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Don’t Let Incremental Funding Drag Your Program over the Fiscal Cliff

During this period of fiscal uncertainty, characterized by continuing resolutions and the approaching “Fiscal Cliff,” many may turn to incremental funding as a means to manage scarce and unpredictable resources.  Incremental contract funding is a useful financial tool because it forces the government to closely monitor costs.  However, if not deliberately planned and carefully managed, incremental funding can result in more problems than benefits.

Incremental funding has limitations.  First, it cannot be used for the development of major systems – these must be fully funded unless excepted by appropriations law.  Also, fixed price contracts may be incrementally funded if the contract is for severable services.  A service is severable if it can be separated into discrete elements or periods that independently meet a need of the government; the government obtains a benefit when the services are provided even if the contract ends early.

When considering incremental funding, be sure to consider the following:

Incremental funding should not be used to cover funding shortfalls.

If the product or service’s cost exceeds the funds available, avoid using incremental funding to partially cover the contract’s cost.  Incremental funding is not a means to buy time while seeking additional funds.  Don’t use incremental funding if you are uncertain of the arrival or timing of funding.  If you find yourself in this situation, rather than use incremental funding, divide your requirement into core services and non-core services.  Solicit for the non-core services as contract options that you can fund separately based upon need and funds availability.

Using options to shorten performance periods may also limit the government’s liability.  For example, given our current Fiscal Year 2013 continuing resolution (CR), consider timing the first period of performance with the end of the CR, with an optional period to finish the year.  If funds do not become available, not exercising the option would not result in termination costs. 

Incremental funding increases total price/cost.

From the offerors’ perspective, incremental funding means there is risk that additional funding may not be obligated on time, or perhaps not at all.  Offerors will price additional risks into their offer, including the potential cost to finance additional cash flow due to government payment delays, the costs related to maintaining staffing during work stoppages, as well as an “uncertainty premium” to compensate for performance at the contractor’s risk.  The uncertainty of continued work may also stifle offerors’ willingness to invest resources to improve their capabilities, resulting in less-than-best performance.  Contracting officers must weigh these considerations when incorporating incremental funding into their cost estimates and source selection plans.

Avoid incrementally funding critical requirements.

If there is a chance that funding may not arrive on time, do not use incremental funding for critical services.  Examples include network or systems administration, call centers, critical repair services, and security.  Even food service can quickly become critical in some environments.  If the contractor walks off the remote job site the weekend that funds run out, and the finance and contracting staff don’t return to work until Monday, where will the employees relying on that support eat?  Incremental funding increases the chance that programmed funds may be repurposed to another program with a higher priority – don’t place your critical requirements at risk!

Incremental funding increases the administrative burden.

A yearlong contract funded in quarterly increments trebles the funding request-review-approval processes, funding commitment and obligations, and contract modifications.  Funding in monthly increments, not unheard of at the operational level, dramatically increases the financial management workload.  Additionally, if additional funding increments are not approved, the contract may require termination for the convenience of the government, and the government may incur termination costs as well as re-procurement costs if funds become available later.

Incremental funding requires careful planning and management.

If incremental funding can’t be avoided, plan the management of incremental funds into the program during the requirements development process and solicitation.  Time funding increments to ensure funds cover weekends and holidays, and add the incremental funding process into your program plan.  Ensure Federal Acquisition Regulation clause 52.232-22, Limitation of Funds is included in the solicitation and subsequent contract, as well as clauses 52.232-18, Availability of Funds and 52.232-19, Availability of Funds for the Next Fiscal Year, as applicable.

When thoughtfully applied, incremental funding can be a useful financial tool for the management of federal funds, but its use requires careful planning and management to prevent being pulled over the Fiscal Cliff.  Use options where possible, and avoid incrementally funding critical services.