Defense rule tightens use of long-term contracts

A new proposed rule from the Defense Department would tighten the use of contracts that extend beyond one year-a policy that could further restrict the ability of agencies to introduce private sector contracting methods.

The rule, which implements sections of the 2005 Defense Appropriations Act and 2005 National Defense Authorization Act, prohibits the Pentagon from using funds appropriated for fiscal 2005 for multiyear contracts that obligate the government to pay funds that have not yet been approved by Congress. The rule allows for certain exceptions, including if the secretary of Defense asks Congress for funding ahead of time or if the contract can be canceled without penalty.

The rule also specifies that cancellation fees of over $100 million on multiyear contracts must be explained to Congress.

"Funding restrictions probably cause the greatest amount of harm to the procurement process," said Chip Mather, former contracting officer and co-founder of Acquisition Solutions Inc., a consulting company in Oakton, Va. Because agencies are only guaranteed funding on an annual basis, they can't offer long-lasting contracts that give contractors incentives to invest in a project, which Mather said would lower costs.

Private sector companies frequently use multiyear contracts, largely to encourage investment.

Mather said that the effect of this proposed rule would probably be limited, however, because many contracting officers already avoid using multiyear contracts as a result of current restrictions. Instead, he said, contracting officers often use a series of one-year contracts, or contracts with options for renewal after congressional funding is secured.

Congressional approval of funds used to buy goods and services frequently divides those who support the expanded use of private sector contracting in government from those who are more concerned with congressional oversight. Share-in-savings contracts, which allow contractors to finance investments for agencies in return for keeping a portion of the savings, generate disagreement over whether or not the contracts violate appropriations rules.

In December, Jacque Simon, director of the American Federation of Government Employee's public policy department, criticized share-in-savings contracts because they obligate the government to pay contractors in the future, before that money is appropriated. Share-in-savings contracts are currently restricted to information technology purchases.

Few people expect the annual appropriations process to change. "The annual and biannual appropriations acts are sacred, so [contracting officers] are trying to figure out a way around them," said Mather.

The Office of Management and Budget did not have jurisdiction over the proposed rule. David Safavian, head of the Office of Federal Procurement Policy, said the rule and the law that requires it "are consistent with OMB's approach to full funding of major acquisitions. We don't see anything in the rule that would undermine performance-based contracting or other innovations."

A spokesman for Rep. Tom Davis, R-Va., who has spearheaded acquisition reforms, including share-in-savings, declined to comment on the proposed rule.

Defense will accept comments on the rule until July 8.