The funding of economic order quantity (EOQ) purchases (i.e., bulk purchases) associated with a multiyear procurement (FAR 17.1) is considered an exception to the full funding policy in that whole end items are not being financed. Funding for EOQ procurements is included in advance procurement budget requests unless an exception is granted by USD (Comptroller).
Although a multi-year procurement can benefit the government, it can also entail certain risks. Accordingly, in Public Law 97-86 (10 USC Sec. 2306b), Congress established criteria that multiyear procurement candidates must meet to limit those risks. Further refinement by the GAO, OSD, and the congressional committees has resulted in the current criteria.
- Substantial Savings: The multi-year procurement should achieve “significant” savings compared to annual procurement of the same quantities to compensate for the reduction of future budget flexibility and added program risk. There is no officially defined “significant” percentage or dollar value of savings for a multi-year procurement. In the past, minimum savings of 10% or more were expected, although very costly programs were able to obtain approval for a multi-year procurement with less than this due to the high dollar value of the savings.
- Continuing/stable requirement: A stable requirement means that the minimum need for the item will not vary significantly (particularly downward) over the term of the multi-year contract. Decreases in procurement quantities or procurement rate can cause increases in unit cost and subsequently reduce savings.
- Funding availability and stability: There should be a reasonable expectation that program funding at the required level for the procurement will be available throughout the multi-year contract period. Both DoD and Congress must be committed to ensuring that sufficient funds are provided to complete the multi-year contract at planned production rates.
- Design stability: System or subsystem design should be stable before initiating a multi-year procurement. Test and evaluation should be completed and demonstrate that the system or subsystem is operationally effective. A program should be judged mature and stable only after research and development and one or two production runs have been successful.
- Realistic cost estimates: Estimates should be based on historical cost data for the same or similar item. Savings are calculated as the difference between cost estimates, proposals, or negotiated prices for the multiyear contract and the cost of procuring the same quantities in the same time frame with successive annual contracts.
- National security enhancement: The use of a multiyear contract should promote the national security of the United States.
- Impact on Industrial Base: Programs seeking approval for a multiyear procurement must describe the impact on the industrial base, including improved competition, enhanced facilities investment, improvement in vendor skills, increased production capacity, etc.
Multiyear procurement contracts cannot be initiated for over $500 million unless specifically provided for in an appropriations act and an act other than an appropriations act. Congress has mandated the following requirements:
- Proposed multiyear contract costs must be provided for with the President’s budget submission or as a budget amendment and
- The House and Senate Armed Services and Appropriations Committees must be notified at least 30 days in advance of a proposed contract award that employs advance procurement or economic order quantity procurement in excess of $20 million in any one year of the contract or unfunded contingent liability of over $20 million. In addition, thirty days prior to a contract award, SECDEF must certify to Congress that the support costs associated with a multi-year procurement of over $500 million are fully funded in the FYDP. The certification letter must be then approved and signed by the defense committees.
“Cancellation Ceiling” is a term that applies to multi-year procurements only. It represents protection to the contractor in the event that the government cannot continue the contract due to a lack of funds. It is designed to reimburse the contractor for those costs that have been incurred as a result of ordering material in advance, or investing and facilitating for the procurement. There is a cancellation ceiling associated with each fiscal year and it decreases in dollar value in the later years of the contract. An exception must be approved by USD(C) to award a multi-year procurement contract with an unfunded cancellation ceiling. Congress must be notified a minimum of 30 days prior to awarding a contract with a cancellation ceiling in excess of $100 million.
AcqLinks and References:
- Navy Multiyear Procurement Guidebook – Nov 2010
- Website: 10 USC Sec. 2306b “Multiyear contracts: acquisition of property”
- Website: Subpart 17.1 Multi-year Contracting
- Website: FAR 17.105-2 Multiyear Objectives
- Report: Multiyear Procurement and Block Buy Contracting – 19 Oct 18
- OSB Marketing to the Department of Defense: The Basics
- Government Contracting: The Basics
- DoD Subcontracting Program: The Basics