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



Regulations and

Case Studies

Frequently Asked Questions


HHS Reference Tool Content

I.Basic Appropriations Law Concepts
 A.Anti-Deficiency Act
 B.Bona FideNeeds Rule
 C.Appropriation Types
 D.Continuing Resolution
II.Decision Factors
 A.No-Year Appropriation
 B.Bona FideNeeds Rule
 C.Acquiring Severable Services
  1.Annual Appropriation
   a.Contract period not more than one year
   b.Contract period more than one year
    -Incremental Funding
  2.Multiple-Year Appropriation
   a.Contract period will not extend beyond multiple-year appropriation's period of availability
   b.Contract period will extend beyond multiple-year appropriation's period of availability
    -Incremental Funding
 D.Acquiring Non-severable Services
  1. Funded in Full
    a.Entire Contract/Single Requirement
    b.Fully Funded Initial Requirement (Followed by Options)
  2.Multi-year Contracting
  3.Options After Initial Requirement
    a.Severable Services
    -Annual Appropriation
    -Multiple-Year Appropriation
    b.Non-severable Services
    -Fully Funded
    -Multi-Year Contract
 E.Acquiring both severable and non-severable services
  1.Single Definitive Contract
  2.Indefinite-Delivery/Indefinite-Quantity Contract
III.Case Studies
IV.Frequently Asked Questions

Annual Appropriations — Funding a contract for more than one year

What method will be used to address the portion of the performance period that will exceed one year?


Option(s)           Incremental Funding


Help Notes

Option means a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract within the existing term of the contract, or may elect to extend the term of the contract. This definition expands on the definition in FAR 2.101. Please also see 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 contract award. Because most of the Department’s funding is provided through annual appropriations, base and option periods are typically defined with 1-year terms.

Incremental funding, as addressed in FAR Subpart 32.7 and HHSAR Subpart 332.7, is a method of funding contracts for severable services that obligates funds and sets specific spending limits that are less than the total estimated cost/price of the contract, with the understanding that additional funds are expected to be obligated at a later date. At contract award, the full contract performance period is specified, but the amount obligated provides only an initial increment of funding. Funds are subsequently obligated in periodic installments as work progresses, consistent with the terms of the contract and in observance of the maximum 12-months of performance that may be authorized when the funding source is an annual appropriation.


  • When severable services will cover more than one year, it is HHS policy [HHSAR 332.702-70(b)] to structure contracts with a base period (not to exceed 1 year) and annual options. 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.
  • HHS policy [HHSAR 332.702-70(e)] prohibits the use of incremental funding in contracts for non-severable services.