Section 809 Panel Recommends Increased Flexibility of Time Frame to Spend DOD Contract Dollars

As we’ve written about before, the Section 809 Panel is the Congressionally-mandated group that has made a number of far-reaching recommendations to change current programs that affect DOD acquisitions.

The third volume of the Panel’s recommendations, stretching over 500 pages, includes a recommendation that DOD be granted additional flexibility to spend its appropriated dollars from Congress. As the Panel puts it, Congress should “[p]rovide increased flexibility to the time periods within which contract obligations are permitted to occur.”

The panel has identified a problem that DOD units attempt to spend all of their contract dollars at the end of the fiscal year based on “use-it-or-lose-it mentality.” But this “can lead to lower-quality requirements and contracts, inefficient allocation of resources, degraded negotiating leverage and pricing power, and a negative effect on workforce morale.”

The end of fiscal-year spending issue is based on the fact that DOD acquisitions are tied to specific time periods during which DOD can acquire goods and services. “Throughout the acquisition community there is a strong cultural belief that if funds are not obligated, they will be reallocated to other projects or reduced in future appropriations.” Spending therefore increases at the end of each fiscal year.

In particular, Operations and Maintenance (O&M) funding must be obligated within the span of a single year. The panel has some nuanced thoughts about O&M timing:

A full expansion of O&M obligation authority to multiple years would limit Congress’s ability to control how much is spent from one period of time to the next. Many in Congress clearly view this ability as a core aspect of the oversight process.

A more feasible and low-risk approach would be to permit the obligation of up to 5 percent of O&M funding for 1 year beyond what would normally be the end of its fiscal year availability. This change would allow for a smoothing effect across fiscal years, mitigating the perceived urgency to spend all available funds by end-year.

Various levels of budget periodicity apply to DOD spending, ranging from Congressional oversight, OMB rules, DOD and military department review, and program executive officers and program managers.

“The reduction of future funding as a consequence of failure to obligate current funding serves as a powerful perverse incentive for acquisition personnel to spend money regardless of the return on their investment.” This can have many negative outcomes:

  • “Lower-quality contracts may result directly from end-period surges. Because of the high workload associated with surges in obligations or disbursements, contract reviews may be less detailed and reviewers may be less likely to detect problems.”
  • “Inefficient allocation of human capital may occur when acquisition professionals are focused more on timing of spending and less on value and return on investment.”
  • “Unnecessary purchases may occur if acquisition authorities are motivated to obligate excess money purely to avoid future funding reductions.”
  • “Loss of negotiating power and loss of pricing power may occur when potential vendors know exactly how much money is available to a program office and the precise deadlines by which each portion of that money must be spent. The resulting decrease to return on investment may constitute an inefficient use of taxpayer resources.”
  • “Lower employee morale can result from a chaotic end-year workload.”
  • “Auditing may be more complex and difficult due to the need to track time periods as well as appropriation accounts and budget line items.”

DOD appropriations can be single-year or multiyear. Congress imposes these time limits on funds to “allow for a regular, standardized oversight process to occur by default each year” and to address the concern that if funds do not automatically expire, they will accumulate into large unobligated balances that could be used for purposes unapproved by Congress.” Other layers of the funding apparatus within the executive branch and the DOD impose their own time limits in part because they fear if they do not use the funds, they will lose out on them in the future.

So, what is the practical result of these time limits and the fear of losing funding?

Here, the report provides a quote that drives the impact home:

If one assumes four layers in the chain of command and each layer holds back 3%, that means the lowest layer only received 88.5% of the funding and the remaining 11.5% will come cascading down late in the year. In some cases, that last unit—an installation, squadron, or program office may see 10%-15% of its annual budget authority appear in the last few weeks of the year.

Furthermore, as a weapons system acquisition professional put it, “current policies … effectively punish programs that reduce cost below the budgeted expenditures.”

There is disparity in the year-end surge numbers for different types of contracts. IT and construction contracts both have higher year-end surges than other types of contracts. And readers of the blog may be interested to know that “[o]bligations on contracts awarded under small business or other socioeconomic policies also appear to be particularly concentrated at the end of the fiscal year.”

The panel recommends increased flexibility to the time periods within which contract obligations are permitted to occur.

The most appropriate way of mitigating end-period spending surges, however, would be to create a mechanism allowing for a small percentage of single-year funding to cross fiscal years. Such a mechanism could be accomplished by allowing the obligation of up to 5 percent of O&M funding for 1 year beyond what would normally be the end of its availability. This approach would allow for a smoothing effect across fiscal years, mitigating the perceived urgency to spend all available funds by end-year by creating a funding bridge across fiscal years, allowing for DoD’s single-year funding accounts to more easily meet the legislature’s antideficiency and impoundment control requirements.

There is a lot of material to think about in the Section 809 Panel’s discussion of DOD budget periodicity. On this issue, unlike some others, the Panel has recommended a somewhat limited approach to addressing the issue of year-end spending surges and the accompanying ills of doing all that contracting in a short period. For some reason, the Panel doesn’t provide its estimate of what this 5% of O&M funding would be, although given DOD’s annual budget, it’s certain to be a sizeable amount.

We’ll have to see if Congress acts on this recommendation, perhaps in the next iteration of the National Defense Authorization Act.