The Bona Fide Needs Rule
The bona fide needs rule governs how federal agencies must handle their funding for goods and services that span multiple years. Essentially, the rule requires agencies to sufficiently establish a need before requesting fiscal appropriations, and supports a larger government policy of establishing and maintaining fiscal responsibility in all areas of budgeting and spending. Although there are many exceptions to the rule, a primary purpose is that funds appropriated for the current fiscal year cannot be used to meet the needs of a future year. The Federal Acquisition Regulation ("FAR") identifies the Bona Fide needs rule at FAR 32.702. In addition to the FAR, the Bona Fide Needs rule is also currently codified at 31 U.S.C. 1502(a), which states the following: "An amount available for obligation in one year…may not be obligated for…a current-year need…in another year or for a future needs." Agency-specific regulations also supplement the FAR with additional requirements depending on the Contracting Officer. For instance , Department of Defense ("DoD") agencies must comply with the "DoD Bona Fide Needs Rule" as codified at DoD Five-Year Defense Program (Section 221 of title 10, U.S.C.). Further, DoD Instruction 7045.7(c) notes that while "reimbursable orders may be funded from the applicable increment in the advancing order….[i]t does not authorize the use of current year funds to meet a bona fide need of a subsequent year." This is an important factor when DoD has budgetary restraints, and the Contracting Officer decides against obligating another $50,000 from the current year funds to meet a procurement to meet future years’ needs. It is equally important for the government when the goods and services are used to support future contracts and acquisitions, because the subsequent year’s funds may not be sufficient.
Historical Background and Legal Basis
Historically, the bona fide needs rule has its genesis in the Department of the Treasury Appropriation Act of 1954. In this Act, Congress appropriated funds to "meet needs which arise during the period of availability." Deferring to the authority of the Executive branch, this provision was interpreted as a limitation on the amount of contract authority encumbered in one fiscal year to only on-going needs. This principle has been adopted ever since by the GAO and the various Armed Services Boards of Contract Appeals. It is now further codified in the relevant FAR provisions found at 48 C.F.R. § 32.703-2(a) and (b) ("bona fide needs rule"); 48 C.F.R. § 32.703-3 ("prospective application only"), and 48 C.F.R. § 11.002 ("Definition of terms.").
However, due to the often overlapping nature of the bona fide needs rule and the "Balance of the Act rule" (i.e. "The Balance of the Act rule prohibits contracting officers from incurring obligations in excess of, or in advance of an appropriation if the agency does not intend to request appropriations for the excess") most courts addressing claims arising from the same set of facts must address both at some level. For example, in Argonaut Ins. Co. v. United States, 607 F.2d 1028, 1033 (Ct. Cl. 1979) cert. denied 444 U.S. 826 (1979), the Court of Claims analyzed the specific language used in a claim involving the construction of a satellite tracking station. The contract’s "schedule of payments" included a clause stating that no money would be paid before completion of the project. Contra the Court of Claims’ holding, the Appellant argued that the clause was not binding because it was not included in the contract. In rejecting Appellant’s argument, the Court of Claims stated: [It] is the general policy of the government to commence payment on contracts only when the government receives the consideration for which the payment is made. GAO often has stated that the "lump sum" payment provision, referred to in the schedule of payments clause, must be included in the contract in order to be considered. But we have held to the contrary and, more importantly for our purposes here, Congress and the President have approved contractual payments in advance of performance. Thus, there is no statutory prohibition against prepayment under the balance of the act rule. In accord with Argonaut, the Armed Services Board of Contract Appeals has held that where a contract contains a progress payment clause calling for payment five days after submission of an invoice and there is no specific provision in the contract prohibiting early payment, the contract should be read as permitting early payment even if the Contractor submits an invoice before the work is complete. See, e.g., General Electric Company, ASBCA 18983, 1986 WL 49165 (Dec. 11, 1986).
Implementation in Federal Contracting
In the federal context, the bona fide needs rule conveys an obligation that, absent some exception, a government agency must acquire supplies and non-severable services only for the next 12 months. It further holds, as a matter of law, that the timing, amount, generation, or exhibition of the bona fide need drives the timing of the obligation and the expenditure rate. First and foremost, the bona fide needs rule instructs that an agency may only contract or obligate funds for the next 12 months when contracting for supplies. For instance, an agency may not issue a contract or issue an order under an existing contract to order supplies on a multi-year basis if the contract does not provide for funding beyond the single fiscal year. The B-300093, Oct. 29, 2002 (consolidation of multiple prior decisions). As for non-severable services, funding properly may be provided across the years if the periods of performance under the contract or order with the appropriate accounting data in either the contract or order. B-261296, July 27, 1995. The B-291432: Oct. 31, 2003 (holding that the bona fide needs rule does not prohibit the use of a GSA schedule contract under an existing ordering activity’s strategic sourcing strategy). Funding must be available and the bona fide needs rule is complex, especially when it comes to the allowable timing and amount of funds for multi-year and severable contracts. (i) Multi-Year Contracts The bona fide needs rule covers multi-year contracts and orders, including the rules for fund availability, budgetary treatment, and contract financing. The bona fide needs rule requires that the obligation to pay be "properly matched" to the need. For example: (ii) Severable vs. Non-Severable Contracts The bona fide needs rule applies to severable and non-severable contractual obligations. Key distinctions include the following: When applying the bona fide needs rule for purposes of severable versus non-severable contracts, courts consider several factors, such as the type of supplies (i.e., consumable versus non-consumable), and whether separate economic benefits attach to each fiscal year, as opposed to a discrete benefit to be enjoyed over the life of the contract.
Exceptions to the Rule and Special Circumstances
There are exceptions to the bona fide needs rule. For example, a subsequent procurement may be justified on the basis of an urgency exception or an overriding public interest exception, provided that such exceptions are approved by the Department of Defense. Also, when determining the needs of the Department, the head of an agency may authorize variances from applicable laws, regulations, and policies if the variances promote the objectives of the Buy American Act and foster competition. Another exception applies when the exigencies of the contract award would not permit an agency to use a competitive method of procurement (e.g., urgent and compelling reason exception). This exception may not be used if there was an available, qualified source that would have been selected if the contract were awarded competitively.
For procurement by the Department of Defense, the Under Secretary of Defense for Acquisition, Technology, and Logistics is authorized to waive the application of a specific provision of the statute. The Under Secretary of Defense may waive application of the two-year rule if the Under Secretary makes a determination of nonavailability of domestic sources or that the application of the two-year rule would seriously impede the national defense. Such waiver may also be granted if application of the two-year rule would make the contract uneconomical.
Penalties for Violations
Violation of the bona fide needs rule can result in a re-budgeting of funds, refund to the U.S. Treasury, and possibly a serious blow to the credibility of an agency. In addition, over and above what may be recovered from agencies, there may be the possibility of personal individual liability under the False Claims Act by agency personnel who engage in "willful violation." 31 U.S.C. § 3729(a)(3) (imposing liability for actions taken "in violation of the law."). In assessing whether an official or contracting officer may be liable, the Court will look at whether that person was acting as a reasonable and prudent official under the circumstances . See United States ex rel Eisenstein v City of NY, 1994 WL 691105 at *4 (E.D.N.Y. Dec. 12, 1994) (citing HR Rep NO 99-660, 99th Cong, 2d Sess 226, reprinted in 1986 USCC & Ad News 5266, 5285 (1986), an official is liable for monetary damages under the False Claims Act if that official "knew or should have known, an honest or reasonable official would have specifically rejected the certification of claims.") See also United States v Kennedy, 68 F.3d 1459, 1466 (9th Cir. 1995) (finding sufficient basis to hold contracting officer personally liable where he "was clearly aware [that] he was violating the law, or it was clearly foreseeable that his actions would violate the law.")
Case Law and Real World Scenarios
While the bona fide needs rule is an often-ambiguous area, there are real-world case studies that can provide clarity on the application and implementation of this doctrine in federal contracting.
In one USAF decision, the Agency determined that a "time card printer" was a critical need tool that would be used daily. As a result, it must be acquired by a full and open competition. In this instance, a contractor would have a "bona fide" need for a tool if it were specifically identified in the contract so that the Agency would be able to set aside funding for the item. This particular tool was not available as "off-the-shelf" items but was anticipated as a mandatory supply for use during a two-year period, and therefore a critical need tool.
An Air Force case study involved interpretation of the "non-severable" nature of construction contracts. The Agency contracted to construct both a weather radar facility and the control tower at an Air Force Base. It believed (and the contractor argued the point) that once the weather radar facility was constructed, it could be "severed" from the control tower and the building, and partially paid for and accepted.
The Armed Services Board of Contract Appeals (ASBCA) did not agree with this line of reasoning. It found that the entire contract was non-severable and, therefore, the contractor had "no right to partial payment" for items that were not completely delivered and ready for use.
This case illustrates that the government cannot sever contracts just because it wishes to use individual items purchased in the future and not for the purpose originally intended at the time of contract award.
Another example of the bona fide needs rule can be found in the context of the Multi-Year Weapons Procurement Act (MWPA). The Department of Defense is generally authorized to enter into multi-year weapons systems procurement contracts, but only if three conditions are met:
In addition, the contract must contain a provision stating that the proposed procurement is in the national interest and specifies the maximum quantity of each end item and the prices for each quantity. The "foreseeable needs of the Government" language of the MWPA mirrors the bona fide needs rule.
The salient point to be gleaned from the MWPA and bona fide procurement is that the Government may not create needs for the convenience of its agencies without having a specific, well-defined, and strategically anticipated goal in mind. Once the bona fide need has passed, spending the money with the hope that some procurement need will arise is far too opportunistic for the Government.
Approaches to Ensuring Compliance
Ensuring compliance with the bona fide needs rule requires proactive planning, ongoing auditing, and management of fiscal resources to guarantee that needs arising in a particular fiscal year are funded with the relevant appropriations. To this end, agencies may benefit from considering the following strategies: When submitting their budgets to Congress, agencies should identify bona fide needs and request appropriate appropriations to cover those needs. These requests should be as specific as possible in terms of funding requirements, timeframes, and the purpose of the funding requirements. Procurement personnel should routinely audit and review their files for purchases that will be funded with an appropriation that may be projected to expire before the order is received or performed. Consistent with fiscal law guidance, if the funds are applied to an order that will not be funded from the same appropriation as the order was placed, the contract documents should document the agency’s need for the order and its intent to fund the order from the appropriation that will be available when the contract is performed . Agencies should have procedures in place to advise contracting personnel, financial management personnel, and program personnel of the proper process for providing for bona fide needs. Agencies should implement purchase order procedures that will ensure consistency with bona fide needs principles. For example, agency policies could require that purchases of supplies or services that are to be funded with expired funds must be approved by someone with knowledge of fiscal law requirements who has been designated to ensure that purchases are properly funded. Agencies may need to revise their policies and practices for obligating funds to account for the transfer and management of funds between the ordering office and the paying and reporting office. For example, an agency could consider amending its policy to restrict members of the ordering office from approving payment on a contract without securing assurance that the funds will be available to cover payments until the end of the performance period.