Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Budget Volume 3

Recommendation 57: Modify fiscal law to extend the duration of when funds 

cancel from 5 years to 8 years in expired status to align program acquisitions 

with funding periods and prevent putting current funds at risk and to support 

meeting appropriation intent.

Problem

Since the early 1990s, when Congress enacted the 5-year time limit on expired funds, DoD weapon 

systems and the methods used to contract for them have become more complex. By law, DoD has set 

periods within which it is required to obligate and disburse appropriated funds, referred to here as 

fund periods (obligation period based on the type of appropriation/expiration period of 

5 years/cancelation). Updating the time of expired funds from 5 years to 8 years would align the fund 

periods with how programs are contracted, executed, and closed out.

Background

The current 5-year term for expired funds deadline (31 U.S.C. § 1552) specifies, “On September 30th of 

the 5th fiscal year after the period of availability for obligation of a fixed appropriation account ends, 

the account shall be closed and any remaining balance (whether obligated or unobligated) in the 

account shall be cancelled and thereafter shall not be available for obligation or expenditure for any 

purpose.”1 The deadline was originally codified in the FY 1991 NDAA (Pub. L. No. 10–510) as part of a 

broad reorganization of certain U.S. fiscal law provisions.2 In the same NDAA, Congress provided that 

current appropriation accounts could be used to pay for obligations chargeable from closed 

appropriation accounts with a stipulation that this use “may not exceed an amount equal to 1 percent 

of the total appropriations for that account.”3

Prior to 1990, DoD obligations made but not liquidated were placed into a merged (M) account at the 

Department of Treasury. There was a 2-year period during which funds retained their fiscal year 

identity after their availability for new obligations expired. Beyond this 2-year span, unobligated funds 

entered merged surplus accounts and already obligated funds entered M accounts.4 Agencies were then 

able to disburse money from these accounts irrespective of fiscal year, provided they were used for the 

same general purpose for which Congress had originally appropriated the funding. DoD was able to 

access these appropriated funds without having to obtain authorizing legislation, appropriations 

legislation, or even reprogramming approval from Congress. This ability provided the defense 

acquisition system with a high degree of fiscal flexibility. 

Congress enacted the 5-year time limit on expired funds in 1990 as a reaction to GAO reports that DoD 

spent large amounts of money using funds from the M accounts. One particular example cited was the 

Air Force contract for more than a billion dollars in upgrades to the B-1 bomber using merged account 

funds from the Treasury. The B-1 bomber was a high-interest item to members of Congress and the Air 

Force’s use of the merged accounts to contract for upgrades was viewed as a circumvention of 

 

1 Procedure for appropriation accounts available for definite periods, 31 U.S.C. § 1552. 2 See Section 1405 of FY 1991 NDAA, Pub. L. No. 101-510 (1990). 3 Availability of appropriation accounts to pay obligations, 31 U.S.C. § 1553(b)(2). 4 An Act to revise, codify, and enact without substantive change certain general and permanent laws, related to money and finance, as 

title 31, United States Code, “Money and Finance,” Pub. L. No. 97-258 (1982). 
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congressional oversight and prerogative. GAO noted that, as of 1990, the Army’s Operation and 

Maintenance merged surplus account still contained spending authority dating back as far as 1956.5

This situation resulted in the 1990 reductions in flexibility, but the expired funds deadline has been 

unchanged since 1990, and the basis for establishing a 5-year expiration is unclear.

Discussion

As a result of the FY 1991 NDAA (Pub. L. No. 101–510), when DoD exceeds the expired funds period, 

the appropriated funds cancel and are no longer available for payment. This legal time limit on 

payments saves no money for taxpayers or DoD as the government remains responsible for paying 

contractors for their work despite cancelation of appropriated funds. Instead DoD pays contractors 

using appropriations that have not yet cancelled (current appropriations), harming existing programs 

and DoD strategic interests, as well as undermining the original intent of the appropriators. 

Figure 4-17 reflects that $2–3 billion was spent of current-year appropriations in FY 2016 and FY 2017 

on cancelled appropriation accounts. Defense Contract Management Agency (DCMA) also projects 

cancelling-year actions potentially reaching $8.74 billion of current funds being at risk in the near 

future. DCMA will work to reduce this projection prior to FY 2020.

Figure 4-17. DCMA Projected Cancelling Year Funds at Risk ($B)6

Paying for obligations chargeable to cancelled appropriation accounts creates additional workload and 

cost for DoD and contractors. A 2018 paper by defense industry representatives and DoD officials listed 

several cost estimates associated with current rules, including the following:7

 

5 GAO, The Government’s Use of “M” and Merged Surplus Accounts, GAO/T-AFMD-90-26, August 2, 1990, accessed November 1, 2018, 

https://www.gao.gov/assets/110/103446.pdf. 6 Data points gathered from DCMA response to the RMD700A2 from the PBR19-23 cycle, email to Section 809 Panel, July 2, 2018. 7 Statistics reported by DCMA, DFAS, and AIA in reports provided to Section 809 Panel, April 2018.
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§ $56 million per year in administrative activity by DoD and its contractors

§ $1.2 million in administrative costs to obtain and pay for DoD contractor invoices with 

cancelled funds

When the 5-year expiration period was established, neither Congress nor DoD recognized how difficult 

it would be to close out contracts within the required statutory expiration period of 5 years. Figure 4-18

(also included as Attachment 4-1) depicts these complexities with varying examples of how fund

periods (obligation/expiration/ cancelled) are associated with acquisition and delivery of weapon 

systems. The graphic portrays examples with different appropriations and the timelines associated 

with closing out flexibly priced contracts involving industry, Defense Contract Audit Agency (DCAA), 

and DCMA. The subsequent examples describe the complexities and how difficult it is to close out 

contracts within the statutory fund periods (Obligation/Expiration/Cancelled).

Figure 4-18. Contract Closeout Complexities to Stay Within Statutory Fund Periods

Note: To see a larger-scale version of this figure, see Attachment 4-1 at the end of Section 4.

Example 1

Based on contract closeout time standards provided by the FAR paying out a contract should take no 

longer than 3 years.8 Example 1 is a traditional procurement, with no schedule slips or continuing 

resolutions. It reflects that contract closeout could be accomplished prior to funds being cancelled. 

 

8 Closeout by the Office Administering the Contract, FAR 4.804-1(a)(1-4).
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Example 2

Example 2 reflects incorporation of Section 802 of the FY 2018 NDAA, which decreased the statutory 

time limit for DCAA to complete incurred cost audits, but offered more time for DCMA. Although the 

FAR shows 6 months for DCMA to perform closeout activities, on average it takes approximately 

12 months for DCMA to negotiate final closeout rates with industry and then contractors have another 

120 days to submit their final invoice, as well as an additional 1 to 2 months for invoice reconciliation. 

After reconciliation, DFAS has 30 days to process the invoice. Implementation of the FY 2018 provision 

gives DCMA time needed to conduct contract closeout activities. 

Example 3

Example 3 depicts industry perception of how long it takes to close out a contract—approximately 

78 months. The 78-month period is driven by the time it takes prime contractors to receive final 

invoices from subcontractors. The depiction doubled the time recommended by the FAR. The timeline 

is also affected by variation of vendors’ calendar accounting cycles. Vendors cannot submit their 

incurred-cost proposal to DCMA until after the accounting cycle ends and all costs have been 

identified. This sequential process needs concurrent improvements. Industry experts believe 

eliminating or modifying the expired period time limits to a duration commensurate with the 

complexity of the acquisition process would generate substantial cost savings for DoD without creating 

risk for U.S. Taxpayer.9

Not only does it take longer to close out a contract than the FAR recommends, but also the majority of 

cancelling-year risk exposure is related to currently active contracts (as opposed to those contracts in 

closeout). A DFAS root cause data analytics initiative noted that 66 percent and 68 percent of cancelling

funds in FY 2017 and FY 2018 respectively are against active contracts. Table 4-6 provides breaks out of 

cancelled and cancelling funds by category. 

Table 4-6. DFAS Data Analytics Root Cause Analysis10

FY 2018 Cancelled Dollars—MOCAS DCMA and Non-DCMA Administered (July 2018)

ACRNS % of ACRN Contracts $Billion % of Dollars

Active Contracts 6710 34% 2150 1.078 66%

Pending Closeout 12233 61% 5299 0.434 27%

Litigation 947 5% 524 0.117 7%

Pending Adjustment 35 0% 21 .004 0%

Total 19925 1.634

FY 2018 Cancelled Dollars—MOCAS DCMA and Non-DCMA Administered (July 2018)

 

9 AIA, meeting with Section 809 Panel, July 30, 2018. 10 DFAS representatives, email to Section 809 Panel, July 26, 2018.
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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Budget Volume 3

ACRNS % of ACRN Contracts $Billion % of Dollars

Active Contracts 9460 34% 2150 2.385 68%

Pending Closeout 17462 62% 5299 0.900 26%

Litigation 1221 4% 524 0.199 6%

Pending Adjustment 20 0% 21 0.004 0%

Total 28163 3.488

Ongoing DFAS analysis with the Military Services continues to illuminate the relationships between 

cancelling-year risk exposure and contract type, incentives, and fiscal policy (e.g., effect of full funding 

and antecedent liabilities). 

Example 4

Example 4 depicts a long-duration contract for which delivery of an end item occurs at the end of the 

expiration period, thus contract closeout cannot begin until the funds have already cancelled. DoD 

requires longer delivery schedules when procuring technically complex systems, such as the satellite in 

this example. This contract type potentially places current funds at risk. 

Examples 5 and 6

Many RDT&E funded efforts are at risk of having cancelling-year funds problems. As shown in 

Examples 5 and 6, if an RDT&E contract is longer than 48 months, it is likely that a portion of the initial 

year’s funding for that contract will cancel prior to final payment. This situation happens because many

RDT&E funded fixed-price contracts have progress payments limited to 80 percent of total cost, and the 

final 20 percent is not paid until contract closeout. DFAS default payment method is to use 80 percent 

of each year’s funding and hold the other 20 percent for the final payment. Although RDT&E efforts 

are funded incrementally, up to 20 percent of the initial year’s funding of an RDT&E effort may not be 

paid until the final closeout. Program contracts awarded prior to December 2017 could make special 

payment instructions (such as paying oldest-year funds first) in their contracts to mitigate the risk of 

having cancelling funds. Allowance for these special payment instructions was removed from the 

DFARS, Procedures Guidance and Information, so DoD can no longer use special instructions as a 

payment methodology when the line item is multifunded. Eliminating this option for dealing with 

cancelling funds leaves more funds at risk of cancelling. Because of the change, those contracts with 

special payment instructions now must be manually processed and reconciled, which increases 

workload at DFAS to process the special payments. 

Examples 4 through 6 could place current funds at risk due to technical complexities, and DoD and 

industry spend many hours working to lower the risk, whether the contract is in active status or 

closing. Similar to the DFAS Data Analytics, the Space and Missile Systems Center (SMC) at 

Los Angeles Air Force Base analyzed upward obligation adjustments (UOAs) processed during a 

5-year period to pay cancelled-year bills. For UOAs exceeding $10,000, SMC examined the specific 

cause for delayed billing and payment. SMC found that 97 percent of $116.8 million cancelled-year bills 

were associated with programmatic issues (e.g., hardware integration issues) on active contracts as 
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opposed to contracts pending closeout by DCMA. SMC found that $102 million of the $116 million in 

cancelled-year invoices analyzed could have been paid out from the original appropriation if the 

period of availability was extended another 2 years. Figure 4-19 illustrates a graphical depiction of 

SMC’s breakout of cancelled year bills by reason.11

Figure 4-19. SMC Cancelled Year Bills Analysis (more than $10K) By Reason

Examples 6 and 7

Examples 6 and 7 in Figure 4-18 are a Navy shipbuilding and conversion account, which has a 5-year 

obligation period. In accordance with the FMR, the Navy can add an additional 5 years to the 

obligation work limit date with approval from the Department of the Treasury.12 Having a longer 

obligation period allows Navy shipbuilding to close out contracts prior to funds expiration and not 

place current funds at risk. 

Conclusions

Industry groups and government officials have advocated for a permanent change to U.S. fiscal law 

extending the funds cancellation deadline from 5 to 10 years.13 A permanent change to 8 years would 

better align the funding periods with how complex weapon systems are administered. This change 

would provide contract administration organizations that deal with contract closeouts, such as DCMA 

and DFAS, with the time required to close out existing contracts without accessing current-year funds 

and provide time needed to ensure the costs proposed are allowable, allocable, and reasonable. It 

could, in some cases, reduce the wait time for industry to receive payment. 

Extending the expired funds period would in no way change the intended use of expired funds. The 

expired funds cannot be used for new obligations. Congress should extend the expiration period to 

 

11 SMC, email to Section 809 Panel, July 24, 2018.

12 Shipbuilding and Conversion (SCN), Navy Appropriation, DoD FMR, Volume 3, Chapter 10, Section 100203.

13 Representatives from defense agencies and defense contractors, discussions with Section 809 Panel, April and May 2018.
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8 years, allowing complex program acquisitions ample time to close out contracts without placing 

current funds at risk. This practice would arguably serve the interests of Congress, by aligning 

disbursements more closely with the original intent of appropriations laws. It also would reduce the 

burden caused by addressing cancelling-year efforts and refocus efforts on actually closing out 

contracts.

Implementation

Legislative Branch

§ Amend 31 U.S.C. § 1552 to extend time available for expired funds from 5 to 8 years.

Executive Branch

§ Amend appropriate portions of the DoD Financial Management Regulation, Volume 3, to reflect 

the change from 5 years to 8 years.

- Chapter 10, Accounting Requirements for Expired and Closed Accounts, Sections 1002.C, 

100302.A, 100303.A, 100304.D.1-2, 100305.B.1-2, 100312.B.1, 100314.A.1, 100314.B.3.e.

- Chapter 11, Unmatched Disbursements, Negative Unliquidated Obligations, and In-Transit 

Disbursements, Section 1102.F.

- Chapter 13, Receipt and Distribution of Budgetary Resources Departmental-Level, 

Section 130202.A.2.b, 130208.B.

- Chapter 15, Receipt and Distribution of Budgetary Resources – Execution Level, 

Section 150305.A-B, 150306.A & C.

Implications for Other Agencies

§ There are no cross-agency implications for this recommendation.