Why can't agencies buy on credit?

In my latest column on share-in-savings contracts [FCW, Feb. 22], I referenced the prohibition on government contracting in advance of appropriations. The following questions are related to that topic: What is a contract in advance of appropriations? Why is it prohibited? Why can't government agencies buy on credit?

As I noted in my last column, some proponents of share-in-savings contracts would like to eliminate the base contract price normally found in incentive contracts and make the contractor's entire compensation contingent on performance. These commentators want contractors to make the up-front investments and recover the costs, plus a profit, from any savings that might result from the contract. As a practical matter, however, this is not likely to work.

If a contract is structured so that an agency can walk away from it anytime it pleases without any liability to the contractor, no reasonable contractor would want the contract. On the other hand, if the agency will be liable for some - or all - of the contractor's costs if the agency terminates the program before it is completed, the agency will be forced to solve some difficult fiscal law issues before it signs on.

Congress generally appropriates funds for agencies on a fiscal-year basis. Funds occasionally are made available for perhaps two or three years or are appropriated on a "no-year" basis, which means they will remain available until expended. In any case, an agency may obligate appropriations only for the bona fide needs of the period for which the funds are appropriated.

When using annual appropriations, an agency must ensure that it does not incur any liability beyond the bona fide needs of the period for which it has appropriations. Moreover, the agency must have available, and must obligate to the contract, sufficient funds to cover its liabilities.

An agency is prohibited by the Antideficiency Act from obligating funds in advance of an appropriation from Congress. [See 31 U.S.C. & Sect; 1341(a)(1).] Accordingly, an agency may not award a contract purporting to obligate future appropriations. Sometimes an agency can award a contract that is properly chargeable to a new fiscal year before the appropriation is finalized, using an availability of funds clause to protect the government's interests. However, that authority is rather tightly controlled. (See, for example, Federal Acquisition Regulation 32.703-2.)

Taken together, the bona fide needs rule and the Antideficiency Act prohibit agencies from entering into any agreement that would bind the government beyond the specified period of the agency's currently available appropriations.

The seminal case in this area is Leiter v. United States [271 U.S. 204 (1925)], in which the Supreme Court found an agency's attempt to enter into a multiyear lease using annual appropriations to be binding on the government for only the first year. According to the ruling, the contract must require the agency to take an affirmative action to revitalize it after the first year. For example, the contract could be structured with a one-year base period and options for additional one-year periods, as long as the agency is required to take some positive action to exercise the option.

Simply reserving a right to terminate a contract nominally covering more than one year would not be sufficient. The contract must be structured to end on its own terms unless the agency acts to extend it.

The inclusion of an availability of funds clause in a contract, by itself, would not satisfy this requirement. According to the General Accounting Office, simply structuring the contract so that it continues from year to year, subject to the availability of appropriated funds and without requiring the agency to exercise an option, would run afoul of the Leiter case. [See GAO, Principles of Federal Appropriation Law, Vol. II, p. 6-27 (2d ed. 1992).]

Any contractual requirement to pay termination charges, special charges or any other amounts for failure to exercise an option will cause additional problems. An agency generally cannot obligate its annual appropriations to cover such charges without violating the bona fide needs rule. Moreover, it cannot obligate future funds to that purpose without violating the Antideficiency Act.

In Burroughs Corp. [56 Comp. Gen. 142, 76-2 CPD : 472 (1976)], GAO ruled that a contract clause requiring the government to pay separate charges if it failed to exercise an annual renewal option rendered the contract illegal. According to GAO, an agency must obligate enough funds at the time of the contract award to cover the government's minimum responsibilities under the contract. The agency could not use the year's appropriations to cover the separate charges because those charges were not a bona fide need of the current year. Under the Antideficiency Act, the agency could not obligate future appropriations.

Similarly, in another case [48 Comp. Gen. 494 (1969)], GAO ruled that an installment purchase plan for a computer replacement project that provided for payment over a period of years was an improper proposal for a sale on credit. According to GAO, the contract would be permissible only if it were structured with discrete options for each year.

As in the Leiter case, the inclusion of a termination clause was insufficient to meet this requirement. (See also Storage Technology Corp., B-182289, April 25, 1975.)

These rules can make it difficult to award share-in-savings contracts of any size with the contractor's entire payment based on anticipated savings. For most valid savings opportunities, however, this will not be a problem because traditional incentive contracting techniques will work fine.

--Peckinpaugh is a member of the government contracts section of the law firm Winston & Strawn, Washington, D.C.