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Transcript of 1. 2 Professor Gerry Land CPA, CDFM-A Defense Acquisition University Capital & Northeast Region Fort...
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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
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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).
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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
Production Lead Time
Production Lead Time
Funded DeliveryPeriod
Production Lead Time
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
31
• 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)
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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 . . . .
Fund MOD Kits for End Items and
the installation of Kits with . . .
THEN . . . .Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
Funding for Product ImprovementsDecision Tree
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MOD INCREASES
PERFORMANCE?NO
PROCUREMENT
INDEPENDENT DT OR
IOT&E REQUIRED?
YES
IF . . . .
Funding for Product ImprovementsDecision Tree
AND . . . .Fund MOD Kits for End Items and
the installation of Kits with . . .
RDT & E
THEN . . . .
Fund Development and
Testing with . . .
(including MOD Kits used
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 . . . .
Funding for Product ImprovementsDecision Tree
Fund MOD Kits for End Items and
the installation of Kits with . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
38
MOD INCREASES
PERFORMANCE?NO
PROCUREMENT
SYSTEM IN
PRODUCTION?
O & M
INDEPENDENT DT OR
IOT&E REQUIRED?
NO
NO
IF . . . .
THEN . . . .
AND . . . .
Funding for Product ImprovementsDecision Tree
Fund MOD Kits for End Items and
the installation of Kits with . . .
Fund Development and
Testing with . . .
(including MOD Kits used
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
Fund MOD Kits for End Items and
the installation of Kits with . . .
Fund Development and
Testing with . . .
(including MOD Kits used
for Testing)
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• 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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