1. 2 Professor Gerry Land CPA, CDFM-A Defense Acquisition University Capital & Northeast Region Fort...

2

Professor Gerry Land

CPA, CDFM-ADefense Acquisition University

Capital & Northeast Region

Fort Belvoir, VA

(703) 805-3755; DSN 655-3755

E-mail: [email protected]

2010 PDI – June 2010

Programming and Budgeting Policies

for Acquisition Programs

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Funding Policies Workshop Topics

• Budgeting Building Blocks • Funding Policies

- Annual Funding

- Incremental Funding

- Full Funding

- Advance Procurement

- Multiyear Procurement (economic order quantity)

• Exceptions to Full Funding

- Communications and Information Systems

- LRIP Articles

- Product Improvements

• Funding Policies for Unique Items

4

SAC SASC SBC HAC HASC HBC

BudgetExecution

Congressional Enactment

Operational Capability Force StructureModernizationReadinessSustainability

BudgetResolution

Authorization &

Appropriation Laws

OperationalCapability

Need

EstimateCostAnalysis

Life CycleCost

ICE

FiscalEnvironmentPOE

CCE

A o A

CAIV

AnnualFunding

IncrementalFunding

Funding Policies Full

Funding (Exceptions)

Planning, Programming, Budgeting and Execution Process

President’sBudget

Budget Authority Obligation ReprogrammingFeedbackCommitment Expenditure Outlay

MBIs

FYDP GDF POM FOL CP MFP JPG BES PDM PBD

Capability Docs

Acquisition Program Baseline

Resource Management Flow from Identification of Capability Need to Achieving Operational Capability

Capabilities-Based

Assessment

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What is Needed to Build a Program Budget?

A statement of what the program manager is expected to do – the Acquisition Program Baseline (APB)

A translation of the program direction into a statement of the tasks required to achieve the program objectives

Program Direction:

Work Breakdown Structure (WBS):

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

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Appropriation Categoriesvs. 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)

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DoD Appropriation Account Codes

Appropriation Account

RDT&E

Procurement

Aircraft

Missiles

Weapons

W&TCV

Ammunition

SCN

Other

USMC

MILPERS

O&M

MILCON

Army

21 -

2040

2031

2032

2033

2034

2035

2010

2020

2050

DoD Wide

97 -

0400

0300

N/A

0100

0500

Air Force

57 -

3600

3010

3020

3011

3080

3500

3400

3300

USMC

17 -

1109

1105

1106

Navy

17 -

1319

1506

1507

1508

1611

1810

1453

1804

1205

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Underlying Assumptions in Budgeting

• Funding is requested (i.e., budgeted) for the fiscal year when the organization honestly “requires” the funds in accordance with proper funding policy

• 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

• “Color of money” (i.e., Appropriation) requested in the budget is based on type of work to be performed

• Application of proper funding policy implies that funds will be obligated during the first year of availability

• Normally, funding is requested for a 12 month fiscal year (1 October – 30 September of following year)

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“Notional” Example of Preparing Input for

FY10 FY11 FY12 FY13 FY14 TOTAL

Price Today (Base Yr $ ) Outlay Rate ( % ) Cumulative Inflation ( % )

Dollar “Value” ( $ ) When Outlaid

“Required Budget” Estimate (Current/Then Yr $ )

Budget Estimate = “Price Today in Base Yr $” plus inflation plus economic effects of outlays occurring in future years

$$

Year Budget Prepared

FY 2012 Budget - Applying Escalation

To go from “Price Today” to “Required Budget”, multiple “ Price Today” by proper Weighted (Composite) Index of Appropriation Account

Target Fiscal Year

$$$

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Major Appropriation Categories

Scope / Type of Work Effort

2 Years Program Element

Incremental

Full

Full

Annual

Annual

1 Year

1 Year

3 Years

5 Years

Line Item

Sub-Activity Group

Budget Activity

Project

Period Available

for Obligation

R&D Activities and Expenses

Useable End Items >= $250K system unit cost; Centrally managed items; Initial Spares; Labor for certain production-related functions (e.g., item assembly, quality assurance)

Military Personnel Expenses

Major Construction Projects >$750K

Replenishment Spares; Fuel; Civilian Pay; Travel; Construction Projects <$750K; Non-Centrally managed end items <$250K system unit cost

Control Level (Budgeting)

Funding Policy

Appropriation CategoryRDT&E

Procurement

O&M

MILPER

MILCON

(SCN) (5 Years)

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Annual FundingPolicy

• 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).

12

Service ContractException 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

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Supplies

TDY

$ 510 K $ 520 K$ 500 K

$ 30 K

$ 50 K$ 40 K

FY 1 FY 2 FY 3 FY 4Expense

Expenses by Fiscal Year

Budget Request

Service Contract

Annual Funding Policy

Period when expenses are being incurred

$ 645 K $ 585 K $ 600 K

Simple Application – O&M Appropriation

Civ Pay $ 525 K

$ 35 K$ 25 K $ 30 K $ 35 K

12 Month

$ 40 K $ 35 K $ 40 K

$ 585 K

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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

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Purposes of theIncremental 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

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18 Month Exception toIncremental 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

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How does a Program Office Prepareits 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 submissionNote: 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)

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TASK 1$ 300 K

TASK 2$ 150 K

$ 100 K $ 100 K$ 50 K

$ 100 K$ 25 K $ 25 K

$ 10 K $ 50 K $ 40 K

FY 1 FY 2 FY 3 FY 4Task Cost

Cost Incurred by Contractor by Fiscal Year

Budget Request

TASK 3$ 100 K

Incremental Funding Policy

Planned Period of Performance (i.e, planning for costs to be incurred)

$ 50 K $135 K $250 K $ 115 K

Simple Application – RDT&E Appropriation

36 month effort

18 month effort

24 month effort

$ 50 K

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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)

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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

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Concept of “Usable End Items”Which Program is Correct Under Full Funding?

Program A Program BYear 1 Year 1

Year 2 Year 2

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LOT 1 ($400K)

Start Up Costs:

2 2 3 3

FY 1 FY 2 FY 3 FY 4

Contract Award Date

Production Lead Time

How We Expect the Contractor to Incur Cost by FY

Budget Request:

10 Items

Recurring Production Costs:

$ 40 K

$ 30 K

$ 0 K

$140 K

$ 0 K

$140 K

$ 0 K

$ 50 K

$140 K $ 50 K$140 K$ 70 K

Full Funding Policy Conceptual - Procurement Category

($400K)

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FY 1 FY 2 FY 3 FY 4

LOT 1

10 ITEMS

LOT 2

20 ITEMS

LOT 3

40 ITEMS

Budget Request

Lot Cost

$ 400 K

$ 600 K

$ 900 K

2 2 3 3 = 10

5 5 5 5 = 20

8 10

Full Funding Policy Simple Application - Procurement Appropriation

= 18

+ 22

$ 400 K $ 900 K$ 600 K - 0 -

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Application of Funded Delivery Period Policy

FY 1 FY 2 FY 3 FY 4 FY 5

2 2 3 3 5 5 5 5 8 10



Funded DeliveryPeriod


12 Months of Deliveries

12 MonthsOf Deliveries

X X X X X X

Defer to Later Fiscal Years

LOT 1

QTY 10

LOT 2

QTY 20

LOT 3

QTY 18

“Requirement” is for 48 Tanks Delivered by End FY 5

Contract Award

Proposed Deliveries

Contract Action

Contract Action

5 5 5 5

8 10

Deliveries

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Advance ProcurementLong 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)

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Advance Procurement Application with Procurement Appropriation

LOT 3 ($400M) 20 Items

LOT 4 ($700M)

38 Items

ADVANCEPROCUREMENT

* BA ADV PROC BA SYS

BA TOTAL (FY)

* Separate Budget Line Line Item one fiscal year in advance of associated production contract

$ 700M

$ 400M

- $ 10M

+ $ 10M

- $ 15M

+ $ 15M

$ 10M

$ 390M

$ 405M $ 685M

$ 685M

$ - 0 -

FY 1 FY 2 FY 3 FY 4

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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

Economic Order Quantity (EOQ)

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• 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

Multiyear Procurement (MYP)Continued

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• 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)

Multiyear Procurement (MYP)Continued

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FundedUnits

1 4 5 6 9 9 9 9 9 9 9 9 9 9 9 9 9 9 8

1 2 3 4 5 FY 1 FY 2 FY 3 FY 4 FY 5 FY 6 FY 7

End Items$M

EOQ Items$M

$ $ $ $

Multiyear Procurement (MYP) Contract(Example of Budget Preparation for a MYP Contract)

Budget in same method as Full

Funding

Except for items budgeted under

“EOQ” rules

16 36 36 36 26

$ 60

$250 $ 514 $ 523 $ 508 $ 356

$

Deliveries of Production ItemsProduction Lead Time

Notification to Contractor and Obligation of Funds

Assumes a 92% Learning Curve and composite indices appropriate to given fiscal years

Contract Award

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• 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

Recent ExampleMultiyear Procurement (MYP)

32

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

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Low Rate Initial Production

PURPOSE APPROPRIATIONProcurement

Procurement

RDT&E

Procurement

Primary Purpose and Proper Appropriation

To permit an orderly increase in production ramp-up

To establish an initial production base

To provide production configured representative articles for operational test -

* Articles planned to be destroyed during testing – or planned to not go into operational inventory

* Articles scheduled to go into operational inventory

RDT&E is default, but use . . . . .

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Funding for Product Improvements

MOD INCREASES

PERFORMANCE?NO

Fund MOD Kits for End Items and

the installation of Kits with . . . PROCUREMENT

YESSYSTEM IN

PRODUCTION?

NOYESFund Development and

Testing with . . .

(including MOD Kits used

for Testing)

RDT & E PROCUREMENT O & M

INDEPENDENT DT OR

IOT&E REQUIRED?

YESNO

IF . . . .

THEN . . . .

AND . . . .

Decision Tree

35

MOD INCREASES

PERFORMANCE?

PROCUREMENT

YES

RDT & E

IF . . . .

AND . . . .


the installation of Kits with . . .

THEN . . . .Fund Development and

Testing with . . .


for Testing)

Funding for Product ImprovementsDecision Tree

36

MOD INCREASES

PERFORMANCE?NO

PROCUREMENT

INDEPENDENT DT OR

IOT&E REQUIRED?

YES

IF . . . .


AND . . . .Fund MOD Kits for End Items and


RDT & E

THEN . . . .

Fund Development and

Testing with . . .


for Testing)

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MOD INCREASES

PERFORMANCE?NO

PROCUREMENT

SYSTEM IN

PRODUCTION?

YES

PROCUREMENT

INDEPENDENT DT OR

IOT&E REQUIRED?

NO

IF . . . .

THEN . . . .

AND . . . .





Testing with . . .


for Testing)

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MOD INCREASES

PERFORMANCE?NO

PROCUREMENT

SYSTEM IN

PRODUCTION?

O & M

INDEPENDENT DT OR

IOT&E REQUIRED?

NO

NO

IF . . . .

THEN . . . .

AND . . . .





Testing with . . .


for Testing)

39

Funding for Product Improvements

MOD INCREASES

PERFORMANCE?NO

PROCUREMENT

YESSYSTEM IN

PRODUCTION?

NOYES

RDT & E PROCUREMENT O & M

INDEPENDENT DT OR

IOT&E REQUIRED?

YESNO

IF . . . .

THEN . . . .

AND . . . .

Decision Tree




Testing with . . .


for Testing)

40

• 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.

Summary

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Questions?

Now for the DAU optional “commercial”

Briefing for DAU Students

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Jan 2010’05 ’06 ’07

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