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

Contracts for Supplies and Equipment

Generally, contracts for supplies and equipment are more straight-forward than those for services or research and development with regard to compliance with appropriations law requirements, including the bona fide needs rule. In its most elementary form — where the entire contract (award, delivery/performance and payment) takes place during a single fiscal year — this rule means simply that the appropriation is available only for the needs of the current fiscal year. The common application of the rule in this context is that an appropriation is not available for the needs of a future year. For example, if, near the end of the fiscal year, HHS purchased a truckload of a particular medicine when it is clear that, based on current usage, the existing inventory of this medicine is enough to last several more years—it would appear that the motivation was to use up the appropriation before it expired. Thus, this contract would violate the bona fide needs rule.

This is not to suggest that an agency may purchase only those supplies it will actually use during the fiscal year. A contract for the replenishment of inventory levels/stock is viewed as meeting a bona fide need of the year of contract award as long as it is intended to replace stock used in that year, even though the replacement items will not be used until the following year. "Stock" in this context refers to "readily available common-use standard items" (44 Comp. Gen. 695, 1965). Thus, the bona fide needs rule does not prevent maintaining a legitimate inventory at reasonable and historical levels. There are limits, however; GAO has questioned the propriety (from the bona fide needs perspective) of purchases of supplies carried in stock for more than a year prior to issuance for use (B-134277, December 18, 1957).

When the government purchases supplies or equipment in one fiscal year and delivery occurs in whole or in part in a subsequent fiscal year, the question is whether the contract meets a bona fide need of the fiscal year in which it was executed. If deliveries are scheduled only for a subsequent fiscal year, or if contract timing precludes delivery until the following fiscal year, generally it will be presumed that the contract was made to obligate funds from an expiring appropriation and not intended to meet a bona fide need of the year of contract award. However, the timing of delivery, although a relevant factor, is not conclusive. There are legitimate situations in which an obligation may be incurred in one year with delivery to occur in a subsequent year. The stock/inventory discussion above is one example. Where supplies or equipment cannot be obtained in the same fiscal year in which they are needed and contracted for, provisions for delivery in the subsequent fiscal year do not violate the bona fide needs rule as long as the intervening period between contract award and delivery is not excessive and the procurement is not for standard commercial items readily available from other sources (38 Comp. Gen. 628, 1959). Similarly, an agency may contract in one fiscal year for delivery in a subsequent year if the material contracted for will not be obtainable on the open market at the time needed for use, provided the intervening period is necessary for production or fabrication of the material (37 Comp. Gen. 155, 1957). GAO has also held that, if an obligation is proper when made, unforeseen delays that cause delivery or performance to extend into the following fiscal year will not invalidate the obligation (23 Comp. Gen 82, 1943).

While the above discussion covers the general tenet, and its key exceptions, that an appropriation may not be used for future years' needs (i.e., a time period subsequent to its period of availability), different issues arise with regard to prior years' needs. Here, there are situations where it is not only proper but it is mandatory to use current available appropriations to satisfy a need that arose in a prior fiscal year. This is referred to as a "continuing need" (B-197274, September 23, 1983). The essential requirements of the continuing need corollary (to the bona fide needs rule) are that: (1) the need, unmet in the year it arose, must continue to exist in the subsequent fiscal year/obligational period; (2) the incurring of the obligation must have been a matter of agency discretion; and (3) no obligation for the need was in fact incurred during the prior year. If the agency has no discretion as to the timing of an obligation, or in discretionary situations the agency incurred a valid obligation in the prior year, then the continuing need corollary has no application and the obligation must be charged to the prior year. Absent statutory authority, current appropriations are not available to fund an obligation or liability of a prior obligational period (as opposed to an unmet need for which funds have not been obligated).

This tool cannot substitute for the application by the Office of the General Counsel (OGC) of appropriations law to the facts and circumstances of a particular situation and should not be used as the sole basis for decision-making. If there is any question concerning the application of appropriations law, OGC advice must be sought.

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Content created by Assist. Sec./Financial Resources - Grants/Acquisition Policy
Content last reviewed on April 16, 2014