The Incremental Funding Policy states that partial funding of a contract is allowed with additional funds anticipated to be provided at a later time and the amount budgeted shall be limited to the budget authority needed to cover all costs expected to be incurred during a (12) month period. This is used when the total cost of a project can’t be covered within the current allocated budget because the project spans multiple years.
Incremental funding for cost-reimbursement contracts solicitation clause
As prescribed in 48 CFR 3432.705-2: Sufficient funds are not presently available to cover the total cost of the complete project described in this solicitation. However, it is the Government’s intention to negotiate and award a contract using the incremental funding concepts described in the clause titled “Limitation of Funds” in 48 CFR 52.232-22. Under that clause, which will be included in the resultant contract, initial funds will be obligated under the contract to cover an estimated base performance period. Additional funds are intended to be allotted to the contract by contract modification, up to and including the full estimated cost of the entire period of performance. This intent notwithstanding, the Government will not be obligated to reimburse the contractor for costs incurred in excess of the periodic allotments, nor will the contractor be obligated to perform in excess of the amount allotted.
Incremental funding for fixed-priced contracts
A fixed-price contract (FAR Subpart 232.704-70) may be incrementally funded only if its for:
- Services that do not exceed one year in length and uses funds available (unexpired) as of the date the funds are obligated
- Contract that uses funds available from multiple (two or more) fiscal years and is funded with research and development appropriations or Congress has otherwise authorized incremental funding
Research, Development Test & Evaluation (RDT&E) Funding 
RDT&E appropriations are available for two (2) fiscal years but the incremental funding policy states that the DoD is to budget only for those contract costs expected to be incurred in the first (1) fiscal year. The second year of availability is only there to provide flexibility in the event of schedule slippage. Although, all second year obligations of RDT&E funds must be restricted to only those tasks within the scope of the approved budget year program.
R&D budgets reflect funding required for twelve (12) months’ worth of effort from 1 October through 30 September or some lesser amount if the contract period of performance does not cover the full 12 month period. Congress then authorizes and appropriates RDT&E funds for the specific “increments” of work to be accomplished during the fiscal year for which the funds were requested. The objective of Incremental Funding Policy is to use RDT&E funds during the initial (i.e., first) year of obligational availability. Thus, R&D work is usually programmed on an annual, incremental basis coincident with the fiscal year.
There is an exception to incremental funding for R&D contracts with PoPs less than 18 months (DoD 7000.14-R, Volume 2A, Chapter 1, paragraph 010214 C. b., page 1-43). This permits budgeting for the entire contract price in the first year but only under the circumstances discussed in that paragraph.
AcqLinks and References:
-  Financial Management Overview
- Website: DoD Comptroller: DoD 7000.14R – (Most Updated Versions)
- Website: FAR Subpart 232.704 “Contract Funding”
- Website: 48 CFR 52.232-22 “Limitations of Funds”
- Website: 48 CFR 3432.705 “Incremental Funding”