Alleged violations of the Antideficiency Act in the Air Force's procurement of advanced cruise missiles., File: B-255831, Date: July 7, 1995

B-255831 Jul 07, 1995 Jump To VIEW DECISION RELATED PAGES GAO CONTACTS Highlights Projected cost overruns between the target and ceiling prices of a fixed- price-incentive contract are not de facto obligations. Potential cost overruns are contingent liabilities. Where overruns were foreseeable. In April 1992 the Air Force terminated its contract for ACMs because projected cost overruns would have exceeded available funds. The first is the failure to commit funds to cover the ceiling price of the contract and the resulting projection of unfunded cost overruns. You ask whether the Air Force violated the Act when it allowed contract performance to continue unabated until all available funds were exhausted. We do not believe that the Act was violated. While it is clear the Air Force could have done substantially more to manage the contract effectively. View Decision B-255831 July 7, 1995 The Air Force did not violate the Antideficiency Act when it terminated a fixed-price-incentive contract for lack of funds. Termination of a contract prior to incurring obligations in excess of funds available in the appropriation account prevents an Antideficiency Act violation. Projected cost overruns between the target and ceiling prices of a fixed- price-incentive contract are not de facto obligations. Until the contractor has a legal right to be paid for costs incurred, potential cost overruns are contingent liabilities. Air Force regulations permit a procuring entity to limit the initial obligation on a fixed-price-incentive contract to the target price. Regulations also require the procuring entity to commit funds to cover the expected cost of contract. Failure to follow those regulations on the advanced cruise missile contract for fiscal year 1987, where overruns were foreseeable, resulted in insufficient funds being available when needed to complete the contract at the ceiling price. Derek J. Vander Schaaf Deputy Inspector General Department of Defense Dear Mr. Vander Schaaf: You asked for our views on three questions concerning the Air Force's procurement of advanced cruise missiles (ACM) for fiscal years (FY) 1987 and 1988. The questions involve alleged violations of the Antideficiency Act pertaining to the FY 87 procurement. The Act, codified in part at 31 U.S.C. Sec. 1341, prohibits federal employees from incurring obligations in excess of available funds. Attempting to avoid a violation of the Antideficiency Act, in April 1992 the Air Force terminated its contract for ACMs because projected cost overruns would have exceeded available funds. In this respect, we reported in 1994 [1] that the ACM program had to be restructured dramatically in 1992 in key part because of the lack of funds to cover FY 87 and 88 cost overruns. You question whether three separate aspects of the Air Force actions violated the Antideficiency Act. The first is the failure to commit funds to cover the ceiling price of the contract and the resulting projection of unfunded cost overruns. Second, you ask whether the Air Force violated the Act when it allowed contract performance to continue unabated until all available funds were exhausted. Third, you assert that costs actually incurred by the contractor prior to termination exceeded available funds in the account, thus causing a deficiency. We do not believe that the Act was violated. While it is clear the Air Force could have done substantially more to manage the contract effectively, a projection of overruns does not in itself constitute an Antideficiency Act violation. Further, we see no violation in allowing contract performance to continue, as opposed to terminating the contract based on the projection of overruns. Moreover, the Air Force's termination strategy avoided costs that, had the transaction been structured differently, may have caused a deficiency. Our finding that the Air Force did not violate the Antideficiency Act should not be taken as an endorsement of its actions with regard to the FY 87 ACM procurement. In view of the difficult technical and cost problems that delayed contract definitization for a year and a half, the Air Force should have anticipated that cost overruns likely would take the contract to ceiling price. Yet, at the time of definitization, the Air Force did not act to commit sufficient funds in the appropriation account to complete the contract. Even after definitization, as the likelihood of overruns approached reality, the Air Force took no steps to manage the contract (e.g., cutting back the number of missiles), or the account (e.g., reducing other demands on the account), to cover the ceiling.