(b) THE RULES GOVERNING THE FUNDING OF MULTI-YEAR CONTRACTS

(1) Multi-year contracts are funded one year at a time with annual appropriations.

(2) The general rules, for each year of the multi-year contract, are:

(i) Fully fund the end items being procured.

(ii) Fund the estimated termination liability of the advance (i.e., EOQ and Long Lead) procurement.

(iii) Fund at least the recurring cost portion of the cancellation ceiling.

(iv) Estimates should be based on prior cost history for the same or similar items or proven cost estimating techniques. Normally, production assets should have been delivered in order to obtain actual costs for the comparisons (exceptions include satellites and ships).

(v) With the exception of funding for EOQ procurement and advance procurement for long lead-time items as defined in DoD 7000.14-R, Volume 2A, Chapter 1, section 010202, multi-year procurement contracts should comply with full funding. The full funding policy applies to each individual year of the multi-year contract. Multi-year contracts should not be used as a vehicle for incrementally funding the items across the fiscal years covered by the contract. The production lots on the contract should be the same as those described in the budget and advance procurement should not be used to achieve a higher production rate for the end item. Funds should not be "borrowed" from the amounts budgeted for items in the early fiscal years of a multi-year contract to begin work on items not budgeted until later fiscal years of the contract.

(vi) The inclusion of recurring costs in cancellation ceilings is an exception to normal contract financing arrangements and requires approval by the Agency Head (FAR 17.106-3(e)) and the USD Comptroller.

(vii) An exception, to be approved by the USD Comptroller, is needed to structure a contract with an unfunded cancellation ceiling. Justification explaining why an unfunded cancellation ceiling is the chosen acquisition strategy should be provided. This justification should specify what costs comprise the unfunded cancellation ceiling and why these costs are not funded under the full funding policy.

(viii) In keeping with the DoD policy of not relying upon industry to finance the cost of Defense programs, even on a temporary basis, the use of unfunded cancellation ceilings on multi-year contracts should be rare and limited to no more than 20 percent of the value of the budget for each fiscal year covered by the contract.

(ix) Funds obligated for multi-year contracts need to be sufficient to cover any potential termination costs. The costs of cancellation or termination may be paid from (1) appropriations originally available for the performance of the contract concerned; (2) appropriations currently available for procurement of the type of property concerned, and not otherwise obligated; or (3) funds appropriated for those payments.

(x) Contingent liabilities for multi-year contracts that provide for cancellation charges, when it is necessary for the government to cancel the contract for reasons other than contractor liability, are not recorded as commitments. Any such cancellation charge should be recorded as an obligation when it becomes necessary to cancel the contract and the contractor is so notified.

(3) The basis for each of these general rules is in one or more of the following:

(i) 10 USC 2306b

(ii) DoD 7000.14-R, Volume 2A, Chapter 1 and DoD 7000.14-R, Volume 3, Chapter 8.

(iii) FAR 17.1 and supplements

(iv) FAR 32.7 and supplements

(v) Section 8008 of the Defense Appropriations Act for FY 2005

(vi) Section 814 of the National Defense Authorization Act for FY 2005