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Vol 4 May 30, 1995

**[Multi-Year Awards]{.underline}**

by Michelle McClelland

The Department is currently revising its guidelines and procedures for
multi-year financial assistance awards. Unlike multiple year awards,
where awards are fully funded for a period of more than one year,
funding is not available for the entire award period of a multi-year
award. This Commerce-specific award classification permits federal
assistance programs to use multi-year awards to fund recipients for a
period of more than one year when only partial funding is available.
However, there are certain statutory constraints to consider, such as
Antideficiency Act concerns and the *bona fide* need rule, before a
program can be designated as a multi-year program, and individual awards
funded on an incremental basis.

The Department first established pro-cedures pursuant to Federal
Assistance Notice (FAN) No. 10, dated September 24, 1992, to provide
guidance to funding agencies to designate certain programs as multi-year
programs to fund awards for a period of up to three years without
requiring additional approvals to release funds during the award period.

The procedures were initially adopted as a measure to reduce the
administrative burden on both the applicant and the funding agency.

Multi-year awards are effective long range planning tools since the
funding agencies are permitted to obligate funds for a one year budget
period and anticipate options to renew for up to two additional years.
The procedures are currently under review to expand the award period to
five years, as well as to give funding agencies additional discretion
and flexibility. We applaud the Department\'s Office of Executive
Assistance Management in taking a lead role to streamline the federal
assistance review process for multi-year awards.

Multi-year awards, however, raise many legal issues each which must be
considered at every level of review and approval to avoid possible civil
and/or criminal sanctions that could possibly be imposed against
employees during the review and approval process. **Now that I have your
attention** - - with the additional discretion given to funding agencies
comes additional responsi-bilities. All grants personnel and fund-ing
agencies should be aware of the principles of the *bona fide* need rule,
\[31 U.S.C. § 1502\] and the Anti-deficiency Act \[the provisions
concerning this discussion are found at 31 U.S.C. § 1341(a)(1)\].

The practice of incrementally funding multi-year projects only one-year
at a time is prohibited unless (1) there is specific statutory authority
for incre-mental funding, (2) \"no year\" funds are used to fund a
project with certain conditions imposed which are discussed below, or
(3) a multi-year project can be separated into annual tasks with defined
work products which can be completed at a years\' end. To our knowledge,
no Commerce grant programs have the statutory authority to incrementally
fund projects so the first option is not available.

The Economic Development Admin-istration usually is appropriated \"one
year\" funds and therefore fully funds its multi-year projects. Many
other Commerce grant programs do, however, fund multi-year projects on
an annual basis in order to increase the number of projects they can
fund in one year. Most Commerce programs can continue to do this if they
have \"no year\" funds and properly structure the awards under the other
two options.

If an agency is using only \"one year\" funds, such as the Economic
Devel-opment Administration, or using funds transferred from another
Federal agency and those funds are time limited, it must comply with the
*bona fide* need rule.

***Bona fide* Need Rule**

The *bona fide* need rule provides that an appropriation which is
limited for obligation to a definite period is available only for
payment of expenses properly incurred during the period of availability.
The \"properly incurred\" restriction is the statutory basis for the
rule. An appropriation may be obligated only to meet a *bona fide* need
that arises during the period of availability of the appropriation. This
rule is applicable to contracts, grants and cooperative agreements.
\[See B-229873, November 29, 1989.\] For multi-year awards, the *bona
fide* need rule has been interpreted to allow full funding of projects
that may extend into future years if obligated when the time-limited
appropriations were available. However, the rule does not permit, absent
specific statutory authority, the funding of projects in annual
increments when performance is required in future years to complete the
work. The practice of funding multi-year projects only one year at a
time is prohibited **unless a project can be separated into annual
components with defined work products completed at a years\' end.**
\[*Incremental Funding of U.S. Fish and Wildlife Service Research Work
Orders,* B-240264 (February 7, 1994).\]

Accordingly, the Department\'s Multi-year award procedures require a
justification for each individual award which includes a statement
regarding how the scope of work under the program is severable and can
be easily separated into annual increments of meaningful work which
represent solid accomplishments if prospective funding is not made
available to the Recipient. \[FAN No. 10, §§ .02(a), .03(c)(4),
.04(c).\] If the award funds are annual or time limited funds, the award
tasks or scope of work must be accomplished within that year.

During our legal review of proposed multi-year awards, the majority of
the issues raised are in response to the severability statements or lack
thereof. The award may be denied funding or delayed until we can
determine whether the proposed scope of work is severable and the
increments of funding represent meaningful work which include solid
accomplishments. We recommend that all programs include in the Requests
for Applications and the Program Announcements in the *Catalog of
Federal Domestic Assistance*, the requirement of a year-by-year or
budget-by-budget analysis demonstrating solid accomplishments of the
tasks during the period of the award. This addition would streamline the
review and approval process for eligible multi-year awards.

In some cases, however, projects may not be severable. The *bona fide*
need rule only applies to annual or time-limited funds. Therefore, if
the project is funded with time limited appropriations and the nature of
the award renders it impossible to sever the tasks on an incremental
basis, the project must be funded wholly at the time of the award.

For programs funded with no-year funds, we have a little more
flexibility. The *bone fide* need rule does not apply to no-year
appropriations since such funds do not have a limited period of
availability. However, the Antideficiency Act applies equally to both
time limited and no-year funds.

**Antideficiency Act**

The Antideficiency Act is one of the primary enforcement devices of
Congress to control the \"public purse\". The Act prohibits making or
authorizing the making of an expenditure, or creating, involving, or
authorizing the creation or involvement of the United States in any
contract or obligation to make future expenditures, in the absence of
sufficient funds in the account to cover the payment or the obligation
at the time it is made or incurred, unless otherwise authorized by law.
\[31 U.S.C. § 1341 (a)(1).\] Put simply, the legal principle is \"pay as
you go\". Compliance with the Antideficiency Act is determined on the
basis of when an obligation or liability is incurred, not when actual
payment is scheduled to be made.

Violations of the Antideficiency Act are subject to administrative and
penal sanctions. An officer or employee who violates the Antideficiency
Act is subject to appropriate administrative discipline including, when
circumstances warrant, suspension from duty without pay or removal from
office. \[31 U.S.C. § 1349(a).\] Moreover, an officer or employee who
\"knowingly and willfully\" violates the Antideficiency Act can be fined
up to \$5,000, imprisoned for not more than 2 years, or both. \[31
U.S.C. § 1350.\]

The General Accounting Office approved the incremental funding of
multi-year (contract) awards using no-year funds in 43 Comp. Gen. 657
(1964). The Comptroller General opined that where Congress expressly
provides in an appropriation, that funds shall \"remain available until
expended\" thereby making it a no-year appropriation, all statutory time
limits as to when the funds may be obligated and expended are removed.
\[40 Comp. Gen. 694; 43 Comp. Gen. 657.\] Thus, no-year funds would be
made available, and could be obligated, on a year-by-year basis,
together with the following award conditions to ensure compliance with
the Antideficiency Act:

1\. a statement that the Government is not obligated to the Recipient
for any amount in excess of the amount of Federal funding available.

2\. a statement that the Recipient is not obligated to incur costs for
any activity after the first increment of funds unless and until it has
been notified in writing by the Grants Officer of an increase in the
availability of funds.

3\. a \"commitment\" to cover maximum cancellation costs.

The commitment to cover cancellation costs would protect the
government\'s maximum potential liability in each year. \[43 Comp. Gen.
657, 661.\] The com-mitment to cover cancellation costs is necessary to
ensure compliance with the Antideficiency Act for projects where the
scope of work is non-severable, such as some projects funded by the NIST
Advanced Technology Program or NOAA\'s Joint and Cooperative Institute
Program. If a research project neces-sarily requires multiple years to
complete and is not subject to definable annual tasks, the recipient
most likely will incur substantial start-up costs that must be spread
across the multiple year period. If the award is prematurely terminated
or is not renewed, the cancellation costs would make the recipient
whole. By agreeing to termination costs, the government has anticipated
all liabilities arising under this agreement and therefore complies with
the Antideficiency Act. The cancellation cost clause should be used only
if the project is not severable.

If, however, a multi-year project can be separated into annual tasks,
then the scope of work and budget should be so structured so as not to
run afoul of the Antideficiency Act. By meeting the requirements of the
*bona fide* need rule, if the award was prematurely terminated or not
renewed, all government liabilities were contemplated and agreed to by
the recipient without any need for inclusion of the cancellation costs
as the third condition of the agreement.

The Department\'s multi-year award procedures provide for the obligation
of the first year funds only. Proposed funding for the subsequent
periods is not committed until funds are made available and the Program
office recommends continuance of the program. The Recipient is then
notified in writing and funds for the next budget period are obligated
and released. Funding agencies should never alter the language provided
in the Special Award Conditions for multi-year awards. The conditions
have been drafted to account for the restrictions imposed by the *bona
fide* need rule and the Antideficiency Act. However, FAN No. 10 does not
include language regarding the cancellation cost clause.

We will assist the Department in revising the multi-year award
guidelines and procedures to make it clear that there will always be
sufficient funds obligated or committed to cover the maximum liability
of the Government. In addition, the option of using a cancellation
clause will be included as a Special Award Condition for awards that are
non-severable and funded with no-year appropriations. The clause would
provide that cancellation of the award would occur upon notification to
the recipient that funds are not available for subsequent program years
or upon failure to notify the recipient of the availability of funds by
a specified time. In the event of cancellation, the recipient would be
provided costs for firm cancellation of the award. There must be an
agreed upon commitment of funds representing the firm cancellation costs
to protect the government\'s potential liability in the event of a
cancellation. Accordingly, by including these provisions, no obligations
are incurred in excess of available appropriations or in advance of
appropriations.

For projects which are severable, the funding agencies must continue to
provide a scope of work and budget

stating that each year of activity is severable and can be separated
easily into increments of meaningful work which represent solid
accomplishments.

**Points to Remember**

1\. An annual or time limited appropriation can be obligated only during
the period of availability.

2\. An annual or time limited appropriation may be properly obligated
only for the bona fide need of the period of availability.

3\. The Antideficiency Act prohibits the making of awards which impose
liabilities upon the Government which exceed currently available
appropriations or which obligate appropriations not yet made.

4\. Violations of the Antideficiency Act are subject to administrative
(suspension or removal) and penal sanctions (up to a \$5,000 fine and/or
2 years imprisonment).