HHS Reference Tool for Contract Funding, Formation and Appropriations Law Compliance
Annual Appropriation — Incremental Funding
Will all future increments cover a period of one year or less?
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 entire contract, with the understanding that additional funds are expected to be obligated at a later date. At contract award, the full contract period is specified, but the amount obligated provides only the 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.
The HHSAR limits the use of incremental funding to contracts for severable services. Its use in contracts for non-severable services is prohibited [see HHSAR 332.702-70(e)]. In addition to its common application to cost-reimbursement contracts, HHSAR 332.702-72 authorizes the use of incremental funding in fixed-price, time and materials or labor-hour contracts, provided the contract base period and any option period:
- Is for severable services;
- Does not exceed one year; and
- Is funded using the appropriation in effect on the date the funds are obligated.
- Regardless of contract type, HHSAR 332.702-70(b) establishes a policy preference for the use of options rather than incremental funding when structuring contracts for severable services that will cover more than 1 year. This policy preference recognizes that the use of options limits the Department’s liability, i.e., ending a contract by not exercising an option would not incur termination costs. Also, the use of options poses less risk in terms of ensuring compliance with applicable appropriations law principles.
- HHSAR 332.705 prescribes the use of contract clauses (based on the contract type in use) to help ensure that contract formation complies with applicable appropriations law principles.