Federal Appropriations: Bona Fide Need Rule | Practical Law The Journal

Agencies can use available funding only for current needs or requirements. If agencies fail to use funds properly, they may violate federal appropriations statutes. (31 U.S.C. § 1502(a).)

Agencies use the BFN rule to determine whether they are properly expending funds. The BFN rule allows agencies to:

Obligate funds that are accessible in the period of availability (POA).
Obligate funds for needs that exist in the POA.
Continue to use expired funds to pay for obligations that agencies made during the time when the funds were still available.

The rule restricts agencies from using a current year’s appropriation to fund requirements for a prior or future year. Therefore, agencies cannot:

Obligate current fiscal year funds for the needs of a prior or future year.
Expend current fiscal year funds for a period beyond that fund’s POA, unless an exception exists. (31 U.S.C. §§ 1341(a) and 1502(a).)

This article discusses:

Application of the BFN rule.
Exceptions to the BFN rule.
Common BFN-related issues for agencies.

(For more on appropriation issues related to the principle of time, see Federal Appropriations: Time Overview on Practical Law.)

Application of the BFN Rule

The BFN rule applies to all initiatives by the federal government including:

Contracts.
Grants.
Cooperative agreements.
Interagency agreements.

The BFN rule also applies to:

Annual appropriations.
Multiple-year appropriations.
Appropriations that contain availability restrictions.

In analyzing a BFN rule issue, an agency should determine:

The agency ultimately must show that the expense or obligation bears a sufficient relationship to legitimate needs in the appropriation’s POA.

Exceptions to the BFN Rule

Generally, an agency must use currently available funds only for current needs. In some situations, the agency’s need must be obligated in the current POA, but performance or delivery will not occur in the same period. There are exceptions to assist an agency in connection with services contracts and supply contracts. (For more on exceptions to the BFN rule for services or supplies, see Federal Appropriations: Bona Fide Need Rule for Services and Supplies Flowchart on Practical Law.)

Services Contracts

Contracts for services are categorized as either:

Severable. These are services that can be naturally separated. An example of a severable service is a janitorial maintenance contract. The maintenance is a discrete, repeatable task that can be performed for an agreed-on period of time. If more services are required on future dates, an agency can contract for additional service maintenance in another contract or order.
Non-severable. These are services that cannot be broken into separate agreements, contracts, or tasks. Usually, these services result in a deliverable at the end of the contract, which relies on the totality of the contractor’s work over the performance period. An example of a non-severable service is a consulting study in which the agency does not receive the substantial benefit of the service unless the consultant completes the whole study.

Agencies that use multiple-year or no-year appropriations to fund severable services do not violate the BFN rule when services span more than one fiscal year if the period of performance does not exceed the fund’s POA (Whether the Gen. Servs. Admin. May Proceed with an Assisted Acquisition for the Dep’t of Veterans Affairs in Fiscal Year 2012 Using the Department’s Fiscal Year 2009/2010 Funds, 2012 WL 3059227, at *5 (O.L.C. Mar. 2, 2012)).

Funding Severable Services Contracts

Congress gave agencies the authority to enter into contracts for severable services that:

Begin in one POA or fiscal year.
End in the next POA or fiscal year.
Do not exceed a period of one year. (10 U.S.C. § 3133; 41 U.S.C. § 3902; 48 C.F.R. § 32.703-3.)

The agency may charge the entire contract price of the services to the current POA of the funds. For example, if the base period for a building custodial contract runs from September 1, 2022 to August 30, 2023, the agency can fund the entire base year with fiscal year 2022 (FY22) funds.

A restriction for this exception is that the base period of a severable contract cannot be longer than 12 months. In other words, the agency cannot use FY22 funds for a base year that both runs longer than 12 months and crosses fiscal years into fiscal year 2023. For example, an agency cannot fund a contract that runs from September 1, 2022 to September 30, 2023 with FY22 funds.

Funding Non-Severable Services Contracts

Agencies may contract for non-severable services that span multiple years or POAs for their funding. This exception to the BFN rule requires that agencies have a bona fide need for the current POA. Therefore, agencies may use funds for the current POA to pay for the full cost of the non-severable services contract, even for the portion of the contract that goes beyond the current POA (In re EEOC — Payment for Training of Mgmt. Interns, 1995 WL 683813, at *2 (Comp. Gen. Nov. 15, 1995)).

Supply Contracts

Supplies are considered a bona fide need of the fund’s POA or fiscal year in which they are purchased and used. However, an agency may also purchase supplies in an expiring fiscal year for use in the next fiscal year if the purchase is reasonable.

When determining if this exception applies, an agency should consider:

The typical ordering time.
Replacement and maintenance of stock at reasonable and historic levels. (In re Farmers Home Admin. (FmHA) Purchase of Office Chairs, 73 Comp. Gen. 259, 261-62 (1994).)

An agency must finalize the supply order during the POA for the funds used to purchase those supplies (In re Nat. Res. Conservation Serv. — Obligating Orders with GSA’s AutoChoice Summer Program, 2009 WL 2004210, at *6 (Comp. Gen. July 1, 2009)).

Stock Level Exception

Something is considered stock if it is a readily available, common-use item, such as copier paper. Agencies may need to keep a reasonable amount of certain supplies (stock) on hand. Generally, the BFN rule will not permit this because agencies may not use stock until the next POA for funding, but there is an exception.

To determine whether a purchase falls under this exception, an agency attorney should ensure that:

The item meets the definition of stock.
The agency has a requirement to keep stock of the item.
The amount purchased is reasonable to support the agency’s mission or operations. (FmHA Purchase of Office Chairs, 73 Comp. Gen. at 262; To Mrs. Betty F. Leatherman, Dep’t of Commerce, 44 Comp. Gen. 695, 697 (1965); Comptroller Gen. Warren to the Sec’y of Def., 32 Comp. Gen. 436, 438 (1953).)

Delivery Lead-Time Exception

An agency does not violate the BFN rule when the delivery time of supplies occurs outside of the POA of the funds used as long as:

The agency obligates the funds during the fund’s POA.
The intervening time between contracting and delivery is not excessive.
The supplies are not standard, commercial items readily available from other sources.

Agencies should be careful to ensure that no party artificially manipulates contracted delivery schedules to allow for a later delivery date than possible. A BFN rule violation may occur if an agency could have contracted and received its supplies in the same POA. (To Hon. H. V. Higley, Adm’r, Veterans Admin., 1957 WL 1600, at *1 (Comp. Gen. Dec. 18, 1957).)

Agencies should be careful to ensure that no party artificially manipulates contracted delivery schedules to allow for a later delivery date than possible. A BFN rule violation may occur if an agency could have contracted and received its supplies in the same POA.

Production Lead-Time Exception

Similar to the delivery lead-time exception, an agency may be able to contract for supplies using currently available funds, and receive the supplies after the current POA, if the delay is due to production or fabrication reasons. Specifically, the delivery of supplies will not violate the BFN rule if:

The supplies contracted for will not be obtainable on the open market when needed for use.
The intervening period is necessary for production or fabrication of the supplies. (To the Chairman, US Atomic Energy Comm’n, 37 Comp. Gen. 155, 159-60 (1957).)

(For more on determining if there is an exception to the BFN rule, see Federal Appropriations: Bona Fide Need Checklist on Practical Law.)

Common BFN-Related Issues

The BFN rule has application beyond federal contracts, for example, concerning:

Interagency agreements.
Unforeseen delays.
Grants and cooperative agreements.
Litigation claims.

Interagency Agreements

Agencies use interagency agreements (IAs) as contracting vehicles for supplies or services (48 C.F.R. subpt. 17.5). IAs are an efficient and effective way to support agencies’ contracting requirements. However, there are sometimes fiscal issues, such as when funds are transferred to revolving or franchise funds.

When an agency (the requesting agency) uses IAs to receive supplies or services from another agency (the servicing agency), it sends funds to the servicing agency to cover expenses. In some cases, the requesting agency may need to obligate the full value of the expenses, even though it may not receive all services or supplies during the fund’s POA. The requesting agency may send more funds than required to the servicing agency to cover expenses. Generally, when the servicing agency uses a fund that has the same time restrictions as the funds transferred by the requesting agency, there are no unique fiscal issues.

Legal issues occur, however, when the fund of the servicing agency does not have the same POA restrictions as the requesting agency’s funds. A servicing or requesting agency may create a fiscal issue if it attempts to use those funds beyond the POA for new obligations. When a requesting agency transfers funds to a servicing agency, the funds of the requesting agency retain their time restrictions unless the servicing agency has statutory authority to change the character of the funds. The attempt to use transferred funds beyond their original POA is referred to as “parking” or “banking” funds. (Whether the Gen. Servs. Admin. May Proceed with an Assisted Acquisition for the Dep’t of Veterans Affairs in Fiscal Year 2012 Using the Department’s Fiscal Year 2009/2010 Funds, 2012 WL 3059227, at *11 (O.L.C. Mar. 2, 2012); In re Implementation of the Library of Cong. FEDLINK Revolving Fund, 2001 WL 1029307, at *4 (Comp. Gen. Sept. 6, 2001).)

When a requesting agency transfers funds to a servicing agency, the funds of the requesting agency retain their time restrictions unless the servicing agency has statutory authority to change the character of the funds.

Unforeseen Delays

Sometimes an agency makes a proper obligation, but due to unforeseen delays, the delivery or performance of the supply or service extends into the next POA. In a case such as this, the existing exceptions to the BFN rule do not apply or bring an agency into compliance with appropriations law. Instead, the facts may provide justification that will avoid a potential violation of law.

Factors that may help an agency determine if there is an exception to the BFN rule are whether:

The agency awarded the contract as expeditiously as possible.
The agency intended the work to begin within the current POA.
There was a delay in the start of performance or delivery of supply due to matters outside the control of the agency. (Comptroller Gen. Warren to the Sec’y of the Interior, 23 Comp. Gen. 82, 82 (1943); Comptroller Gen. Warren to the Sec’y of Agric., 20 Comp. Gen. 436, 438 (1941); Comptroller Gen. McCarl to Maj. F. J. Baker, US Army, 1 Comp. Gen. 708, 709 (1922).)

Grants and Cooperative Agreements

Grants and cooperative agreements are different from contracts. Therefore, the BFN rule analysis differs, mainly stemming from the agency’s need for grants and cooperative agreements as compared to contracts.

The requirements of a contract define the need, and the need is for the primary benefit of the agency. However, for grants and cooperative agreements, the need is to make a federal award in furtherance of congressional goals stated in the enacted authority. Because the need is so broad, the agency must focus its analysis solely on whether the agency makes the grant or cooperative agreement during the POA of the appropriation. Moreover, the BFN rule and appropriations laws apply to the agency’s obligation of the funds and do not limit the time in which the recipient must use the funds once received.

Litigation Claims

Litigation against a federal agency may involve a contract using funds that may expire soon or are unavailable for new obligations. Generally, funds are:

Unavailable for new obligations after they expire.
Returned to the general fund of the Treasury once they reach closed status. (31 U.S.C. §§ 1551-1558.)

Congress provided exceptions to these fiscal rules for:

Protests (31 U.S.C. § 1558(a)).
Litigation, where the funds are expired but not closed (31 U.S.C. § 1552(a)).
Litigation, where the funds are closed (31 U.S.C. § 1502(b)).

Federal Appropriations: Bona Fide Need Rule | Practical Law The Journal | Reuters (2023)