GAO-10-527R Defense Budget 

United States Government Accountability Office

Washington, DC 20548 

March 31, 2010 

Congressional Committees 

Subject: Defense Budget: Fourth Quarter Obligation Rates and Contract Obligations 

for Fiscal Years 2006-09 

This letter formally transmits the enclosed briefing in response to the National 

Defense Authorization Act for Fiscal Year 2010 (Pub. L. No. 111-84), which requires 

GAO to review Department of Defense (DOD) policies related to year-end spending 

and the rate of obligations incurred by DOD in the fourth quarter of fiscal years 2006 

through 2009, as compared with the obligations incurred in the first three quarters of 

those fiscal years for both 1-year and multi-year appropriations. GAO is required to 

report to the Committees on Armed Services of the Senate and House of 

Representatives by March 31, 2010. On March 19, 2010, we provided the briefing to 

staff of your respective committees. 

We are sending copies of this report to the appropriate congressional committees. 

We are also sending copies to the Secretary of Defense and the Under Secretary of 

Defense (Comptroller) and the Secretaries of the Army, the Air Force, and the Navy. 

The report also is available at no charge on the GAO Web site at http://www.gao.gov. 

Should you or your staff have any questions concerning this report, please contact 

Sharon L. Pickup at (202) 512-9616 or Bill Woods at (202) 512-8214. Contact points for 

our Office of Congressional Relations and Public Affairs may be found on the last 

page of this report. Key contributors to this report were Donna Evans, Assistant 

Director; Robert Brown; Jason Jackson; Mae Jones; Julia Kennon; Lonnie McAllister; 

Charles Perdue; Stephen Pruitt; and Patrick Washington. 

Sharon L. Pickup 

Director 

Defense Capabilities and Management 

Enclosure 
Page 2 GAO-10-527R Defense Budget 

List of Committees 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Honorable Ike Skelton 

Chairman 

The Honorable Howard McKeon 

Ranking Member 

Committee on Armed Services 

House of Representatives 
Enclosure 

1

DOD’s Fourth Quarter Obligation Rates and 

Contract Obligations for Fiscal Years 2006-09

Briefing for Congressional Committees 

March 31, 2010

Page 3 GAO-10-527R Defense Budget 
Page 4 GAO-10-527R Defense Budget 

Enclosure

2

Overview

• Objectives

• Background

• Scope & Methodology 

• Objective 1

• Policies and Guidance for Obligating Funds

• Objective 2

• Fourth Quarter Obligation Rates for MILPERS

• Fourth Quarter Obligation Rates for O&M

• Obligation Rates for Procurement

• Obligation Rates for RDT&E

• Objective 3

• Fiscal Years 2006-09 Contract Obligations

• Undefinitized Contract Actions (UCAs) 
Enclosure

3

Objectives 

1) To what extent has DOD established policies or guidance 

regarding the obligation of funds in the fourth quarter of the fiscal 

year?

2) To what extent has DOD incurred obligations in the fourth quarter 

of fiscal years 2006-09 for both 1-year and multi-year 

appropriations?

3) To what extent has DOD incurred contract obligations in the fourth 

quarter of a fiscal year as compared with obligations incurred in 

the previous three quarters, and to what extent are those fourth

quarter obligations incurred for competitive contracts?

Page 5 GAO-10-527R Defense Budget 
Page 6 GAO-10-527R Defense Budget 

Enclosure

4

Background

• The Fiscal Year 2010 National Defense Authorization Act requires GAO to review 

obligations incurred by the DOD in the fourth quarter of fiscal years 2006-09 for 1-

year and multi-year appropriations and to 

• compare those obligations with those incurred in the first three quarters of the 

fiscal year and 

• determine whether DOD’s financial execution policies contributed to hastened 

year-end spending. 

• DOD has certain time frames to obligate funds for its various appropriation accounts: 

• For 1-year appropriations such as Military Personnel (MILPERS) and Operation 

& Maintenance (O&M) accounts, DOD generally has 1 year to obligate funds 

before they expire and

• For multi-year appropriations, such as Procurement and Research, 

Development, Test & Evaluation (RDT&E), DOD generally has 3 and 2 years, 

respectively, to obligate funds before they expire.
Enclosure

5

Background (cont.)

• The Conference Report, H. Rept. 111-288, accompanying the Fiscal Year 2010 

National Defense Authorization Act noted

• In 1979 and 1980, the Senate Subcommittee on Oversight of Government 

Management held hearings and issued a report entitled Hurry-Up Spending in 

which it found that the rush to obligate expiring funds before the end of the fiscal 

year frequently resulted in lack of competition, poorly defined statements of 

work, inadequately negotiated contracts, and the procurement of low-priority 

items or services.

• The Subcommittee’s work contributed to the passage of the Competition in 

Contracting Act of 1984 (P.L. 98-369, Div. B., title VIII). 

• In 1998, GAO reported that systemic procurement reforms, including the 

Competition in Contracting Act of 1984, had addressed most issues raised in the 

Subcommittee’s report but that some problems persisted (See Year End Spending: 

Reforms Underway but Better Reporting and Oversight Needed, GAO/AIMD-98-185).

Page 7 GAO-10-527R Defense Budget 
Page 8 GAO-10-527R Defense Budget 

Enclosure

6

Background (cont.)

• Contracts generally must be competed, but there are statutory exceptions 

(such as urgency) that permit non-competitive awards.

• Agencies also can use undefinitized contract actions (UCAs) when they 

need to make awards before reaching agreement on all contract terms. 

GAO has reported that UCAs are considered to be risky for the government 

because contractors lack incentives to control costs before reaching final 

agreement on contract terms. (See Defense Contracting: DOD Has 

Enhanced Insight into Undefinitized Contract Action Use, but Management 

at Local Commands Needs Improvement, GAO-10-299).
Enclosure

7

Scope & Methodology

• Reviewed legislation, DOD’s Financial Management Regulation, and internal budget 

guidance and policies from the Office of the Under Secretary of Defense, 

Comptroller and service components.

• Interviewed officials from the Office of the Under Secretary of Defense, Comptroller 

and service components to determine whether DOD had established guidance or 

policies concerning the obligation of funds in the fourth quarter.

• Obtained data on obligation rates from Under Secretary of Defense, Comptroller and 

Defense Finance and Accounting Service data for 1-year appropriations (MILPERS 

and O&M) and multi-year appropriations (Procurement and RDT&E) for fiscal years 

2006-09. For purposes of this analysis, we reviewed active and reserve component 

obligations for each of the military services, which include both base and 

supplemental funding for each fiscal year.

• For 1-year appropriations, we compared obligation rates incurred in the fourth 

quarter to obligation rates incurred in the total remaining three quarters. 

Page 9 GAO-10-527R Defense Budget 
Page 10 GAO-10-527R Defense Budget 

Enclosure

8

Scope & Methodology (cont.)

• For multi-year appropriations, we identified total obligation rates for each year 

of the appropriated funds’ availability and for the fourth quarter of the last year 

of availability. 

• To analyze appropriations whose last year of availability fell in fiscal years 

2006-09, the time period specified in the mandate, in some cases, we had to 

obtain obligation data from fiscal years prior to 2006. For example: 

• For Procurement appropriations, which have 3 years of availability, we 

reviewed fiscal years 2004-09 data.

• For RDT&E appropriations, which have 2 years of availability, we reviewed 

fiscal years 2005-09 obligation data. 
Enclosure

9

Scope & Methodology (cont.)

• Since 1995, GAO has designated DOD’s financial management as a high-risk area 

due to, among other things, DOD’s pervasive financial and related business

management system deficiencies. For example, we have reported on the 

unreliability of DOD’s financial transaction data, including accounting for obligations, 

and the lack of reasonable assurance over DOD’s compliance with legal limitations 

on the use of appropriated funds. Consequently, we are unable to ensure that 

DOD’s reported obligations are complete, reliable, and accurate, and they should 

therefore be considered approximations. For the purposes of our review, we verified 

that the data we collected were consistent with the data recorded in source 

documents, but we did not independently assess the reliability of the data.

• We used unaudited Federal Procurement Data System-Next Generation (FPDS-NG) 

data to identify both the percentage and dollar amounts obligated for competed and 

non-competed contracts in fiscal years 2006 through 2009. The system does not 

break down contracting data by appropriation. We believe that the system’s data 

used for these analyses are sufficiently reliable for the purposes of this review. 

However, the data on UCAs were not sufficiently reliable. 

Page 11 GAO-10-527R Defense Budget 
Page 12 GAO-10-527R Defense Budget 

Enclosure

10

Scope & Methodology (cont.)

• We conducted this performance audit from November 2009 to March 2010 

in accordance with generally accepted government auditing standards 

(GAGAS). Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

• DOD provided technical comments on a draft of this product, which we 

incorporated.
Enclosure

11

Policies and Guidance for Obligating Funds

• Neither DOD nor the military services have policies or guidance that specifically 

address the obligation of funds in the fourth quarter of the fiscal year. However, the 

Air Force has developed guidance that discourages spending resources at the end 

of the fiscal year merely because they are available, and encourages reporting 

unused funds to headquarters.

• DOD is subject to a statutory limitation (the 80/20 rule) that states: not more than 20 

percent of 1-year appropriations may be obligated during the last 2 months of the 

fiscal year.

• A passage in the DOD Financial Management Regulation refers to the 80/20 

rule and states: Each year, the general provisions of the DOD Appropriations 

Act require a certification that not more than 20 percent of the appropriations in 

that act, which are limited for obligation during the current fiscal year, shall be 

obligated during the last 2 months of the fiscal year (i.e. the “80/20 rule). 

Supplemental funds are not subject to the 80/20 rule. 

• The Office of the Under Secretary of Defense, Comptroller and the service 

components create annual spending plans to monitor obligations throughout 

the year and use this information to certify whether the 80/20 rule was 

addressed. 

Objective 1

Page 13 GAO-10-527R Defense Budget 
Page 14 GAO-10-527R Defense Budget 

Enclosure

12

Fourth Quarter Obligation Rates for MILPERS---

Active and Reserve Components

• For fiscal years 2006 through 2009, the active and reserve 

components obligated between 25.1 percent and 26.6 percent of its 

MILPERS appropriations in the fourth quarter, as shown on the 

following slide.

• DOD officials explained that obligation rates may appear higher in 

the fourth quarter because, for example, of cyclical occurrences, 

such as a summer surge in recruiting, an increase of troop endstrength, and an increased availability of reserve component 

members for annual training during the summer months. DOD 

officials also explained that other factors, such as a higher rate of 

permanent change of station actions may affect fourth quarter 

obligation rates as well. 

Objective 2 
Enclosure

13

Fourth Quarter Obligation Rates for 

MILPERS--Active and Reserve Components 

Objective 2 

Page 15 GAO-10-527R Defense Budget 
Page 16 GAO-10-527R Defense Budget 

Enclosure

14

Fourth Quarter Obligation Rates for MILPERS by 

Service Component--Active

•Fourth quarter MILPERS obligation rates for the active service 

components ranged from 24.2 percent to 27.3 percent for fiscal years 

2006 through 2009, as shown on the following slide.

•DOD officials explained that obligation rates may appear higher in 

the fourth quarter because, for example, of cyclical occurrences, 

such as a summer surge in recruiting, an increase of troop endstrength. DOD officials also explained that other factors, such as a 

higher rate of permanent change of station actions may affect fourth 

quarter obligation rates as well.

Objective 2
Enclosure

15

Fourth Quarter Obligation Rates for MILPERS by 

Service Component--Active

Marine Corps 24.9% 25.4% 25.7% 26.3%

Navy 25.3% 25.4% 24.9% 25.0%

Air Force 25.7% 26.6% 26.4% 25.8%

Army 24.2% 27.3% 25.6% 26.6%

Active service 2006 2007 2008 2009

component 

Fourth Quarter MILPERS Obligation Rates by Active Service Component (FY 2006-09) 

Objective 2

Source: GAO analysis of DOD data. 

Page 17 GAO-10-527R Defense Budget 
Page 18 GAO-10-527R Defense Budget 

Enclosure

16

Fourth Quarter Obligation Rates for MILPERS by 

Service Component--Reserve

•Fourth quarter MILPERS obligation rates for the reserve service 

components ranged from 17.9 percent to 30.4 percent for fiscal years 

2006 through 2009, as shown on the following slide. 

•DOD officials explained that obligation rates may appear higher in 

the fourth quarter because, for example, of cyclical occurrences, such 

as a summer surge in recruiting, an increase of troop end-strength, 

and an increased availability of reserve component members for 

annual training during the summer months. 

Objective 2
Enclosure

17

Fourth Quarter Obligation Rates for MILPERS by 

Service Component--Reserve

Navy Reserve 24.8% 28.1% 27.4% 26.8%

23.7% 23.4% 22.2% 30.0% Marine Corps 

Reserve 

Air Guard 22.3% 23.8% 26.9% 25.0%

19.5% 20.6% 20.7% 17.9% Air Force 

Reserve 

Army Guard 27.9% 30.4% 28.4% 29.4%

Army Reserve 29.2% 27.2% 27.9% 29.5%

2006 2007 2008 2009

Reserve 

service 

component 

Fourth Quarter MILPERS Obligation Rates by Reserve Service Component (FY 2006-09) 

Objective 2

Source: GAO analysis of DOD data. 

Page 19 GAO-10-527R Defense Budget 
Page 20 GAO-10-527R Defense Budget 

Enclosure

18

Fourth Quarter Obligation Rates for O&M--Active 

and Reserve Components

Objective 2

•For fiscal years 2006 through 2009, the active and reserve 

components obligated between 27.6 percent and 29.5 percent of its 

O&M appropriations in the fourth quarter, as shown on the following 

slide.

•DOD officials explained that obligation rates may appear higher in 

the fourth quarter because, for example, DOD received supplemental 

funding late in the fiscal year. 
Enclosure

19

Fourth Quarter Obligation Rates for O&M--Active 

and Reserve Components

Objective 2 

Page 21 GAO-10-527R Defense Budget 
Page 22 GAO-10-527R Defense Budget 

Enclosure

20

Fourth Quarter Obligation Rates for O&M by 

Service Component--Active

•Fourth quarter O&M obligation rates for the active service components 

ranged from 23.3 percent to 32.2 percent for fiscal years 2006 through 

2009 as shown on the following slide.

•DOD officials explained that obligation rates may appear higher in the 

fourth quarter because, for example, DOD received supplemental 

funding late in the fiscal year.

Objective 2
Enclosure

21

Fourth Quarter Obligation Rates for O&M by 

Service Component--Active 

Marine Corps 32.0% 27.1% 32.2% 31.9%

Navy 25.7% 27.1% 25.6% 23.3%

Air Force 31.9% 32.1% 30.2% 29.0%

Army 31.0% 25.6% 27.1% 31.0%

2006 2007 2008 2009 Active service 

component 

Fourth Quarter O&M Obligation Rates by Active Service Component (FY 2006-09) 

Objective 2

Source: GAO analysis of DOD data.

Page 23 GAO-10-527R Defense Budget 
Page 24 GAO-10-527R Defense Budget 

Enclosure

22

Fourth Quarter Obligation Rates for O&M by 

Service Component--Reserve 

•For fiscal years 2006 through 2009, fourth quarter obligation rates for 

the reserve component ranged from 19.6 percent to 41 percent as 

shown on the following slides.

•DOD officials explained that obligation rates may appear higher in 

the fourth quarter because, for example, DOD received supplemental 

funding late in the fiscal year.

Objective 2
Enclosure

23

Fourth Quarter Obligation Rates for O&M by 

Service Component--Reserve 

Navy Reserve 25.7% 26.2% 26.1% 19.7%

Marine Corps Reserve 38.8% 19.6% 41.0% 22.7%

Air Guard 21.9% 25.0% 26.5% 22.8%

Air Force Reserve 27.3% 28.5% 25.3% 25.6%

Army Guard 26.0% 26.5% 21.9% 25.2%

Army Reserve 27.7% 30.0% 30.6% 28.8%

2006 2007 2008 2009 Reserve service

component 

Fourth Quarter O&M Obligation Rates by Reserve Service Component (FY 2006-09) 

Objective 2

Source: GAO analysis of DOD data.

Page 25 GAO-10-527R Defense Budget 
Page 26 GAO-10-527R Defense Budget 

Enclosure

24

Obligation Rates for Procurement for Service 

Components--Active 

•For procurement, the active service components obligated 75.3 percent 

or more of the appropriation in the first year that funding was available 

and then significantly smaller percentages in the second and third years.

•For the fourth quarter of the third year of funding availability, obligation 

percentages were 1.9 percent or less, as shown on the following slide.

Objective 2
Enclosure

25

Obligation Rates for Procurement for Service 

Components--Active

2007-09 75.3% 19.3% 5.4% 1.9%

2006-08 80.8% 15.7% 3.5% 1.5%

2005-07 86.9% 10.5% 2.5% 0.8%

2004-06 89.9% 7.7% 2.4% 1.0%

Fourth quarter 

3rd 3 year rd 2 year nd 1 year st year

Funding 

availability by 

fiscal year 

Procurement Obligation Rates by Year of Funding Availability (FY 2006-09)

Objective 2

Source: GAO analysis of DOD data.

Page 27 GAO-10-527R Defense Budget 
Page 28 GAO-10-527R Defense Budget 

Enclosure

26

Obligation Rates for Procurement

Objective 2

•For procurement, the active service components obligated 70.8 

percent or more of the appropriation in the first year that funding was 

available and then obligated significantly smaller percentages in the 

second and third years.

•For the fourth quarter of the third year of funding availability, 

obligation rates were 2.7 percent or less, as shown on the following 

slide. 
Enclosure

27

Obligation Rates for Procurement

Navy 76.7% 17.6% 5.7% 2.2%

70.8% 23.1% 6.1% 1.4% Marine 

Corps

75.1% 18.6% 6.3% 2.7% Air 

Force 

Army 75.5% 20.2% 4.3% 1.1%

Fourth Quarter 3rd year 

FY 2009 

3rd year

FY 2009 

2nd year 

FY 2008 

1st year 

Service FY 2007

Procurement Obligation Rates by Year of Funding Availability by Service (FY2009)

Objective 2

Source: GAO analysis of DOD data. 

Page 29 GAO-10-527R Defense Budget 
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Enclosure

28

Obligation Rates for RDT&E

•For RDT&E, the active service components obligated 86.5 percent or 

more of the appropriation in the first year that funding was available 

and then significantly smaller percentages in the second year. 

•For the fourth quarter of the second year of funding availability, 

obligations rates were 2.7 percent or less, as shown on the following 

slide.

Objective 2
Enclosure

29

Obligation Rates for RDT&E

2007-08 88.7% 11.3% 2.3%

2006-07 88.6% 11.4% 1.9%

2005-06 91.0% 9.0% 1.6%

2008-09 86.5% 13.6% 2.7%

Fourth quarter 

2 2 nd year 1 nd year st year

Funding 

availability by 

fiscal year

RDT&E Obligation Rates by Year of Funding Availability (FY 2006-09) 

Objective 2

Source: GAO analysis of DOD data.

Page 31 GAO-10-527R Defense Budget 
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Enclosure

30

Obligation Rates for RDT&E

Objective 2

•For RDT&E, the active service components obligated 84 percent or

more of the appropriation in the first year that funding was available 

and then significantly smaller percentages in the second year.

•The percentage of RDT&E funds obligated in the fourth quarter of the 

last year of funding availability was 2.9 percent or less, as shown on 

the following slide.
Enclosure

31

Obligation Rates for RDT&E

Navy 88.7% 11.3% 2.4%

Air Force 84.0% 16.0% 2.9%

Army 88.3% 11.7% 2.5%

Fourth quarter 2nd year 

FY 2009

2nd year 

FY 2009 

1st year 

Service FY 2008

RDT&E Obligation Rates by Service by Year of Funding Availability (FY 2009)

Objective 2

Source: GAO analysis of DOD data.

Note: The Marine Corps is included in the Navy’s RDT&E appropriation. 

Page 33 GAO-10-527R Defense Budget 
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Enclosure

32

Fiscal Years 2006-2009 Contract Obligations

Objective 3

Contract obligations by quarter for fiscal years 2006 through 2009 

vary and show no consistent pattern.
Enclosure

33

Fiscal Year 2006 Contract Obligations: 

Competed vs. Non-Competed

Objective 3 

The percentage of contract obligations competed was highest (68.3%) in the fourth quarter.

Page 35 GAO-10-527R Defense Budget 
Page 36 GAO-10-527R Defense Budget 

Enclosure

34

Fiscal Year 2007 Contract Obligations: 

Competed vs. Non-Competed

Objective 3 

The percentage of contract obligations competed was highest (68.6%) in the fourth quarter.
Enclosure

35

Fiscal Year 2008 Contract Obligations:

Competed vs. Non-Competed

Objective 3

The percentage of contract obligations competed was highest (65.6%) in the fourth quarter. 

Page 37 GAO-10-527R Defense Budget 
Page 38 GAO-10-527R Defense Budget 

Enclosure

36

Fiscal Year 2009 Contract Obligations: 

Competed vs. Non-Competed

Objective 3

The percentage of contract obligations competed was highest (72.2%) in the fourth quarter.
Enclosure

37

Undefinitized Contract Actions (UCAs)

• Available data show that obligations for UCAs are about 5 percent of total contract spending: $18 billion in potential obligations out of $378 

billion in total contract spending in fiscal year 2008. 

• Data limitations prevented us from analyzing spending on UCAs by quarter.

• As we have previously reported,* data limitations also hinder DOD’s full understanding of the extent to which UCA’s are used. For 

example,

• Eight of the 24 contract actions that should have been included in a required DOD report on UCA’s were omitted.

• DOD reporting requirements are still in flux, i.e., DOD has proposed including unpriced change orders in UCA reporting.

*Defense Contracting: DOD Has Enhanced Insight into Undefinitized Contract Action Use, but 

Management at Local Commands Needs Improvement, GAO-10-299 (Washington, D.C.: Jan. 28, 

2010).

Objective 3 

(351428) 

Page 39 GAO-10-527R Defense Budget 
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