1
Programming and Budgeting Policies
for
Acquisition Programs
Professor Gerry Land
CPA, CDFM-A
Defense Acquisition University
Capital & Northeast Region
Fort Belvoir, VA
(703) 805-3755; DSN 655-3755
E-mail: gerry.land@dau.mil
2010 PDI – June 2010
2
Funding Policies Workshop Topics
• Budgeting Building Blocks
• Funding Policies
- Annual Funding
- Incremental Funding
- Full Funding
• Exceptions to Full Funding
- Advance Procurement
- Multiyear Procurement (economic order quantity)
• Funding Policies for Unique Items
- Communications and Information Systems
- LRIP Articles
- Product Improvements
3
Resource Management Flow from Identification of
Capability Need to Achieving Operational Capability
Life Cycle
Cost
ICE
Annual
Funding
Cost
Analysis
Funding
Policies Full
Estimate
CCE
CAIV Fiscal
Environment
POE
Incremental
Funding
Budget
Resolution
Operational
Capability
Need
Capabilities- Capability
Based
Docs
Assessment
FYDP GDF POM FOL CP
MFP JPG BES PDM PBD
Funding
MBIs
(Exceptions)
Congressional
Enactment
AoA
Acquisition
Program
Baseline
Planning, Programming,
Budgeting and Execution
Process
HAC
SAC
HASC
SASC
HBC
SBC
President’s
Budget
Authorization
&
Appropriation
Laws
Operational Capability
Budget Authority Obligation
Reprogramming
Feedback
Commitment
Expenditure
Outlay
Budget
Execution
Force Structure
Modernization
Readiness
Sustainability
4
What is Needed to Build a
Program Budget?
Program Direction:
A statement of what the program manager is expected
to do – the Acquisition Program Baseline (APB)
Work Breakdown Structure (WBS):
A translation of the program direction into a statement
of the tasks required to achieve the program objectives
Schedule:
The sequence of tasks in the WBS –
• Showing when each task begins and ends
• How tasks are related to each other
• How workload/cost for each task is distributed within
the time period
5
Appropriation Categories
vs. Appropriation Accounts
• Appropriation Categories
• Definition: Broad, generic terms pertaining to general “types”
of Federal Government funds.
•
Examples of interest to Acquisition Community:
•
Research, Development, Test and Evaluation (RDT&E)
•
Procurement
•
Military Construction (MILCON)
• Appropriation Accounts
• Definition: Specific designation of Federal Government funds
as contained in an Appropriations Act passed by Congress and
signed into law by President. Each account has a unique
four digit code preceded by a two digit prefix.
•
Examples of interest to Acquisition Community:
•
Research, Development, Test and Evaluation (RDT&E), Army (2040)
•
Aircraft Procurement, Navy (1506)
•
Operations & Maintenance (O&M), Air Force (3400)
6
DoD Appropriation Account Codes
Army
Navy
Appropriation Account
21 -
17 -
RDT&E
2040
1319
USMC Air Force
17 -
57 -
97 -
3600
0400
Procurement
0300
Aircraft
2031
Missiles
2032
Weapons
1506
3010
3020
1507
W&TCV
2033
Ammunition
2034
SCN
Other
DoD Wide
1508
3011
1611
2035
1810
USMC
3080
1109
MILPERS
2010
1453
1105
3500
N/A
O&M
2020
1804
1106
3400
0100
MILCON
2050
1205
3300
0500
7
Underlying Assumptions in Budgeting
• “Color of money” (i.e., Appropriation) requested in the
budget is based on type of work to be performed
• Normally, funding is requested for a 12 month fiscal
year (1 October – 30 September of following year)
• Correct level of funding requested (i.e., budgeted) for a
fiscal year is based on required level of work effort
plus application of proper funding policy for that
Appropriation
• Funding is requested (i.e., budgeted) for the fiscal year
when the organization honestly “requires” the funds in
accordance with proper funding policy
• Application of proper funding policy implies that funds
will be obligated during the first year of availability
8
“Notional” Example of Preparing Input for
FY 2012 Budget - Applying Escalation
Year Budget
Prepared
FY10
Price Today
(Base Yr $ )
Outlay Rate
(%)
Cumulative
Inflation
(%)
Dollar “Value” ( $ )
When Outlaid
“Required Budget” Estimate
(Current/Then Yr $ )
Target Fiscal
Year
FY11
FY12 FY13
FY14 TOTAL
$$
To go from “Price Today” to
“Required Budget”, multiple
“ Price Today” by proper
Weighted (Composite) Index
of Appropriation Account
$$$
Budget Estimate = “Price Today in Base Yr $” plus inflation
plus economic effects of outlays occurring in future years
9
Major Appropriation Categories
Funding
Policy
Period
Available
for
Obligation
Control Level
(Budgeting)
Scope / Type of Work Effort
Appropriation
Category
R&D Activities and Expenses
RDT&E
Incremental
2 Years
Program
Element
Procurement
Full
3 Years
Line Item
Useable End Items >= $250K
system unit cost; Centrally
managed items; Initial Spares;
Labor for certain productionrelated functions (e.g., item
assembly, quality assurance)
Replenishment Spares; Fuel;
Civilian Pay; Travel;
Construction Projects
<$750K; Non-Centrally
managed end items <$250K
system unit cost
(5 Years)
(SCN)
O&M
Annual
1 Year
Sub-Activity
Group
Military Personnel Expenses
MILPER
Annual
1 Year
Budget
Activity
Major Construction
Projects >$750K
MILCON
Full
5 Years
Project
10
Annual Funding
Policy
• Appropriations:
• Operations and Maintenance
• Military Personnel
• Budgeting Policy:
• Annual budget request will be
limited to obligation authority
necessary to cover all
expenses during a 12 month
budget period (usually the
fiscal year).
11
Service Contract
Exception to
Annual Funding Policy
• Exception to budgeting for
“Fiscal Year” period
• U.S. Code, Title 10, Section 2410a
provides authority for DoD to
budget for and obligate funds for
severable service contracts for
periods crossing fiscal years -provided the contract period does
not exceed 12 months
12
Annual Funding Policy
Simple Application – O&M Appropriation
Expenses by Fiscal Year
Expense
FY 1
FY 2
FY 3
FY 4
Civ Pay
$ 500 K
$ 510 K
$ 520 K
$ 525 K
Supplies
$ 25 K
$ 35 K
$ 30 K
$ 35 K
$ 30 K
$ 40 K
$ 35 K
$ 40 K
$ 585 K
$ 600 K
TDY
Service
Contract
Budget
Request
$ 40 K
$ 50 K
12 Month
$ 645 K
$ 585 K
Period when expenses are being incurred
13
Incremental Funding Policy
• Appropriation:
Research, Development, Test & Evaluation (RDT&E)
• Budgeting Policy:
• Annual budget request will be
limited to budget authority
necessary to cover all costs
expected to be incurred during
that fiscal year
• Incremental Funding Policy
provides flexibility to the
government in the uncertain
environment of RDT&E
14
Purposes of the
Incremental Funding Policy
• Allows Congress to review
progress of every R&D project –
each year – and decide if the
project should continue and, if so,
at what dollar amount
• Does not require one Congress
to “tie the hands” of a future
Congress
• Provides DoD flexibility to fund
R&D projects on a year-by-year
basis
15
18 Month Exception to
Incremental Funding
Policy
• For requirements with no logical way
to divide the work to limit contract to
a shorter period, or
• If the planned technical effort is such
that no responsible contractor will
accept a contract for less than
completion of the total requirement
• For these types of efforts that take
longer than 12 months, but less than
18 months, the Service or Defense
Agency Comptroller may approve
financing the total requirement in one
fiscal year
16
How does a Program Office Prepare
its Budget under Incremental Funding ?
• Create a good estimate of expected future costs to be
incurred (even though system design may be
unstable and contractor may not be chosen)
• Use 9-months or less of effort for first year increment
of a “new start” program (due to nature/timing of
budget approval)
• For second and succeeding yearly increments,
budget for entire year, taking into account any
changes (slippages) that may have occurred from
previous budget submission
Note: Service or Agency comptroller may approve up to 15 months of costs
for second and succeeding fiscal years (i.e., 3 months beyond end of
fiscal year)
17
Incremental Funding Policy
Simple Application – RDT&E Appropriation
Cost Incurred by Contractor by Fiscal Year
Task Cost
FY 1
$ 50 K
FY 2
FY 3
$ 100 K
$ 100 K
FY 4
$ 50 K
TASK 1
$ 300 K
36 month effort
$ 25 K
$ 100 K
$ 25 K
TASK 2
$ 150 K
18 month effort
$ 10 K
TASK 3
$ 50 K
$ 100 K
Budget
Request
$ 40 K
24 month effort
$ 50 K
$135 K
$250 K
$ 115 K
Planned Period of Performance (i.e, planning for costs to be incurred)
18
Full Funding Policy
• Applies to Procurement and Military Construction
Appropriations
• Annual budget request must cover the total cost to
deliver a given quantity of complete, militarily usable
end items in a 12 month funded delivery period
• Governing Concepts
• Usable End Items - Piecemeal procurement of systems
is not permitted
• Funded Delivery Period - 12 month period starting with
projected delivery of first item
• Exceptions to Policy
• Advanced Procurement (For Long Lead Items)
• Economic Order Quantity (With Multiyear Procurement)
19
Purposes of Full Funding Policy
• Allows Congress to understand the full cost of a
complete weapon system through budget process
• Does not require one Congress to “tie the hands”
of a future Congress
• Avoids purchase of a large number of partially
completed systems, followed by the need for
more money to complete these systems
• Achieves better program stability - but on a year
by year basis
20
Concept of “Usable End Items”
Which Program is Correct Under Full Funding?
Program A
Program B
Year 1
Year 1
Year 2
Year 2
21
Full Funding Policy
Conceptual - Procurement Category
FY 1
Contract
Award
Date
FY 2
FY 3
FY 4
Production
Lead Time
10 Items
2
LOT 1 ($400K)
2
3
3
How We Expect the Contractor to Incur Cost by FY
Start Up Costs:
$ 40 K
$ 0K
$ 0K
$ 0K
Recurring
Production Costs:
$ 30 K
$140 K
$140 K
$ 50 K
$ 70 K
$140 K
$140 K
$ 50 K
Budget Request:
22
Full Funding Policy
Simple Application - Procurement Appropriation
Lot Cost
FY 1
FY 2
FY 3
FY 4
$ 400 K
LOT 1
2
2 3
3
= 10
10 ITEMS
$ 600 K
LOT 2
5
20 ITEMS
5
5 5 = 20
$ 900 K
= 18
8 10
LOT 3
40 ITEMS
Budget
Request
+ 22
$ 400 K
$ 600 K
$ 900 K
-023
Application of Funded Delivery Period Policy
“Requirement” is for 48 Tanks Delivered by End FY 5
FY 1
FY 2
FY 3
FY 4
FY 5
Proposed Deliveries
Funded Delivery
Period
Contract Award
2
LOT 1
2
3 3
QTY 10
Production Lead Time
12 Months of
Deliveries
5 X
5 X
5 X
5 X8 X
10
X
Defer to Later Fiscal
Years
Contract Action
5
LOT 2
5
5
5
QTY 20
Production Lead Time
12 Months
Of Deliveries
Contract Action
8 10
LOT 3
Deliveries
QTY 18
Production Lead Time
24
Advance Procurement
Long Lead-time Items
• Exception to Full Funding Policy
– Explanation why an exception: the PMO is
not buying usable end items
– Shown in Acquisition Strategy
– Approved in Milestone Decision
• Circumstances that justify use:
– When necessary to maintain (protect) planned production schedule
– Lead-time of component greater than life of the appropriation
– Lead-time of component significantly longer than remainder of end item
• Budgetary Implications:
– Minimum amount budgeted = termination liability of total cost of long
lead-time items being procured
– Budgeted amount generally requested one fiscal year in advance of
related end item contract
– Budgeted amount is shown as a separate line entry on various budget
exhibits (e.g., P-1, P-5, P-40)
25
Advance Procurement
Application with Procurement Appropriation
FY 1
LOT 3 ($400M)
20 Items
FY 2
$ 700M
ADVANCE
PROCUREMENT
BA TOTAL (FY)
FY 4
$ 400M
LOT 4 ($700M)
38 Items
* BA ADV PROC
BA SYS
FY 3
+ $ 10M
$ 10M
- $ 10M
- $ 15M
+ $ 15M
$ 390M
$ 685M
$ 405M
$ 685M
$-026
Economic Order Quantity (EOQ)
Associated with Multiyear Procurement (MYP)
• Exception to Full Funding Policy
– Explanation why an exception: Contracted deliveries
will exceed the 12 month funded delivery period
• Definition of MYP
– A generic term that describes the process, planning and
ultimate contract by which the government may contract for
the purchase of supplies or services that satisfy
requirements for more than one but normally not more than
five years.
Source: DoD 7000.14-R, Vol 2A, Chap 1, Section 010203
27
Multiyear Procurement (MYP)
Continued
• Commitment to buy a specific quantity of useable end items
of a weapon system over a specified number of years
(normally, maximum of five years)
• Annual Appropriation by Congress for same specified
number of years
• Purpose:
- To reduce program cost growth
- To counteract adverse effects of the annual
budget and procurement process
- To bring stability to acquisition process
28
Multiyear Procurement (MYP)
Continued
• Benefits:
– Provides assurance to contractor of future years
procurement
– Encourages contractor investment
– Facilitates economic order quantities
– Increases contractor productivity
• Potential problems:
– Government liable for a penalty (in a decreasing amount)
for early cancellation of contract
– Can not budget for that cancellation/termination liability
– Controversial concept (both in Congress & OSD)
29
Multiyear Procurement (MYP) Contract
(Example of Budget Preparation for a MYP Contract)
FY 1
Contract
Award
FY 2
FY 3
Production
Lead Time
FY 4
1
FY 5
FY 6
FY 7
2
3
4
Deliveries of Production Items
1 4 5 6 9 9 9 9 9 9 9 9 9 9 9
5
9 9 9 8
$
$
$
$
$
Notification to Contractor and Obligation of Funds
Funded
Units
$M
16
36
$250
$ 514
36
$ 523
36
$ 508
26
$ 356
Budget in same
method as Full
Funding
End Items
$M
$ 60
EOQ Items
Except for items
budgeted under
“EOQ” rules
Assumes a 92% Learning Curve and composite indices appropriate to given fiscal years
30
Multiyear Procurement (MYP)
Recent Example
•
•
•
•
•
•
Program: F/A-18 Super Hornet and E/A-18 Growler
Proposed quantity of aircraft: 124 total
Time period: FY 2010 through FY 2013
Contractor: Boeing
Projected contract award: NLT 30 Sep 2010
Potential savings compared to annual contract
actions: $590 Million (approximately 10% of basic
contract with annual options)
• Congress provided conditional authority in FY 2010
NDAA and FY 2010 Defense Appropriations Act
• On 14 May 2010 OSD notified Congressional leaders
of intent to award the MYP contract for aircraft
31
Funding Rules for Communications
and Information Systems
• RDT&E
- Development, test and evaluation costs
- Development of major upgrades
- Hardware/Software for RDT&E facilities
• Procurement - Investment
- New equipment / SW > $250K
- Upgrades / replacement equipment > $250K
• O&M - Expenses
- New equipment / SW < $250K
- Upgrades / replacement equipment < $250K
- Routine maintenance
- Equipment leases
32
Low Rate Initial Production
Primary Purpose and Proper Appropriation
PURPOSE
APPROPRIATION
To permit an orderly increase
in production ramp-up
Procurement
To establish an initial production
base
Procurement
To provide production configured
representative articles for
operational test -
RDT&E is default,
but use . . . . .
* Articles planned to be destroyed
during testing – or planned to not
go into operational inventory
* Articles scheduled to go into
operational inventory
RDT&E
Procurement
33
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
NO
INDEPENDENT DT OR
IOT&E REQUIRED?
NO
YES
YES
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
SYSTEM IN
PRODUCTION?
YES
RDT & E
PROCUREMENT
NO
O&M
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
34
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
YES
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
RDT & E
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
35
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
NO
INDEPENDENT DT OR
IOT&E REQUIRED?
YES
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
RDT & E
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
36
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
NO
INDEPENDENT DT OR
IOT&E REQUIRED?
NO
SYSTEM IN
PRODUCTION?
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
YES
PROCUREMENT
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
37
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
NO
INDEPENDENT DT OR
IOT&E REQUIRED?
NO
SYSTEM IN
PRODUCTION?
THEN . . . .
NO
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
O&M
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
38
Funding for Product Improvements
Decision Tree
IF . . . .
MOD INCREASES
PERFORMANCE?
NO
INDEPENDENT DT OR
IOT&E REQUIRED?
NO
YES
YES
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
SYSTEM IN
PRODUCTION?
YES
RDT & E
PROCUREMENT
NO
O&M
AND . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
PROCUREMENT
39
Summary
• Each appropriation category has a specific
set of policies pertaining to budget
formulation.
• Budgeting policies are based on agreements
between Congress and OSD.
• Budget requests in the Budget Estimate
Submission (BES) and the President’s Budget
(PB) should be prepared in accordance with
applicable policies.
40
Questions?
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DAU optional
“commercial”
41
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