS policy [HHSAR 332.702-70(b)] to structure contracts with a base period (not to exceed 1 year) and annual option(s). This approach is preferred over the use of incremental funding because the use of options limits the Department’s liability, i.e., ending a contract by not exercising an option would not incur termination costs. Options, which must be priced and established in the contract, allow (but do not require) the Government to unilaterally purchase additional services.
In contrast, formation of a contract for severable services that will use incremental funding recognizes the full period of performance, the expected total price/cost, and the Government’s expectation to continue to fund the contract, provided the availability of future years’ funding. If, after award, the Government no longer has a need for the services, the contract must be terminated for convenience and provide the contractor the opportunity to submit a settlement proposal for compensation for work completed and the preparations made for the terminated portion of the contract, including a reasonable allowance for profit/fee.
2. Can incremental funding be used when contracting for non-severable services?
By their nature, non-severable services must be funded entirely by an appropriation current at the time of award, even though performance may extend into future fiscal years. Following that logic, contracts for non-severable services cannot be incrementally funded (see 71 Comp Gen 428 (1992) and GAO Decision B-317139, Matter of Financial Crimes Enforcement Network). The only means to award a contract for non-severable services without full funding up front is to use the multi-year contracting method per FAR Subpart 17.1.
A multiple-year contract is a contract whose period of performance extends beyond 1 year. It includes any contract for: (a) severable services awarded with a base period and 1 or more option years; or (b) non-severable services for the delivery of a defined end product(s) that will require more than 1 year to complete.
A multi-year contract is a contract developed using the special contracting method in FAR Subpart 17.1. Agencies may use this method to acquire planned requirements (for supplies or services) for up to 5 years without establishing or having to exercise options. A multi-year contract may provide that performance after the initial year is contingent on the appropriation of funds, as long as the funds obligated at award are sufficient to fund the initial year of performance plus a cancellation ceiling payable to the contractor if future appropriations are not sufficient to fund continuation of the contract.
As a matter of HHS policy, the term “multiple-year contract” does not include any contract awarded using the multi-year contracting procedures authorized under FAR Subpart 17.1
FAR 32.703-3, Contracts crossing fiscal years,directly addresses this issue. Subparagraph (a) states the general rule that a contract for severable services funded by annual appropriations may not cross fiscal years, except in accordance with statutory authorization. Sub-paragraph (b) implements the broad authorization provided by the Federal Acquisition Streamlining Act (FASA), 41 U.S.C. § 253l, giving agencies greater flexibility in their use of fiscal year [annual] appropriations. As a result, a contract [option or order] whose period of performance does not exceed 1 year may begin in one fiscal year and end in the next fiscal year, and the appropriation current at the time of award may be used to fund the total amount.
Prior to the passage of this FASA provision, contracts for severable services awarded using annual appropriations could not extend beyond September 30 of the fiscal year covered by the annual appropriation, thus requiring that additional services to be provided in the next fiscal year be funded from the next year’s appropriation. Using this FASA exception, agencies are now able to stagger contract performance periods and option renewals throughout the year to avoid funding logjams at the beginning of the fiscal year.
However, this authority does not apply to a contract funded by a multiple-year appropriation. By its very terms, a multiple-year appropriation is available for the bona fide needs of the agency arising during its multiple-year period. Consequently, an agency using a multiple-year appropriation may enter into a contract for severable services 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. (See: B-317636, Apr. 21, 2009)
Yes. A no-cost extension is a modification that extends the contract performance period without the obligation of additional funds. When acquiring severable services using an annual appropriation, a no-cost extension is permitted only if it is for the continuation of the same services and would not result in a total performance period exceeding 12 months. This limitation includes situations involving an excusable delay, even if caused by the Government.
In contrast to contracts for severable services, a no-cost extension may be used to extend the performance period of a contract for non-severable services. If the completion of the end product(s) will require more time than originally established, a no-cost extension may be granted if it is determined to be both reasonable and in the Government's best interests. However, a prolonged extension (i.e., one that would increase the original period of performance by a quarter or more from its original duration) raises questions about whether the original obligation represented a bona fide need of the year of contract award.
6. If a contract was awarded in one fiscal year and terminated for default in the next fiscal year, are those funds available to the agency for use in a replacement contract? Would the answer be different if the contract were terminated for convenience?
The “replacement contract rule,” which dates back to a 1902 GAO decision, provides that, when a contract is terminated for default, funds obligated under the original contract are available, beyond their original period of availability, to engage another contractor to complete the unfinished work. Subsequent GAO case law has resulted in the development and application of three conditions that must be satisfied in order for funds to remain available to award a replacement contract:
- A bona fide need for the supplies or services must have existed when the original contract was executed, and it must continue to exist up to the award of the replacement contract.
- The replacement contract must not exceed the scope of the original contract.
- The replacement contract must be awarded within a reasonable time after termination of the original contract.
Regarding replacement of contracts terminated for convenience, the case law has shifted over the years, finally establishing a clear position in 1991 (70 Comp. Gen. 230). First, there must be clear evidence that the termination for convenience was needed to correct a legal impropriety in the procurement process (i.e., the original award was defective), documented with appropriate findings of fact and law. This may be based on corrective action determined necessary by the agency or result from a decision made by GAO or another administrative or judicial body. Once that test is met, the three conditions stated above are applied to determine if an agency can use prior-year appropriations to fund a replacement contract.
Funds appropriated for a specific period of time are also known as fixed appropriations and include both annual and multiple-year appropriations. All fixed appropriations go through three distinct phases: current (or unexpired), expired, and closed. Note, however, that these rules do not apply to no-year appropriations – they are available for obligation indefinitely.
During the current phase, a fixed appropriation account is available for incurring new obligations, including the award of new contract actions. This phase lasts for a set number of years: one year for annual appropriations; longer periods for multiple-year appropriations (as specified in the enacting legislation). For example, an annual appropriation enacted in FY 2011 is available for obligation until September 30, 2011; a multiple-year appropriation enacted in FY 2011 with a 3-year availability period may be obligated at any time until September 30, 2013.
During the expired phase, which begins immediately upon conclusion of the current phase, e.g., for a 1-year appropriation whose period of availability ends on September 30, 2011, the expired phase begins on October 1, 2011, the appropriation account is no longer available to fund new obligations. However, it is available for a 5-year period to pay for obligations that were incurred during the account’s period of availability [31 U.S.C. §1553(a)].
After the last (5th) expired year, the appropriation account is closed. At this point, the funds are no longer available for any purpose (31 U.S.C. §1552).
An expired appropriation retains its fiscal year identity and is available for recording, adjusting and liquidating prior obligations properly incurred during the period of time the appropriation was available for obligation [31 U.S.C. §1553(a)]. Five fiscal years after the end of its period of availability for obligation, a fixed appropriation is closed and it is no longer available for any purpose. This is termed the “5-year rule.”
As a result, fully funded contracts for non-severable services should be structured at the outset with this limitation in mind. Specifically, a contract for non-severable services should be structured so that funds obligated at award will be available to pay all invoices submitted under that contract. In most cases, in order to accommodate the 5-year rule, a contract for non-severable services funded with an annual appropriation would need to be less than 5 years in length.
The length of multi-year contracts for non-severable services (under FAR 17.1 and HHSAR 317.1) is also limited to 5 years by statute [[41 U.S.C. § 254c(d)]. However, the original multi-year contract can include an option of up to 5 additional years to acquire related non-severable services after conclusion of the original multi-year contract 5-year term to comply with the 10-year limit on contracts for services set by HHSAR 317.204(e).
9. What happens if a final cost audit, indicating that additional reimbursement is due the contractor, is received after the source appropriation account has been closed? Is there any appropriation source that may be used to obligate the funds necessary to reimburse the contractor?
The funds would have to come from a then-current appropriation. Pursuant to 31 U.S.C. §1553(b), funds may be obligated from any current appropriation account of the agency available for the same purpose, provided:
- The obligation would have been properly chargeable to the original source account, in terms of purpose and amount, prior to closing of that account; and,
- The total amount of charges to an appropriation account for such purposes do not exceed one percent of the total amount of the appropriation account involved.
Requests for funds of this nature and purpose must be closely coordinated with the responsible budget/finance office to ensure these limitations are met.
- Cost-reimbursement contact for severable services using incremental funding?
Insert the provision at 352.232-70, Incremental Funding, together with the clause at 352.232-71, Estimated Cost - Incrementally Funded Contract. The former provides a means to identify the period of time the incremental funding is expected to cover. The latter provides a means to identify the total estimated contract cost, the amount incrementally funded, and the schedule by which the Government expects to allot funds to this contract. Both are used in tandem with the clause at FAR 52.232–22, Limitation of Funds, to establish the parties’ limits of liability during the period when the contract is not funded at the total estimated cost (plus any applicable fee). You must also include the clause at FAR 52.232-20, Limitation of Cost, because that clause will govern once the contract has been fully funded (at which point the Limitation of Funds clause no longer applies).
- Fixed-price (or time & materials or labor hour) contract for severable services using incremental funding?
Insert the clause at 352.232-72, Limitation of Government’s Obligation. The clause places limits the Government’s liability to the amount incrementally funded, establishes the parties’ limits of liability during the period when the contract is not fully funded, and provides a means to specify the mutually-agreed schedule (after contract negotiations) by which the Government will allot funds to this contract.
- Multi-year contract pursuant to FAR Subpart 17.1 for severable or non-severable services?
The HHSAR does not prescribe any provisions or clauses for use in multi-year contracts. The only clause specific to this contracting method is FAR 52.217-2, Cancellation Under Multi-Year Contracts. It establishes the liabilities and rights of the parties in the event the Government cancels the contract. Cancellation is the decision not to continue performance (in any year after the first) and not to fund the next and all subsequent fiscal years due to the unavailability of appropriations. Cancellation is effected between fiscal years. In contrast, termination, pursuant to the applicable termination clauses in the contract, can be effected at any time during the life of the contract.
In order to enter into a multi-year contact pursuant to FAR 17.105-1(a),the Head of the Contracting Activity (HCA) must determine that the need for the supplies or services is reasonably firm and continuing over the contract period, and that the multi-year contract will serve the best interests of the United States by encouraging full and open competition or promoting economy in the administration, performance, and operation of agency programs. HHSAR 317.105-1(a) supplements the FAR by (1) limiting the HCA’s authority, which is not delegable, to individual acquisitions where the full estimated cancellation ceiling does not exceed 20 percent of the total contract value over the multi-year term or $12.5 million, whichever is less, and (2) specifying additional content requirements for the determination.
The approval of the HHS Senior Procurement Executive is required for any: individual determination to use multi-year contracting with a cancellation ceiling in excess of the limits referenced above; or a class determination, i.e., one that seeks approval to use multi-year contracting for a group of related contract actions.
If the estimated cancellation ceiling exceeds $12.5 million, the determination also must be accompanied by a draft congressional notification (required by FAR 17.108 as supplemented by HHSAR 317.108).
If the proposed multi-year contract award includes an option, it must comply with the terms of FAR Subpart 17.2. Use of options as a unilateral right of the Government requires their identification in the solicitation, evaluation of their terms and pricing as part of the award determination, and their inclusion in the awarded contract. Accordingly, an option for related non-severable services that is also structured as a multi-year effort must be addressed in the original determination pursuant to HHSAR 317.105-1(a).
12.What is the proper use of the clause in FAR 52.217-8, Option to Extend Services?
The clause is prescribed by FAR 17.208(f) for use “in solicitation and contracts for services when the inclusion of an option is appropriate.” While it provides no specific direction about the intended use of the clause, the prescription cross-references FAR 37.111, Extension of services, which states:
Award of contracts for recurring and continuing service requirements are often delayed due to circumstances beyond the control of contracting offices. Examples of circumstances causing such delays are bid protests and alleged mistakes in bid. In order to avoid negotiation of short extensions to existing contracts, the contracting officer may include an option clause [see 17.208(f)] in solicitations and contracts which will enable the Government to require continued performance of any services within the limits and at the rates specified in the contract.
This FAR section establishes only two limits on the use of this clause:
- Labor rates will not be adjusted unless they are affected by a change in any applicable prevailing wage rate adjustment (Service Contract Act or Davis-Bacon Act); and,
- The total extension of performance cannot exceed 6 months, even if the clause is used more than once.
The most common use of this clause is to extend existing contracts for up to an additional 6 months as a bridge to ensure the continuing availability of services when the award of a follow-on contract has been delayed by external events. This normally requires the obligation of additional funds to cover the cost of the additional services.
While other uses of this clause are documented in case law, use of the clause does not provide a means to override fiscal limitations imposed by appropriations law. Thus, a contract for severable services with a 12-month performance period funded by an annual appropriation cannot be extended further without obligating new funding from a current appropriation source. An extension of the originally funded services for any period beyond the original 12 months without such additional funding would allow performance to continue beyond the annual appropriation’s period of availability.
Although there is no general prohibition against using multi-year contracting for a task order under an ID/IQ contract, the determination (see FAR 17.105-1(a) and HHSAR 317.105-1) to use this special contracting method must be made at the individual task order level. Making a determination at the time of award of the ID/IQ to address the use of multi-year contracting for all anticipated task orders would be inconsistent with the FAR conditions for the use of an ID/IQ contract. ID/IQ contracts are suitable when the Government cannot predetermine, above a specified minimum, the precise quantities of supplies or services that it will require during the contract period [FAR 16.504(b)]. Should an OPDIV determine that it is desirable to structure individual task orders as multi-year efforts under a particular ID/IQ contract, the Department recommends that the terms and conditions of the ID/IQ contract permit it and the individual task orders adhere to FAR 17.1 and HHSAR 317.1.
14. In early September 2010, after completing source selection, but prior to contract award, one of the unsuccessful offerors filed a protest with the Government Accountability Office (GAO). Accordingly, award of the pending contract was postponed until after resolution of the protest, which is not expected until after September 30, 2010. We had planned to fund this contract from the FY 2010 appropriation, which will expire on September 30, 2010. Once the protest is resolved, does my agency have to commit new funding from the then-current year’s appropriation to fund the contract award?
Not necessarily. Per FAR 33.102(c), if the funds available to the agency for a contract at the time a protest is filed with GAO would otherwise expire, the funds remain available for obligation for 100 days after the date on which the final ruling is made on the protest. In order to use this FAR provision, the agency must maintain the commitment of the funds in the agency accounting system for this specific purpose.
While this FAQ addresses a protest of a proposed award, the funds also remain available for use in this same manner if the protest to GAO concerns a solicitation or a contract award.
It is possible to use both techniques in a contract for severable services that will cover more than one year. HHSAR 332.702-70(b) establishes a policy preference to structure such contracts with a base period (not to exceed 1 year) and annual options, whose terms are established at the time of award. In addition, HHSAR 332.702-70(c) establishes a policy preference to fully fund the base period and each option (when exercised). However, budget shortfalls may not permit fully funding an option year, which would then require the use of incremental funding. Therefore, if there is any possibility that incremental funding may be used, the contract must include the FAR and HHSAR clauses that authorize the use of incremental funding. For a cost reimbursement contract, the required clauses are FAR 52.232-22, Limitation of Funds; HHSAR 352.232-70, Incremental Funding; and, HHSAR 352.232-71, Estimated Cost – Incrementally Funded Contract.