TITLE: B-308969, Interagency Agreements--Obligation of Funds under an Indefinite Delivery, Indefinite Quantity Contract, May 31, 2007
BNUMBER: B-308969
DATE: May 31, 2007
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B-308969, Interagency Agreements--Obligation of Funds under an Indefinite Delivery, Indefinite Quantity Contract, May 31, 2007

   Matter of: Interagency Agreements--Obligation of Funds under an Indefinite
   Delivery, Indefinite Quantity Contract

   File: B-308969

   Date:  May 31, 2007

   DIGEST

   The Department of the Interior, National Business Center, awarded a 1-year
   indefinite delivery, indefinite quantity contract (IDIQ) on behalf of the
   Department of Defense (DOD), having a period of performance from July 1,
   2003, to June 30, 2004. The contract required the government to purchase a
   minimum of $1 million in services from the contractor. The entire minimum
   amount applicable to the IDIQ contract should have been obligated against
   fiscal year 2003 funds; however, Interior and DOD only charged $45,000 to
   the proper fiscal year appropriation. Accordingly, Interior and DOD should
   adjust their accounts to correct the improper obligation.

   DECISION

   The Inspector General for the Department of the Interior requests our
   decision under 31 U.S.C. sect. 3529 regarding issues raised during an
   audit of transactions between the Department of the Interior (Interior)
   and the Department of Defense (DOD).[1] This decision addresses the
   transaction involving DOD's Personnel Security Research Center (PERSEREC)
   and Interior's National Business Center Acquisition Services Division,
   Southwest Branch (SWB), for acquisition of support services for
   PERSEREC.[2]

   The issue is whether SWB and/or DOD violated the Antideficiency Act when
   SWB awarded a 1-year indefinite delivery, indefinite quantity (IDIQ)
   contract on behalf of PERSEREC. The contract specified a guaranteed
   minimum of $1 million over a 3-year period. Interior obligated $45,000 at
   the time of award and $955,000 the following fiscal year.

   As explained below, SWB should have obligated the contract's guaranteed
   minimum of $1 million at the time of award using the fiscal year funds of
   the year of contract award, 2003. Because SWB obligated only $45,000 of
   the $1 million from fiscal year 2003 appropriations and incorrectly
   obligated the balance from fiscal year 2004 appropriations, it potentially
   risked committing an Antideficiency Act violation. It should now adjust
   its accounts to reflect the proper obligation of fiscal year 2003 funds
   for the full amount of the minimum. Also, since SWB was acting as DOD's
   contracting agent and because DOD appropriations ultimately funded the
   contract, as SWB adjusts its accounts, DOD should also adjust its
   accounts. As with SWB, DOD should have obligated its fiscal year 2003
   funds in the amount of the contract's guaranteed minimum, and it
   incorrectly obligated the balance from fiscal year 2004 appropriations.[3]

   Our practice when rendering decisions is to obtain the views of the
   relevant federal agencies to establish a factual record and to elicit the
   agency's legal position on the matter. GAO, Procedures and Practices for
   Legal Decisions and Opinions, GAO-06-1064SP (Washington D.C.: Sept. 2006),
   available at www.gao.gov/legal.htm. In this case, we contacted the General
   Counsel of DOD and the Solicitor of Interior to obtain their legal views
   and obtain factual information regarding the above-mentioned transaction.
   The Solicitor provided documents and responses to our request for factual
   information. Letter from David Bernhardt, Solicitor of the Interior to
   Thomas H. Armstrong, Assistant General Counsel, GAO, Apr. 20, 2007
   (Bernhardt Letter). He declined, however, to provide us with his legal
   views regarding this matter. Id. The General Counsel of DOD also failed to
   respond timely to our request for factual information or to our offer to
   submit legal views. Although a response from the DOD General Counsel would
   have been useful in our decision making process, we were able to obtain an
   adequate record upon which to consider fully the issues raised through
   documents provided to us and public documents such as Interior's and DOD's
   Inspector General reports.

   BACKGROUND

   The Department of the Interior National Business Center, Acquisition
   Services Division, Southwest Branch (SWB) provides acquisition services to
   other government agencies. See www.nbc.gov/organization/index.html (last
   visited May 30, 2007). The Center's operations are financed by the working
   capital fund established by 43 U.S.C. sect. 1467. That section provides:

     "There is established a working capital fund of $300,000, to be
     available without fiscal year limitation, for expenses necessary for the
     maintenance and operation of . . . such . . . service functions as the
     Secretary determines may be performed more advantageously on a
     reimbursable basis. Said fund shall be reimbursed from available funds
     of bureaus, offices, and agencies for which services are performed at
     rates which will return in full all expenses of operation, including
     reserves for accrued annual leave and depreciation of equipment."

   The fund is a revolving fund which charges its customers fees for the
   costs of the services provided. On February 11, 2003, SWB awarded a
   contract pursuant to an interagency agreement between DOD and SWB to
   Northrop Grumman Mission Systems to provide support to the Defense
   Personnel Security Research Center (PERSEREC), contract number
   NBCCHD030003.

   PERSEREC was established in 1986 following a number of espionage cases
   involving United States employees. Devaney Letter, enclosure at tab 3. Its
   mission is to improve the effectiveness, efficiency, and fairness of DOD's
   personnel security systems. Id. It conducts long-term programmatic
   research for the security and intelligence communities, provides studies
   and analyses supporting policy formation and systems operation,
   disseminates research information to security policymakers and
   practitioners, and develops tools and job aids for security professionals.
   Id. However, PERSEREC has not had enough staff to accomplish its mission
   and has outsourced its research since 1987. Id.

   The contract calls for Northrop Grumman to provide services to design and
   conduct personnel security research and development tasks. Contract sect.
   C.1. The contract is an indefinite delivery, indefinite quantity contract.
   Contract sect. B.1. At the time of award, February 11, 2003, the contract
   stated that the period of performance was "1 July 2003 through 30 June
   2004." Contract sect. F.4. SWB orders services under the contract by
   issuing cost-plus-fixed-fee task orders to the contractor. Contract sect.
   B.1. Another clause of the contract, I.13, entitled "Indefinite Quantity,"
   provided in part that "[t]he Government shall order at least the quantity
   of supplies or services designated in the Schedule as the `minimum'." The
   contract maximum is $46,000,000. Contract sect. F.4. The contract states
   that the minimum guarantee is "$1,000,000 over a 3-year period." Contract
   sect. B.2.

   SWB did not record any obligation at the time of contract award. SWB,
   using funds transferred to it by DOD Military Interagency Purchase
   Requests (MIPRs), recorded obligations as it issued task orders. DOD
   recorded obligations upon SWB's acceptance of the MIPRs. On October 18,
   2002, DOD transferred $175,000 of fiscal year 2003 funds from its Office
   of the Secretary, Operations and Maintenance appropriations.[4] SWB issued
   its acceptance of the MIPR on the same date. Interior held the transfer in
   its working capital fund until September 30, 2003, when it issued its
   first task order. At that time, SWB obligated $45,000 of the $175,000 DOD
   transferred to cover the task order. Bernhardt Letter enclosure, tab A.

   SWB issued a second task order and four amendments after receiving and
   accepting MIPRs to finance them, as follows:

     o On November 3, 2003, DOD submitted MIPR No. QS4H5A44F039MP for Task
       Order 0002 in the amount of $422,454. On November 13, 2003, SWB issued
       its acceptance of the MIPR, and on December 3, 2003, SWB issued the
       task order.
     o On February 12, 2004, DOD transmitted a second MIPR for Task Order
       0002 in the amount of $291,000; SWB accepted the same day. On February
       20, 2004, SWB issued the first amendment to Task Order 0002 in the
       same amount as the second MIPR.
     o On April 4, 2004, DOD transmitted the third MIPR for $3,138,834; SWB's
       acceptance followed on April 9, 2004. On April 20, 2004, SWB issued
       the second amendment to Task Order 0002 in the same amount as the
       third MIPR.
     o On July 20, 2004, DOD transmitted a MIPR in the amount of $795,350
       that SWB accepted the same day; on August 6, 2004, SWB issued the
       third amendment to Task Order 0002 for that same amount.
     o On September 29, 2004, DOD transmitted a MIPR for $200,000; SWB
       accepted the MIPR on September 30, 2004, and issued another amendment
       to Task Order 0002 on September 30, 2004.

   The request for this decision stems from a finding in the Interior Office
   of Inspector General report cited above. The IG reported finding a
   potential Antideficiency Act violation relating to contract NBCCHD030003.
   The report concluded that by agreeing to pay a minimum of $1 million over
   a 3-year period at a time before Congress had appropriated funds for all 3
   years, Interior violated the Antideficiency Act, 31 U.S.C. sect.
   1341(a)(1)(B), because it obligated funds in advance of appropriations.
   Interior included an "Availability of Funds for the Next Fiscal Year"
   clause in the contract, as set forth in section 52.232-19 of the Federal
   Acquisition Regulation. That clause provides:

     "Funds are not presently available for performance under this contract
     beyond ___________. The Government's obligation for performance of this
     contract beyond that date is contingent upon the availability of
     appropriated funds from which payment for contract purposes can be made.
     No legal liability on the part of the Government for any payment may
     arise for performance under this contract beyond __________, until funds
     are made available to the Contracting Officer for performance and until
     the Contractor receives notice of availability, to be confirmed in
     writing by the Contracting Officer."

   41 C.F.R. sect. 52.232-19.

   SWB did not fill in the blank spaces specifying in the clause the last
   date that appropriations would be available for contract performance and
   the date after which no government liability would arise until additional
   funds were made available. The IG's position is that without specifying
   those dates, the Availability of Funds clause does not protect the
   government from obligations beyond the fiscal year in which the contract
   was executed, when funds were available for the contract.

   The Inspector General asks whether in awarding Contract NBCCHD030003,
   Interior and/or DOD violated the Antideficiency Act by agreeing to pay a
   minimum of $1 million over a 3-year period before Congress had
   appropriated funds for all 3 years.

   ANALYSIS

   An agency must record an obligation against its appropriation at the time
   that it incurs a legal liability for payment from that appropriation.
   B-300480.2, June 6, 2003; B-300480, Apr. 9, 2003; 42 Comp. Gen. 733, 734
   (1963). Clearly, an agency can incur a legal liability,  that is, a claim
   that may be legally enforced against the government, by signing a
   contract. B-300480.2, June 6, 2003. We addressed the question of the
   proper obligation of an IDIQ contract in our decision, B-302358, Dec. 27,
   2004:

     "When an agency executes an indefinite-quantity contract such as an IDIQ
     contract, the agency must record an obligation in the amount of the
     required minimum purchase. . . . At the time of award, the government
     has a fixed liability for the minimum amount to which it committed
     itself. See [Federal Acquisition Regulation] 16.504(a)(1) (specifying
     that an IDIQ contract must require the agency to order a stated minimum
     quantity). An agency is required to record an obligation at the time it
     incurs a legal liability. 65 Comp. Gen. 4, 6 (1985); B-242974.6, Nov.
     26, 1991. Therefore, for an IDIQ contract, an agency must record an
     obligation for the minimum amount at the time of contract execution.

     "Further obligations occur as task or delivery orders are placed and are
     chargeable to the fiscal year in which the order is placed."

   Thus, in the case of an IDIQ contract, the government incurs a legal
   liability in the amount of the guaranteed minimum at the time at which it
   awards the contract.

   Contract clause, I.13, entitled "Indefinite Quantity,"[5] further supports
   our conclusion that SWB incurred an obligation at the time of contract
   award. It provides, in part (with emphasis added):

     "This is an indefinite-quantity contract for the supplies or services
     specified, and effective for the period stated, in the Schedule. . . .
     The Contractor shall furnish to the Government, when and if ordered, the
     supplies or services specified in the Schedule up to and including the
     quantity designated in the Schedule as the `maximum'. The Government
     shall order at least the quantity of supplies or services designated in
     the Schedule as the `minimum'."

   By using the words "shall order," the emphasized sentence indicates that
   under the contract the government is liable to the contractor for the
   minimum specified in the contract. It therefore incurs a legal liability
   for that amount. This is so whether SWB ever issues a task order to the
   contractor or not, and is so immediately upon contract award.

   Accordingly, on February 11, 2003, SWB incurred a legal liability of $1
   million and should have obligated $1 million on that date. SWB, however,
   did not obligate any funds at the time of contract award. As indicated
   above, SWB obligated only $45,000 in fiscal year 2003 against fiscal year
   2003 appropriations when it should have obligated the full amount of the
   minimum, $1 million. All funds obligated under the contract after the
   $45,000 for the first task order were obligated against fiscal 2004
   appropriations. Consequently, SWB obligated $955,000 against fiscal year
   2004 appropriations that it should have obligated against fiscal year 2003
   appropriations. SWB used fiscal year 2004 funds to satisfy an obligation
   established in fiscal year 2003. Fiscal year 2004 funds are not available
   to satisfy fiscal year 2003 obligations. 31 U.S.C. sect. 1502. As
   indicated above, DOD obligated and transferred the funds that SWB used for
   the task orders upon SWB's acceptance of DOD's MIPRs. Accordingly, DOD
   also obligated $955,000 against fiscal year 2004 appropriations that
   should have been obligated against fiscal year 2003 appropriations.

   Although we conclude that SWB and DOD are at risk of violating the
   Antideficiency Act, it is not for the reason that the IG suggests. As
   described in the background section above, the IG concluded that by
   agreeing to pay a minimum of $1 million over a 3-year period[6] at a time
   before Congress had appropriated funds for all 3 years, SWB obligated
   funds in advance of appropriations and violated the Antideficiency Act, 31
   U.S.C. sect. 1341(a)(1)(B). However, the contract, if obligated properly
   as described above, does not result in the agency's making obligations in
   advance of appropriations. If, as it should have, SWB had obligated the
   entire minimum at contract award, it would have completely satisfied the
   government's initial liability under the contract. No further obligation
   would remain under the contract that would require an appropriation in a
   future fiscal year to fund it unless and until the government placed
   orders exceeding the $1 million minimum.

   Interior stated in response to our development letter that the failure to
   obligate the minimum in the first contract fiscal year did not result in
   the government's being obligated for the payment of funds in advance of
   appropriations because, in its view, the contract ensures that the
   government has no legal liability unless and until SWB submits a task
   order to the contractor and that the task orders are not submitted unless
   they are fully funded. (Bernhardt Letter, enclosure, tab D.) Interior
   notes that the contract at award clearly indicated that no funds had been
   allotted to it. Contract, at 1. Each task order set out a specific period
   of performance, an end date for the availability of funds, and the funded
   amount. For this reason, Interior maintains that the task orders
   themselves provided protection against the obligation of funds in advance
   of appropriations. Interior relies on the language of clause B.1 of the
   contract to support its position. Interior states that the clause
   "provides that all services will be obtained through the issuance of task
   orders, and therefore the basic IDIQ contract did not allot or obligate
   any funds on the contract." (Bernhardt Letter, enclosure, tab C).

   As indicated from our discussion above, Interior's view of how funds
   should have been obligated under the contract is incorrect, as is its
   interpretation of clause B.1. The actual language of the clause reads,
   "This is an Indefinite Delivery, Indefinite Quantity (IDIQ) contract. All
   supplies and services will be obtained through the issuance of
   Cost-Plus-Fixed-Fee task orders. Task orders will be issued by a
   Contracting Officer with the Department of the Interior, National Business
   Center, Acquisition Services Division, Southwest Branch." The clause does
   not speak to the funding of the contract directly in any way. Rather, it
   definitizes for the parties the authorized manner in which services may be
   ordered under the contract.[7] Acceptance of MIPRs for task orders does
   serve as a trigger for the additional obligation of appropriations under
   the contract, as Interior maintains, but only, as explained above, after
   the contract minimum, properly obligated at the time of award, has been
   expended.

   In light of the above, SWB and DOD may have violated the Antideficiency
   Act by failing to obligate funds for the PERSEREC contract correctly. SWB
   should have obligated the entire amount of the contract's guaranteed
   minimum at the time of contract award against fiscal year 2003
   appropriations. Likewise, DOD should have obligated the guaranteed minimum
   against its fiscal year 2003 appropriations. Then, once SWB had issued
   task orders sufficient to exhaust the minimum, it should have charged the
   funds needed to cover the amounts remaining for Task Order 0002 to fiscal
   year 2004 appropriations. Likewise, once DOD had obligated the minimum,
   DOD should have obligated fiscal year 2004 appropriations for the
   remaining amount.

   Because of its incorrect obligation of funds, SWB must now adjust its
   accounts. It should deobligate $955,000 in funds obligated against fiscal
   year 2004 appropriations and should instead charge the obligation to
   fiscal year 2003 appropriations, the appropriations that were current at
   the time of contract award when SWB incurred the liability for the
   guaranteed minimum. DOD should also make corresponding adjustments to its
   accounts. SWB and DOD must determine whether those adjustments result in
   any violations of the Antideficiency Act, 31 U.S.C. sect. 1341(a). To the
   extent that there are insufficient fiscal year 2003 appropriations
   available for obligation, they should report the deficiency in accordance
   with the Antideficiency Act. B-289209, May 31, 2002.

   CONCLUSION

   SWB should have obligated its IDIQ contract's guaranteed minimum of $1
   million at time of award, using the fiscal year funds of the year of
   contract award, 2003. Similarly, DOD should have obligated fiscal year
   2003 funds in the amount of the guaranteed minimum. Because Interior and
   DOD obligated only $45,000 of the $1 million from fiscal year 2003
   appropriations, and incorrectly obligated the balance from fiscal year
   2004 appropriations, the agencies are potentially at risk of committing an
   Antideficiency Act violation. They should now adjust their accounts to
   reflect the proper obligation of fiscal year 2003 funds for the full
   amount of the minimum.

   Gary L. Kepplinger
   General Counsel

   ------------------------

   [1] Letter from Earl E. Devaney, Inspector General, Office of the
   Inspector General, Department of the Interior, to David M. Walker,
   Comptroller General of the United States, Jan. 22, 2007 (Devaney Letter).
   This request arose out of the Inspector General's report on an audit of
   transactions between the Department of Defense (DOD) and the Department of
   the Interior (Interior). U.S. Department of the Interior Office of
   Inspector General, FY 2005 Department of the Interior Purchases Made on
   Behalf of the Department of Defense, Report No. X-IN-MOA-0018-2005 (Jan.
   9, 2007), available at www.doioig.gov/upload/2007-G-0002.txt (last visited
   on May 30, 2007) (Interior IG Report). The Inspector General for the
   Department of Defense also audited many of these transactions and reported
   results in U.S. Department of Defense Office of Inspector General, FY 2005
   DoD Purchases Made Through the Department of the Interior, Report No.
   D-2007-044 (Jan. 16, 2007), available at
   www.dodig.osd.mil/Audit/reports/07report.htm (last visited on May 30,
   2007).

   [2] We will be issuing two companion decisions responding to the Interior
   Inspector General request: B-309181, relating to authority to enter into a
   lease, and B-308944, relating to expiration of funds transferred in
   interagency agreements, in the near future.

   [3] SWB and DOD must determine whether the adjustments to their respective
   accounts result in any violation of the Antideficiency Act, 31 U.S.C.
   sect. 1341(a). To the extent that there are insufficient fiscal year 2003
   appropriations available for obligation, SWB and DOD should report the
   deficiencies in accordance with the Antideficiency Act. B-289209, May 31,
   2002.

   [4] MIPR No. QS3H5A33F011MP, Oct. 18, 2002.

   [5] Federal Acquisition Regulation (FAR), 48 C.F.R. sect. 52.216-22.

   [6] Since the contract period is for one year, we asked SWB the meaning of
   the phrase, "over a 3-year period." Telephone conversation between Keith
   Larsen, Attorney Advisor, Department of the Interior, and Jonathan Barker,
   Senior Attorney, GAO, May 24, 2007. SWB stated that it initially
   considered using a multi-year contract, and the phrase was included in the
   solicitation. Id. When SWB awarded the contract as a 1-year contract, SWB
   mistakenly neglected to remove the phrase. Id.

   [7] We note that SWB accepted MIPRs and issued amendments to Task Order
   0002 to add services after the expiration of the 1-year period of
   performance (June 30, 2004). These actions have no bearing on the legal
   liability of the government at the time it entered into the IDIQ contract.