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Acquisition Alert 2013-01: Guidance Regarding Funding of Contracts for Services Exceeding One Year of Performance Using Annual Appropriations

Topics on this page 

Contracts for Severable Services
Contracts for Non-Severable Services
Multi-Year Contracting Authority
Use of Indefinite-Delivery, Indefinite-Quantity (IDIQ) Contracts for Research Requirements
Continuing Resolutions
OPDIV and STAFFDIV Responsibilities


This Memorandum provides guidance on contract formation and funding strategies applicable to contracts and orders for services (hereafter “contracts”) exceeding 1 year of performance using annual appropriations. It also provides interim HHS Acquisition Regulation (HHSAR) coverage pending formal incorporation into the HHSAR, including: (a) policies related to contract funding requirements for severable and non-severable services; and (b) standard solicitation provisions and contract clauses to be used when cost-reimbursement contracts will be incrementally funded.  Because the use of multiple-year appropriations can raise unique fiscal law questions, guidance on such use should be sought on a case-by-case basis.


Annual appropriations (also called “fiscal year” or “1-year” appropriations) are made for a specified fiscal year and are available for obligation only during the fiscal year for which they are made.

Bona Fide Needs Rule is a fundamental principle of appropriations law, under which a fiscal year appropriation may be obligated only to meet a legitimate, or bona fide, need arising in, or in some cases arising prior to but continuing to exist in, the fiscal year for which the appropriation was made.A common application of the rule is that an appropriation is not available for the needs of a future year.

Continuing resolution is an appropriation act that provides budget authority for federal agencies, specific activities, or both to continue in operation when Congress and the President have not completed action on the regular appropriation acts by the beginning of the fiscal year.

Incremental funding, as addressed in FAR Subpart 32.7 and HHSAR Subpart 332.7 (as provided herein), is a method of funding cost-reimbursement contracts for severable services that provides specific spending limits that are less than the total estimated cost of the entire contract, with the understanding that additional funds are expected to be provided at a later date. 

Multiple-year appropriations are available for obligation for a definite period in excess of one fiscal year.

Multiple-year contract means 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) the completion of non-severable services that extend beyond a 1-year period. For purposes of this memorandum, the term “multiple-year contract” does not include any contract awarded using the multi-year contracting procedures authorized under FAR Subpart 17.1.

Multi-year contracting is a special contracting method (see FAR Subpart 17.1) used to acquire planned requirements (for supplies or services) for up to 5 years without establishing or having to exercise options. A multi-year contract using annual appropriations 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.

No-cost extension is a modification that extends the contract performance period without obligating additional funds.

A Non-severable service is a service that represents an entire job or single undertaking with a defined end-product, which cannot feasibly be subdivided.  (With a non-severable service, the Government only receives value when the non-severable service is completed.  Were the service to cease prior to completion, the Government would not have received “value” for the service already performed.  The service must have independent value,  i.e., its value cannot depend upon the accomplishment of another activity.  If the completed service provides value only upon additional action, then the service is not non-severable and may represent only a portion of a non-severable service).   

Option means a unilateral right in a contract by which, for a specified time, the Government either 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 at FAR 2.101.  Please also see FAR Subpart 17.2.

Severable services are services that are continuing and recurring in nature.   Severable services can therefore be separated into components that independently meet a separate and ongoing need of the Government.  (With severable services, the Government receives value on an ongoing basis.  Were the services to cease prior to completion of the performance period, the Government would have received value for the services already performed).

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1.            General Principles

As a general matter, severable services are a bona fide need of the fiscal year in which they are performed.  Consequently, agencies must generally obligate an appropriation that is current in the fiscal year in which the services are performed.

a.      Exception

When using annual appropriations, agencies may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year (41 U.S.C. § 3902; FAR 32.703-3(b)).

2.            Required Contract Structure and Funding

When using annual appropriations and when a requirement for severable services will cover more than 1 year, it is HHS policy to structure a contract (including an order issued against a Task Order contract) for such a requirement to include a base period (not to exceed 1 year) and options (each not to exceed 1 year). 

If sufficient funds are available to fully fund a 1-year base period, it is HHS policy that each base and option period must be fully funded at the time of contract award or option exercise from an appropriation available for obligation at the time of award or exercise (unless multi-year contracting authority specified in FAR Subpart 17.1, as described below, is used). 

If sufficient funds are not available to fully fund a 1-year base period, it is HHS’ policy preference that a contract for such a requirement be structured to include a base period of shorter duration as may be appropriate, with fully funded option periods each not to exceed 1 year.  However, under such circumstances incremental funding may be used as described below and in accordance with HHSAR 332.702-70, 332.703-1, 332.703-71, and 332.705-2.

Utilizing a base and option period contract structure is required or preferred (depending on the circumstances described above) over the use of incremental funding, because the use of options limits the Department’s liability. The Department does not incur termination costs when an option is not exercised, but does incur termination costs when an increment cannot be funded, since the contract must be terminated.

a.      Exceptions

  1. Incremental Funding

Incremental funding may be used only when acquiring severable services and full funding of a 1-year base period is not available at the time of initial award.  When using incremental funding, the Government obligates an amount to cover a specified period or increment of performance and establishes a schedule for allotment of additional “increments” at the time of award. Incremental funding may be used only in cost-reimbursement contracts for severable services.

No funding increment may cross fiscal years because no authority permits the Department to fund increments that cross fiscal years from a single annual appropriation.  The exception to the bona fide needs rule provided at 41 U.S.C. § 3902, as implemented by FAR 32.703-3(b)), does not apply to funding increments.

  1. Multi-year Contracting Authority


See discussion below. 

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1.            General Principles

As a general matter non-severable services are a bona fide need of the fiscal year in which the contract is awarded.  Consequently, subject to the exceptions provided below, contracts for non-severable services must be funded entirely from an appropriation available at the time of award, notwithstanding that performance may extend into future fiscal years.  

2.            Required Contract Structure and Funding


Because non-severable services represent an entire undertaking that is a bona fide need of the fiscal year in which the contract is awarded, it is HHS policy that contracts for non-severable services shall be structured without options, which are indicative of severability, and that such contracts be fully funded at the time of contract award, subject to the exceptions provided immediately below.  Incremental funding, as described above, is not permitted.  OPDIVs and STAFFDIVs should be mindful of the requirement to fully fund contracts for non-severable services when preparing their budgets, program plans, and acquisition plans.

a.      Exceptions

  1. Appropriate Use of Options for Contracts for Non-Severable Services

Agencies are granted broad discretion in defining their requirements.  Some projects can be structured either as an entire undertaking, or as a series of related but separate entire undertakings, each independently providing the Government with something of value.  Consequently, while the use of options generally is not permissible when acquiring non-severable services, there are circumstances in which it is possible to use options to authorize the contractor to undertake related tasks that are each non-severable in nature and separate from one another.

For example, the ultimate objective of a research study may be to assess the safety and efficacy of a vaccine on humans.  The overall research study may consist of separate and distinct “component” studies, each requiring a final report (e.g., a physical-chemical study, an animal study, and clinical trials), and each having independent value regardless of whether or not the other studies are ultimately conducted.  On the one hand, the requirement could be defined in terms of its ultimate objective, treated as an entire undertaking, and fully funded at the time of contract award.  On the other hand, the requirement could be defined in terms of its component studies and structured as a series of related but separate non-severable services, whereby options are used to acquire each of the component studies.  In either case, the statement of work must clearly describe which approach the agency has elected to take, and define the research study as either an entire undertaking or a series of related but separate entire undertakings.  Additionally, the contract structure and funding method used must reflect the description provided in the statement of work.

When used to acquire non-severable services, an option is considered a bona fide need of the year in which it is exercised and must be funded in full at that time, irrespective of the time period covered. In developing contracts and options to acquire non-severable services, each requirement, line item, or option must stand alone and provide independent merit and value to the Government.  Contracting Officers shall not artificially divide requirements when those requirements are part of one integrated activity that only benefits the Government upon final completion of all related work.

  1. Use of Phases Distinguished from the Use of Options for Non-Severable Services

Using the clinical research project example above, if it is determined that all three work segments are actually integral parts of one non-severable requirement (i.e., the Government only obtains something of value when all three segments are completed), it is not appropriate to treat them as options.  However, the contract statement of work may be structured to define three phases and to divide the work into stages of accomplishment. The contractor must complete, and the Contracting Officer must approve, each phase before the contractor may begin work on the next phase.  The use of phases can therefore facilitate the management of contractor progress during the execution of complex non-severable projects.  Phases are not equivalent to options and the terms should not be used interchangeably.  Phases do not provide a means to partially fund the work involved, because a non-severable requirement cannot be rendered severable simply by separating the requirement into phases or a similar grouping of tasks. Thus, the use of phases does not relieve the Department from fully funding a non-severable requirement at time of award.

  1. Multi-year Contracting Authority

See discussion immediately below.

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1.            General Principles

HHS may use the authority conferred by 41 U.S.C.  § 3903 and FAR Subpart 17.1 to enter into multi-year contracts.  A multi-year contract is a contract for the purchase of property or services for more than one, but not more than five program years.  This special contracting method may be used to acquire up to 5 years of planned requirements; however, it is not considered “incremental funding” within the meaning of FAR Subpart 32.7 and HHSAR 332.7.  HHS does not have specific statutory authority to exceed the 5-year limitation in FAR 17.104(a).

Generally speaking, with respect to services, the multi-year contracting authority applies to the acquisition of both severable and non-severable services.  Notable features of the multi-year contracting authority are as follows: 

  • With respect to severable services, if certain conditions are met, the multi-year authority permits agencies to enter into a contract for up to five years, funding each program year with an appropriation that is current at the time the program year begins, without using options.  The authority also permits agencies to enter into a contract for up to five years and to fully fund the entire contract period using funds available at contract award.  The multi-year authority therefore permits agencies to:  (1) annually fund severable program requirements without options; and (2) enter into and fully fund a contract for severable services for more than one year. 
  • With respect to non-severable services, if certain conditions are met, the multi-year authority permits agencies to enter into a contract for up to five years, funding each program year with an appropriation that is current at the time the program year begins, enabling agencies to acquire such services without fully funding the entire requirement at contract award.  The multi-year authority therefore permits agencies to annually fund non-severable program requirements that span more than one year.

 In order to enter into a multi-year contract, 41 U.S.C. § 3903 requires the agency to determine that:

  • The need for the property or services is reasonably firm and continuing over the period of the contract; and
  • A multiyear contract will serve the best interests of the United States by encouraging full and open competition or promoting economy in administration, performance, and operation of the agency's programs; and
  • Funds are available and obligated for such contract for the full period of the contract, OR
  • Funds are available for the first fiscal year in which the contract is in effect and for the estimated costs associated with any necessary termination of such contract, in which case: (1) the multi-year contract must provide that performance under the contract during the second and subsequent years of the contract is contingent upon the appropriation of funds; and (2) the multi-year contract must provide for a negotiated cancellation payment, which can be $0, to be made to the contractor if appropriations are not made.

2.            Additional Guidance for Annually Funding Program Requirements Under the Multi-Year Authority

When using multi-year contracting procedures to acquire severable or non-severable services by annually funding program requirements, the funding must be provided in full at the start of each program year from a then-current appropriation. Use of a multi-year contract to annually fund program requirements also requires that a cancellation ceiling be established and fully funded at the time of contract award.  Each program year under a multi-year contract represents discrete funding for that year. If funds remain at the end of a given program year, they cannot be “carried over” to a subsequent program year. Additionally, the use of incremental funding in the manner prescribed in Subpart 332.7 is prohibited in any acquisition using multi-year contracting procedures. 

While noted in the FAR as a flexible contracting method applicable to a wide range of acquisitions, the form of multi-year contracting for acquisition of services by annually funding program requirements explained in this section is a complex acquisition method requiring careful planning, budgeting, and application of specialized contracting expertise. With respect to non-severable services, within HHS, multi-year contracting appears to lend itself to certain classes of acquisitions (e.g., certain types of research that represent established, reasonably stable requirements) as an alternative means of funding contracts for those types of services using annual appropriations.  A new Subpart 317.1 was added to the HHSAR in January 2010 to address the use of multi-year contracting, including individual and class determinations and approval authority.

  1. Determination of the Cancellation Ceiling

During acquisition planning, as part of the independent Government cost estimate, the Government must develop an internal estimate of potential cancellation costs, considering the facts of the acquisition and the issues discussed in FAR 17.106-1(c). The resulting solicitation should request that offerors identify the amount and basis for their cancellation ceilings within their cost/price proposals. The content of competitive proposals and discussions may require changes to the cancellation ceiling before final negotiation and award. Upon award, the Government commits to the full contract term and the full, aggregate requirement, subject to the availability of appropriations for the subsequent years. The amount obligated at award must fund the initial year’s requirements plus the full cancellation ceiling.  

Cancellation is the decision not to continue performance (in any year other than the first or last year of performance) and not to fund any subsequent fiscal years due to the unavailability of appropriations.  Cancellation stops the contract from moving into the next program year and cancels all remaining years. If a multi-year contract is cancelled, the Government’s liability is limited to the amount of the cancellation ceiling. Final settlement is a matter of contract negotiation. 

Regardless of whether appropriations are available, a multi-year contract (like any contract) may be terminated for convenience at any time, in whole or in part. In the event of a total termination for convenience, the liability of the Government shall not exceed the amount obligated for performance, plus the cancellation ceiling.

  1. Example

Table 1 below provides an example of a multi-year, cost-plus-fixed-fee contract to illustrate contract formation and funding requirements, as well as the amortization of the cancellation ceiling.  The example uses a 5 year contract for a non-severable research study.

Table 1. Multi-year Contract Funding Illustration (Fiscal Year)


CategoryFY 1FY 2FY 3FY 4FY 5Totals
Initial year program obligation







Obligation of cancellation ceiling







Amortized cancellation liability







Annual program performance level








In this example, the total estimated cost-plus-fixed-fee for the full, 5-year performance of all services is $100 million. At contract award, the Contracting Officer must obligate a total of $25 million—$20 million for the initial year’s program requirements and $5 million for the cancellation ceiling. The cancellation ceiling, per FAR 17.106-1(c), is established by the Contracting Officer to account for non-recurring costs,[i] while excluding all labor and other expenses that might be incurred during performance of subsequent-year program requirements. The cancellation ceiling, which must be fully obligated in Year 1, amortizes each program year to reflect the decrease in the Government’s cancellation liability as subsequent program years are funded and performed.  Contracts shall not carry over unused cancellation funding.  With the availability of an appropriation for Year 5 (final year), any liability for cancellation ends and the remaining $2 million of the cancellation ceiling is no longer needed.

In the event of cancellation, the contractor would be compensated in an amount not in excess of the cancellation ceiling applicable at the time of cancellation. As shown in Table 1 above, if cancellation occurred at the conclusion of Year 2, the maximum liability of the Government would be $3 million. The final determination of compensation due to the contractor, however, is a matter of negotiation and is handled as if the contract had been terminated for convenience. The contractor must submit a detailed claim and justify all costs for which payment is sought. Guidance on handling cancellations is provided by the clause at FAR 52.217-2, Cancellation under Multi-year Contracts.

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It is HHS’ policy preference that contracts for research requirements be structured as (IDIQ) contracts. IDIQ contracts provide for the issuance of task orders throughout the duration of the contract period.  Because research requirements often change as aspects of the projects are completed and data is received, it is advantageous to utilize a contract structure that maximizes flexibility.  Moreover, particularly with respect to long-term research projects, research requirements are often too costly to fully fund at contract award and often include severable and non-severable service components.    In compliance with this memorandum, each task order can be structured and funded in accordance with the severable or non-severable nature of the services ordered.  Accordingly, as compared to other contract vehicles, IDIQ contracts often offer a superior mechanism to accomplish research projects by better accommodating the need for flexibility, better addressing the need to define the requirement according to its component severable and non-severable parts, and better ensuring compliance with appropriations law.  Although a statutory preference exists for agencies to award multiple-award IDIQ contracts, it is permissible to enter into a single-award IDIQ contract based upon certain findings by the contracting officer as described in FAR 16.504.

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1.            No-Cost Extensions

  1.       Severable Services

A modification to authorize a no-cost extension of a contract for severable services originally funded by an annual appropriation is permitted only if it is for the continuation of the same services and would not extend the performance period involved beyond 1 year. This limitation applies to situations involving an excusable delay or Government-caused delay; neither situation justifies a no-cost extension that would extend the total performance period beyond 1 year.  Given the limitation above, and the common HHS practice of structuring contracts for severable services with a base period and option periods of 1 year each, the use of a no-cost extension under a contract for severable services should be a very rare occurrence. Further, a no-cost extension cannot be used to add work that is outside the scope of the original contract.

      b.   Non-Severable Services           

Generally, a no-cost extension may be used to extend the performance period of a contract for non-severable services. This assumes that the original obligation represented a bona fide need of the fiscal year in which the contract was awarded.  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 in the Government’s best interests.

2.            Modifications Affecting Price

      a.   Out-of-Scope Modifications

If a modification exceeds the general scope of the original contract, the modification amounts to a new obligation and is chargeable to funds current at the time the modification is made.  Further, this type of modification requires compliance with the provisions of FAR Subpart 6.3 concerning other than full and open competition, and the signature of both parties.

b.    Within Scope Modifications

A modification within the general scope of the original contract that involves an adjustment to the contract price requires careful consideration when determining the proper appropriation chargeable. Most Government contracts contain clauses which, under certain conditions, make the Government liable for possible adjustments in the contract price. Such liability may arise due to changes in specifications, Government-caused delay, changed conditions, or other circumstances.

When an upward price adjustment is requested in a subsequent year and is attributable to an “antecedent liability” (i.e., the Government’s liability arises and is enforceable under a provision in the original contract), the modification must be funded from the appropriation current at the time the contract was originally executed.

                (1)          Exception

With respect to a cost-reimbursement contract, an increase in the contract cost ceiling (i.e., total estimated cost) that is not enforceable by the contractor and is solely a matter of Government discretion should be charged to an appropriation current at the time of the contract modification.  An increase in the contract cost ceiling that is enforceable by the contractor and is not a matter of Government discretion (e.g., amounts for final overhead in excess of the ceiling where the contractor has an enforceable right to those amounts) remains an antecedent liability and must be charged to funds available when the contract was originally executed.

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Because the terms of CRs may vary, for each CR, specific operating guidance will be issued at the Departmental level by the ASFR. Such guidance may indicate the availability of funds for existing and new projects or activities, identify any specific limits or constraints, and establish the authorized level and timing of obligations. OPDIVs may supplement the general Departmental guidance on the CR to reflect the specific conditions and limitations imposed by the CR on their operations.

Accordingly, contracting activities should confer with OPDIV and STAFFDIV budget/finance personnel to determine the availability of funds for existing and new contract requirements. OPDIV and STAFFDIV budget/finance staff will prepare an operating plan to ensure that available funds are used as efficiently and effectively as possible and minimize disruption of operations.

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OPDIV AND STAFFDIV RESPONSIBILITIES                                                                          

As of the effective date of this memorandum, OPDIVs and STAFFDIVs are expected to comply with the requirements stated herein for new solicitations and applicable contract actions, including modifications. Specifically, OPDIV and STAFFDIV Contracting Activities must do the following: 

As of the effective date of this memorandum, OPDIVs and STAFFDIVs are expected to comply with the requirements stated herein for new solicitations and applicable contract actions, including modifications. Specifically, OPDIV and STAFFDIV Contracting Activities must do the following: 

  1. Near-term actions.
  • For new requirements in process, if the funding strategy is not in compliance with this memorandum:
  1. If the solicitation has not been issued, make all necessary changes to bring it into compliance.
  2. If the solicitation has been issued but proposals have not been received, amend the solicitation to include the appropriate provision(s) and clause(s) shown in the interim HHSAR coverage (attached).
  3. If proposals have been received, provide the appropriate new clause(s) to all offerors still under consideration and include the clause(s) in the resultant contract(s).
  • In the remote event that there are any existing incrementally funded contracts for non-severable services (or other instances of non-compliance), consult with the OPDIV’s or STAFFDIV’s budget/finance office and OGC for next steps.
  1. Ongoing responsibilities.
  • Consistent with 304.7100, Heads of Contracting Activity shall establish interdisciplinary pre- and post-award quality assurance procedures (including the contracting, finance/budget, legal, and program functions) to ensure the appropriate planning, award, and administration of multi-year contracts.
  • Program Managers shall coordinate any Acquisition Plan contemplating the use of multi-year contracting procedures with the appropriate OPDIV or STAFFDIV budget/finance officials to ensure compliance with funding requirements, including the up-front funding of the full amount of the estimated cancellation ceiling.
  • Contracting Officers shall verify that DCIS entries for the data field Multi-Year Contract (Yes or No—FPDS/NG data element #6C) are accurate and consistent with the content of section 4.e. of this memorandum and Subpart 317.1.


[i] Non-recurring costs means those costs that are generally incurred on a one-time basis, such as: lab/plant or equipment relocation or rearrangement necessary to undertake the contract work; acquisition of special equipment; and specialized workforce training. They are distinguished from recurring costs, which include labor, materials and other costs that will directly and repeatedly be incurred as the work is performed. 


Related Information

Acquisition Alert 2013-01 Memorandum
Attachment 1:  Interim HHSAR Revisions (based on 4/26/10 version of the HHSAR)