Defense Procurement: Full Funding Policy—Background, Issues, and Options for Congress

Congressional research reportJun 15, 2007

Ask Donna

What actually matters in this document.

Text

Defense Procurement: Full Funding Policy—

Background, Issues, and Options for Congress

Ronald O’Rourke

Specialist in Naval Affairs

(name redacted)

Specialist in Defense Policy and Budgets

June 15, 2007

Congressional Research Service

7-....

www.crs.gov

RL31404

CRS Report for Congress

Prepared for Members and Committees of Congress

Defense Procurement: Full Funding Policy

Summary

The full funding policy is a federal budgeting rule imposed on the Department of Defense (DOD)

by Congress in the 1950s that requires the entire procurement cost of a weapon or piece of

military equipment to be funded in the year in which the item is procured. Although technical in

nature, the policy relates to Congress’s power of the purse and its responsibility for conducting

oversight of DOD programs. Support for the policy has been periodically reaffirmed over the

years by Congress, the Government Accountability Office, and DOD.

In recent years some DOD weapons—specifically, certain Navy ships—have been procured with

funding profiles that do not conform to the policy as it traditionally has been applied to DOD

weapon procurement programs. DOD, in recent budget submissions and testimony, has proposed

or suggested procuring ships, aircraft, and satellites using funding approaches that do not conform

to the policy as traditionally applied. DOD’s proposals would establish new precedents for

procuring other DOD weapons and equipment with non-conforming funding approaches. Such

precedents could further circumscribe the full funding policy. This, in turn, could limit and

complicate Congress’s oversight of DOD procurement programs, or require different approaches

to exercise control and oversight.

A principal effect of the full funding policy is to prevent the use of incremental funding, under

which the cost of a weapon is divided into two or more annual portions. Incremental funding fell

out of favor because opponents believed it could make the total procurement costs of weapons

and equipment more difficult for Congress to understand and track, create a potential for DOD to

start procurement of an item without necessarily stating its total cost to Congress, permit one

Congress to “tie the hands” of future Congresses, and increase weapon procurement costs by

exposing weapons under construction to uneconomic start-up and stop costs. Supporters of

incremental funding, however, could argue that its use in DOD procurement programs could

produce certain advantages in terms of reducing disruption to other programs, avoiding

investment bias against very expensive items, improving near-term production economies of

scale, and preserving flexibility for future Congresses to halt funding for weapons under

construction that have become unnecessary or inappropriate.

Congress has several options for responding to recent proposals for procuring DOD ships and

aircraft with funding mechanisms that do not conform to the full funding policy. These options

could have the effect of terminating, modifying, maintaining, or strengthening the full funding

policy. In weighing these options, Congress may consider several factors, including Congress’s

power of the purse, its ability to conduct oversight of DOD procurement programs, the impact on

future Congresses, DOD budgeting discipline, and the potential impact on weapon costs. The

process of weighing options may involve balancing a need to meet DOD procurement goals

within available funding against the goal of preserving Congress’s control over DOD spending

and its ability to conduct oversight of DOD programs. This report will be updated as events

warrant.

Congressional Research Service

Defense Procurement: Full Funding Policy

Contents

Introduction ................................................................................................................................1

Background ................................................................................................................................1

Description of Policy ............................................................................................................1

Origins, Rationale, and Governing Regulations .....................................................................2

A Congressionally Imposed Policy ..................................................................................2

Governing Regulations....................................................................................................2

Alternative of Incremental Funding .................................................................................3

Non-Conforming Procurements.............................................................................................4

Recent Procurements.......................................................................................................4

Proposed or Suggested Procurements ..............................................................................6

Issues and Options for Congress................................................................................................ 10

Options ............................................................................................................................... 10

Responding to Specific Non-Conforming Proposals ...................................................... 10

General Legislative Options .......................................................................................... 11

Issues.................................................................................................................................. 13

Congressional Power of the Purse ................................................................................. 13

Congressional Oversight of DOD Procurement Programs .............................................. 14

Future Congresses......................................................................................................... 14

DOD Budgeting and Program-Execution Discipline ...................................................... 14

Potential Impact on Weapon Costs ................................................................................ 15

Legislative Activity For FY2008 ............................................................................................... 16

FY2008 Defense Authorization Bill (H.R. 1585/S. 1547) .................................................... 16

House ........................................................................................................................... 16

Senate........................................................................................................................... 16

Appendixes

Appendix A. Prior-Year Legislative Activity.............................................................................. 18

Appendix B. Detailed Background on the Policy ....................................................................... 45

Contacts

Author Contact Information ...................................................................................................... 60

Congressional Research Service

Defense Procurement: Full Funding Policy

Introduction

The full funding policy is a federal budgeting rule that has been applied to Department of Defense

(DOD) procurement programs since the 1950s. Although technical in nature, the policy relates to

Congress’s power of the purse and its responsibility for conducting oversight of DOD programs.

The application of the full funding policy to DOD procurement programs has been affirmed at

various times over the last five decades by Congress, the Government Accountability Office

(GAO), and DOD.

In recent years, some DOD weapons—specifically, certain Navy ships—have been procured with

funding profiles that do not conform to the policy as it traditionally has been applied to DOD

weapon procurement programs. DOD, in recent budget submissions and testimony, has proposed

or suggested procuring ships, aircraft, and satellites using funding approaches that do not conform

to the policy as traditionally applied.

DOD’s proposals, if implemented, could establish new precedents for procuring other DOD

weapons and equipment with non-conforming funding approaches. Such precedents could further

circumscribe the full funding policy, which in turn could limit and complicate Congress’s ability

to conduct oversight of DOD procurement programs.

The issue for Congress is how to respond to DOD’s proposals for procuring ships and aircraft for

DOD with funding approaches that do not conform to the full funding policy as traditionally

applied to DOD weapon procurement programs. Congress’s decision on this issue could have

significant implications for Congress’s ability to conduct oversight of DOD procurement

programs. It could also affect DOD’s budgeting practices, budget discipline, and annual funding

requirements.

For additional discussion of this issue as it relates to procurement of Navy ships, see CRS Report

RL32776, Navy Ship Procurement: Alternative Funding Approaches—Background and Options

for Congress, by (name redacted). 1

Background

Description of Policy

For DOD procurement programs, the full funding policy requires the entire procurement cost of a

weapon or piece of equipment to be funded in the year in which the item is procured. The rule

applies to all weapons and equipment that DOD procures through the procurement title of the

annual DOD appropriations act. In general, the policy means that DOD cannot contract for the

construction of a new weapon or piece of equipment until the entire cost of that item has been

approved by Congress. Sufficient funding must be available for a complete, usable end item

before a contract can be let for the construction of that item.

CRS Report RL32776, Navy Ship Procurement: Alternative Funding Approaches—Background and Options for

Congress, by Ronald O’Rourke.

Congressional Research Service

Defense Procurement: Full Funding Policy

A principal effect of the full funding policy is to prevent the use of incremental funding in the

procurement of DOD weapons and equipment. Under incremental funding, a weapon’s cost is

divided into two or more annual portions, or increments, that reflect the need to make annual

progress payments to the contractor as the weapon is built. Congress then approves each year’s

increment as part of its action on that year’s budget. Under incremental funding, DOD can

contract for the construction of a weapon after Congress approves only the initial increment of its

cost, and completion of the weapon is dependent on the approval of the remaining increments in

future years by that Congress or future Congresses.

There are two general exceptions to the full funding policy. One permits the use of advance

procurement funding for components or parts of an item that have long production leadtimes.2

The other permits advance procurement funding for economic order quantity (EOQ)

procurements, which normally occur in programs that have been approved for multiyear

procurement (MYP).3

Origins, Rationale, and Governing Regulations

A Congressionally Imposed Policy

Congress imposed the full funding policy on DOD in the 1950s to make the total procurement

costs of DOD weapons and equipment more visible and thereby enhance Congress’s ability to

understand and track these costs. Congress’s intent in imposing the policy was to strengthen

discipline in DOD budgeting and improve Congress’s ability to control DOD spending and carry

out its oversight of DOD activities. Understanding total costs and how previously appropriated

funds are used are key components of Congress’s oversight capability.

Governing Regulations

The full funding policy is consistent with two basic laws regarding executive branch

expenditures—the Antideficiency Act of 1870, as amended, and the Adequacy of Appropriations

Act of 1861. Regulations governing the policy are found in Office of Management and Budget

(OMB) Circular A-11 and DOD Directive 7000.14-R, which provide guidelines on budget

Advance procurement funding is partial procurement funding for an item that appears in the budget one or more years

prior to the year the item is procured. It is sometimes described informally as a “downpayment” on an item to be

procured in a future year. Advance procurement funding is used routinely and extensively in the procurement of the

Navy’s nuclear-powered warships, since nuclear-propulsion equipment has long production leadtimes. Advance

procurement funding is also provided for other DOD weapons that incorporate components with long production

leadtimes, though the amounts of funding provided are usually much smaller than those provided for nuclear-powered

warships.

MYP is a special contracting arrangement, approved by Congress on a program-by-program basis, that permits DOD

to use a single contract to procure multiple copies of a given item that are scheduled to be procured across a series of

years. An MYP arrangement approved for the Navy’s F/A-18E/F strike-fighter program, for example, permitted the

Navy to procure, under a single contract, a total of 198 to 224 F/A-18E/Fs to be procured during the five-year period

FY2000-FY2004. MYP arrangements are governed by 10 USC 2306(b). EOQ procurement involves procuring multiple

copies of a key component of a certain weapon covered by an MYP at the start of the MYP period so as to achieve

significantly reduced costs on that component. For example, an MYP arrangement to procure a total of 12 ships of a

certain kind over a period of four years could involve procuring, in the first year of the arrangement, 12 sets of shippropulsion or ship-combat system equipment.

Congressional Research Service

Defense Procurement: Full Funding Policy

formulation. Support for the policy has been periodically reaffirmed over the years by Congress,

the Government Accountability Office (GAO), and DOD.

For a detailed discussion of the origins, rationale, and governing regulations of the full funding

policy, as well as examples of where Congress, GAO, and DOD have affirmed their support for

the policy, see Appendix B.

Alternative of Incremental Funding

Prior to the imposition of the full funding policy, DOD weapon procurement was accomplished

through incremental funding. Incremental funding fell out of favor because opponents believed it

did (or could do) one or more of the following:

•

make the total procurement costs of weapons and equipment more difficult for

Congress to understand and track;

•

create a potential for DOD to start procurement of an item without necessarily

understanding its total cost, stating that total cost to Congress, or providing fully

for that total cost in future DOD budgets—the so-called “camel’s-nose-under-thetent” issue;

•

permit one Congress to “tie the hands” of one or more future Congresses by

providing initial procurement funding for a weapon whose cost would have to be

largely funded by one or more future Congresses;

•

increase weapon procurement costs by exposing weapons under construction to

potential uneconomic start-up and stop costs that can occur when budget

reductions or other unexpected developments cause one or more of the planned

increments to be reduced or deferred.

Although incremental funding fell out of favor due to the above considerations, supporters of

incremental funding could argue that its use in DOD (or federal) procurement can be

advantageous because it can do one or more of the following:

•

permit very expensive items, such as large Navy ships, to be procured in a given

year without displacing other programs from that year’s budget, which can

increase the costs of the displaced programs due to uneconomic programdisruption start-up and start costs;

•

avoid a potential bias against the procurement of very expensive items that might

result from use of full funding due to the item’s large up-front procurement cost

(which appears in the budget) overshadowing the item’s long-term benefits

(which do not appear in the budget) or its lower life cycle operation and support

(O&S) costs compared to alternatives with lower up-front procurement costs;

•

permit construction to start on a larger number of items in a given year within

that year’s amount of funding, so as to achieve better production economies of

that item than would have been possible under full funding;

•

recognize that certain DOD procurement programs, particularly those

incorporating significant amounts of advanced technology, bear some

resemblance to research and development activities, even though they are

intended to produce usable end items;

Congressional Research Service

Defense Procurement: Full Funding Policy

•

reduce the amount of unobligated balances associated with DOD procurement

programs;

•

implicitly recognize potential limits on DOD’s ability to accurately predict the

total procurement cost of items, such as ships, that take several years to build;

and

•

preserve flexibility for future Congresses to stop “throwing good money after

bad” by halting funding for the procurement of an item under construction that

has become unnecessary or inappropriate due to unanticipated shifts in U.S.

strategy or the international security environment.

Non-Conforming Procurements

In recent years, some items, notably Navy ships, have been procured with funding profiles that do

not conform to the policy as traditionally applied to DOD procurement programs. In addition,

DOD is now proposing to procure other items, including both ships and aircraft, with funding

profiles that do not conform to the policy as traditionally applied.

Recent Procurements

DOD Sealift and Auxiliary Ships in NDSF

As part of its action on the FY1993 defense budget, Congress created the National Defense

Sealift Fund (NDSF)—a revolving fund in the DOD budget for the procurement, operation, and

maintenance of DOD-owned sealift ships4—and transferred procurement of new military sealift

ships and certain Navy auxiliary ships from the Shipbuilding and Conversion, Navy (SCN)

appropriation account, where they traditionally had been procured, to the NDSF.5 Since the NDSF

is outside the procurement title of the defense appropriation act, sealift ships procured since

FY1993, including DOD’s new Large, Medium-Speed, Roll-on/Roll-off (LMSR) ships, as well as

Navy Lewis and Clark (TAKE-1) dry cargo ships procured since FY2003,6 have not been subject

to the full funding policy as traditionally applied to DOD procurement programs.

Sealift ships are cargo ships that transport military equipment and supplies from one land mass to another.

Government-owned sealift ships are operated by the Military Sealift Command using mostly civilian crews.

Congress created the NDSF through Section 1024 of the FY1993 defense authorization act (H.R. 5006; see pages

178-181 of H.Rept. 102-966 of October 1, 1992, the conference report on the act), as amended by Title V of the

FY1993 defense appropriations act (H.R. 5504).

The first three ships in the Navy’s 12-ship Lewis and Clark (TAKE-1) class auxiliary ship program were procured in

the SCN account using full funding. The Administration, as part of its proposed FY2003 defense budget and FY2003FY2007 Future Years Defense Plan (FYDP), proposed to fund the remaining nine ships in the program during the years

FY2003-FY2007 in the NDSF, where they would not be subject to the full funding provision as traditionally applied to

DOD procurement programs. This proposal was consistent with congressional interest for this approach expressed in

action on the FY2001 defense budget. (See H.Rept. 106-616 of May 12, 2000, the House Armed Services Committee

report on the FY2001 defense authorization bill [H.R. 4205], p. 89; S.Rept. 106-292, the Senate Armed Services

Committee report on the FY2001 defense authorization bill [S. 2549], p. 93; and H.Rept. 106-945, the conference

report on the FY2001 defense authorization bill [H.R. 4205], p. 35 [Section 127].)

Congressional Research Service

Defense Procurement: Full Funding Policy

As discussed in a 1996 CRS report,7 although individual LMSRs were ostensibly fully funded

each year by Congress, like ships procured in the SCN account, DOD in some cases actually

applied LMSR funding provided in a given year to partially finance the construction of LMSRs

authorized in various years. For example, although Congress ostensibly approved $546.4 million

in FY1995 for the procurement of two LMSRs, the FY1995 funds were actually applied to help

finance portions of 16 LMSRs whose construction contracts were awarded between FY1993 and

FY1997. In explaining its use of funds in the LMSR program, DOD stated:

The National Defense Sealift Fund (NDSF) is not a procurement appropriation but a

revolving fund. Dollars appropriated by Congress for the fund are not appropriated to

purchase specific hulls as in the case of, for example the Navy’s DDG-51 program. Rather,

dollars made available to the NDSF are executed on an oldest money first basis. Therefore,

full funding provisions as normally understood for ship acquisition do not apply. 8

Individual Navy Ships in SCN in the 1990s

The Navy during the 1990s procured several individual ships in the SCN account during the

1990s—including amphibious ships, aircraft carriers, and an attack submarine—with funding

profiles approved by Congress that, for various reasons, do not appear to conform to the full

funding policy as traditionally applied to DOD procurement programs. These ships were listed

and discussed in CRS testimony to the House Armed Services Committee on March 9, 1999.9

LHD-8 Amphibious Assault Ship Incremental Funding

More recently, Congress included, in both the FY2000 and FY2001 defense appropriations acts, a

provision in the SCN section stating “That the Secretary of the Navy is hereby granted the

authority to enter into a contract for an LHD-1 [class] Amphibious Assault Ship which shall be

funded on an incremental basis.” The ship in question is LHD-8, which was funded on an

incremental basis, with the final increment provided in FY2006. DOD records the ship in its

budget presentations as an FY2002-procured item.

LCS Lead Ships in RDT&E

As part of its proposed FY2005 and FY2006 budget submissions, the Administration proposed,

and Congress approved, funding the two lead Littoral Combat Ships (LCSs) in the Navy’s

research, development, test and evaluation (RDT&E) account rather than the SCN account, where

Navy ships traditionally have been procured. Since the Navy’s RDT&E account is outside the

procurement title of the defense appropriation act, the ships are not subject to the full funding

policy as traditionally applied to DOD procurement programs.

CRS Report 96-257, Sealift (LMSR) Shipbuilding and Conversion Program: Background and Status, by (name re

dacted). (Out of print; available from author at 7-.....)

DOD information paper on strategic sealift acquisition program provided to CRS by U.S. Navy Office of Legislative

Affairs, January 25, 1995, p. 1.

Statement of Ronald O’Rourke, Specialist in National Defense, Congressional Research Service, before the House

National Security Committee Subcommittee on Military Procurement Hearing on Littoral Warfare Protection and Ship

Recapitalization, March 9, 1999, pp. 8-12. Among the ships discussed were the amphibious ships LHD-6, LHD-7,

LHD-8, and LPD-18, the aircraft carriers CVN-76 and CVN-77, and the attack submarine SSN-23.

Congressional Research Service

Defense Procurement: Full Funding Policy

Leasing Authority for Refueling Tanker Aircraft

As part of its action on the FY2002 defense appropriations bill, Congress granted DOD authority

to enter into a 10-year leasing arrangement for 100 aircraft based on the Boeing 767 commercial

aircraft design to serve as Air Force aerial refueling tankers. Although this was a leasing

arrangement rather than a procurement action, some critics argued that the stream of annual lease

payments to be made under the arrangement could be viewed as the equivalent of incremental

funding. As part of its action on the FY2004 defense authorization bill, Congress granted DOD

revised authority to enter into a 10-year leasing arrangement for 20 aircraft and to procure up to

80 additional aircraft under a multiyear procurement contract that uses incremental funding.10 The

tanker lease was ultimately not implemented. 11

Proposed or Suggested Procurements

In addition to the recent non-conforming examples cited above, DOD in recent budget

submissions has proposed or suggested procuring additional ships, aircraft, and satellites using

funding approaches that would not conform to the full funding policy as traditionally applied to

DOD procurement programs.

Large Satellites Incrementally Funded

In testimony to the Strategic Forces subcommittee of the Senate Armed Services Committee on

the proposed FY2008 military space programs budget, Ronald Sega, the Undersecretary of the

Air Force, suggested using incremental funding for procuring large, expensive satellites that are

not procured in large numbers.12

LHA-6 Amphibious Ship Incrementally Funded

The Administration, as part of its FY2007 and FY2008 defense budget submission, proposed to

procure an amphibious assault ship called LHA-6—the lead ship in the LHA (Replacement), or

LHA(R) program—in FY2007 using split funding (a two-year form of incremental funding) in

FY2007 and FY2008.

First Two DDG-1000 Destroyers Incrementally Funded

The Administration, as part of its FY2007 and FY2008 defense budget submissions, proposed to

procure each of the first two DDG-1000 (formerly DD(X)) destroyers in FY2007 using split

funding in FY2007 and FY2008.

For more on the tanker leasing proposal, see CRS Report RL32056, The Air Force KC-767 Tanker Lease Proposal:

Key Issues For Congress, coordinated by (name redacted).

For more on the Air Force’s plans for modernizing its tanker aircraft fleet, see CRS Report RL34398, Air Force Air

Refueling: The KC-X Aircraft Acquisition Program, by (name redacted) and (name redacted).

Source: Transcript of hearing before Strategic Forces subcommittee of Senate Armed Services Committee, April 19,

2007. Sega’s spoken comments on the issue came in response to a question from Senator Inofe. See also Michael Sirak,

“Sega Asks Congress To Allow Incremental Funding of Big-Ticket Satellites,” Defense Daily, April 23, 2007.

Congressional Research Service

Defense Procurement: Full Funding Policy

CVN-78 Aircraft Carrier Incrementally Funded

The Administration, as part of its FY2007 and FY2008 defense budget submission, proposed to

procure the aircraft carrier CVN-78 in FY2008 using split funding in FY2008 and FY2009. About

35.2% of the ship’s estimated procurement cost of $10.5 billion was provided in the form of

advance procurement funding between FY2001 and FY2007, 26.1% is to be provided in the

procurement year of FY2008, and 38.8% is to be provided in FY2009.13

F-22 Aircraft Incrementally Funded

The Administration, as part of its FY2007 budget submission, is proposing to procure F-22

aircraft over the next several years using incremental funding.

First DDG-1000 Destroyer Incrementally Funded in RDT&E

The Administration, as part of its FY2005 defense budget submission, proposed procuring the

lead DDG-1000 destroyer in the Navy’s RDT&E account rather than the SCN account. Congress,

in acting on the FY2005 budget, directed that the lead DDG-1000 be funded in the SCN

account.14

C-17 Airlift Aircraft MYP

The Administration, as part of its FY2003, FY2004, and FY2005 defense budgets submissions,

proposed procuring 60 C-17 airlift aircraft under a follow-on multiyear procurement (MYP)

arrangement approved by Congress in FY200215 that would procure at least some of the aircraft

with funding profiles that resembled incremental funding rather than full funding.16 Under this

approach, the Air Force has requested Congress to appropriate enough money in a given year to

make progress payments on the MYP contract rather than to fully fund a specific number of

aircraft. The affect would be to reduce requested funding in the initial years of the contract and

increase amounts requested in later years. This proposal is of particular note because it would, if

implemented, extend use of something resembling incremental procurement to an area of defense

weapon procurement outside shipbuilding.

For more on CVN-78, see CRS Report RS20643, Navy Ford (CVN-78) Class Aircraft Carrier Program: Background

and Issues for Congress, by (name redacted).

For more on the DDG-1000 and LCS programs, see CRS Report RL32109, Navy DDG-1000 and DDG-51 Destroyer

Programs: Background, Oversight Issues, and Options for Congress, by (name redacted), and CRS Report RL33741,

Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress, by (name r

edacted).

The first MYP arrangement for the C-17 program was completed with the procurement of 8 C-17s in FY2003.

Congress, as part of its action on the FY2002 defense budget, granted authority for a follow-on MYP arrangement for

the C-17 program that began with additional C-17s procured in FY2003. Congress provided advance procurement

funding for this follow-on MYP arrangement in FY2002.

David A. Fulghum, “Military Budget Boost Yields Marginal Change,” Aviation Week & Space Technology, February

11, 2002, p. 11.

Congressional Research Service

Defense Procurement: Full Funding Policy

Advance Appropriations for Navy Ships in SCN

In 2001 and again in 2005, some Navy officials advocated the use of a funding arrangement

called advance appropriations for Navy ships, particularly as a means of increasing the number of

ships that could be placed under construction in the near term with available funding. Use of

advance appropriations would enable the Navy to begin construction on a ship in a given year

even though the budget authority for that year provided only an initial increment of the total

procurement cost of the ship.

Under advance appropriations, funding for the entire procurement cost of a ship would be

approved by Congress in a single decision. In contrast, however, to traditional full funding, in

which the full procurement cost of the ship is assigned to (i.e., scored in) the budget year in which

it is procured, under advance appropriations, the procurement cost of the ship approved in a given

year would be divided into several portions, or increments, that would be scored across several

budget years starting with the original year of procurement.

In contrast to incremental funding, under which Congress must take a positive action each year to

approve the portion of the ship’s cost assigned to that year, with advance appropriations,

Congress each year would need to take a positive action to cancel the portion of the ship’s cost

assigned to that year. Although Navy supporters of the advance appropriation concept stressed

that advance appropriations is a form of full funding rather than incremental funding, they

acknowledge that advance appropriations could be described informally as a legislatively lockedin counterpart to incremental funding.

OMB Circular A-11 defines advance appropriations as appropriations that are:

•

Enacted normally in the current year;

•

Scored after the budget year (e.g., in each of one, two, or more later years,

depending on the language); and

•

Available for obligation in the year scored and subsequent years if specified in

the language.17

The circular allows for the use of advance appropriations to help finance capital assets under

certain circumstances. Specifically, Principle 2 in Appendix J on principles of financing capital

assets, states (italics as in the original):

Regular appropriations for the full funding of a capital project or a useful segment (or

investment) of a capital project in the budget year are preferred. If this results in spikes that,

in the judgment of OMB, cannot be accommodated by the agency or the Congress, a

combination of regular and advance appropriations that together provide full funding for a

capital project or a useful segment or an investment should be proposed in the budget.

Explanation: Principle 1 (Full Funding) is met as long as a combination of regular and

advance appropriations provide budget authority sufficient to complete the capital project or

useful segment or investment. Full funding in the budget year with regular appropriations

alone is preferred because it leads to tradeoffs within the budget year with spending for other

OMB Circular A-11 (July 2003 version), Appendix J (Principles Of Budgeting For Capital Asset Acquisitions),

Section E (Glossary). For the text of this document on the Internet, go to http://www.whitehouse.gov/omb/circulars/

a11/current_year/app_j.pdf.

Congressional Research Service

Defense Procurement: Full Funding Policy

capital assets and with spending for purposes other than capital assets. In contrast, full

funding for a capital project (investment) over several years with regular appropriations for

the first year and advance appropriations for subsequent years may bias tradeoffs in the

budget year in favor of the proposed asset because with advance appropriations the full cost

of the asset is not included in the budget year. Advance appropriations, because they are

scored in the year they become available for obligation, may constrain the budget authority

and outlays available for regular appropriations of that year.

If, however, the lumpiness caused by regular appropriations cannot be accommodated within

an agency or Appropriations Subcommittee, advance appropriations can ameliorate that

problem while still providing that all of the budget authority is enacted in advance for the

capital project (investment) or useful segment. The latter helps ensure that agencies develop

appropriate plans and budgets and that all costs and benefits are identified prior to providing

resources. In addition, amounts of advance appropriations can be matched to funding

requirements for completing natural components of the useful segment. Advance

appropriations have the same benefits as regular appropriations for improved planning,

management, and accountability of the project (investment).

Navy advocates of using advance appropriations for Navy shipbuilding noted that the mechanism

is used by several federal agencies other than DOD. 18

Although use of advance appropriations for Navy shipbuilding was supported in 2001 by some

Navy officials and some Members of Congress,19 the Navy in 2001 apparently did not receive

approval from the Office of Management and Budget (OMB) to use the approach for

shipbuilding, and did not officially propose its use as part of its FY2002 budget submission to

Congress.20 Congress in 2001 did not adopt advance appropriations as a mechanism for funding

Agencies cited by the Navy included the Departments of Agriculture, Commerce, Education, Energy, Health and

Human Services, Housing and Urban Development, Interior, Justice, Labor, State, Transportation, and Treasury, as

well as the Corporation for Public Broadcasting, the General Services Administration, the International Assistance

Program, the National Aeronautics and Space Administration, the National Science Foundation, the Smithsonian

Institution, and the Social Security Administration. (Slides for May 3, 2001 Navy briefing to CRS, Advance

Appropriations for Navy Shipbuilding, pp. 19-21.)

The Navy also argued that current law, contrary to some assertions, does not prohibit the use of advance appropriations.

Specifically, the Navy argued that:

—31 USC 1341, [the] “Anti-Deficiency Act,” prohibits writing a contract which “involves the government in a

contract or obligation for the payment of money before an appropriation is made unless authorized by law.”

—10 USC 2306b [the provision covering multi-year procurement contracts] allows [DOD and certain other

federal agencies] to enter into multi-year contracts for the purchase of weapon systems, as long as [there is] “a

reasonable expectation that throughout the contemplated contract period the head of the agency will request

funding for the contract at the level required to avoid contract cancellation.”

—31 USC 1105 [a provision relating to the contents of the federal budget and its submission to Congress] requires

that [the executive branch] identify in advance of need future appropriations that will have to be approved in order

to complete the contract. These advance appropriations have to be specifically approved by Congress to allow [the

executive branch] to obligate the government in advance of receipt of funds. (Slides for May 3, 2001 Navy

briefing to CRS, Advance Appropriations for Navy Shipbuilding, p. 16. Emphasis as on the briefing slide.)

Christian Bohmfalk, “ O’Keefe: Advance Appropriations, If Used Correctly, Could Help Navy,” Inside the Navy,

November 26, 2001; Christian Bohmfalk, “Stevens Promotes Advance Appropriations to Boost Ship Production,”

Inside the Navy, September 10, 2001; Mike McCarthy, “CNO Advocates Advance Funding of Ships,” Defense Week,

July 16, 2001, p. 2; Christian Bohmfalk, “Senior Navy Leaders Describe Benefits of Advance Appropriations,” Inside

the Navy, April 16, 2001; Christopher J. Castelli, “Congress Weighs Using ‘Advance Appropriations’ for

Shipbuilding,” Inside the Navy, April 9, 2001; Dale Eisman, “Plan Would Boost Navy Shipbuilding,” Norfolk

Virginian-Pilot, April 5, 2001.

Dale Eisman, “White House Rejects Proposal To Stretch Shipbuilding Funds,” Norfolk Virginian-Pilot, September 6,

(continued...)

Congressional Research Service

Defense Procurement: Full Funding Policy

Navy ships. The House Appropriations Committee, in its report (H.Rept. 107-298 of November

19, 2001) on the FY2002 defense appropriations bill (H.R. 3338), stated that it was

dismayed that the Navy continues to advocate the use of alternative financing mechanisms to

artificially increase shipbuilding rates, such as advanced appropriations, or incremental

funding of ships, which only serve to decrease cost visibility and accountability on these

important programs. In attempting to establish advanced appropriations as a legitimate

budgeting technique, those Navy advocates of such practices would actually decrease the

flexibility of future Administrations and Congresses to make rational capital budgeting

decisions with regard to shipbuilding programs. Accordingly, the Committee bill includes a

new general provision (section 8150) which prohibits the Defense Department from

budgeting for shipbuilding programs on the basis of advanced appropriations.21

The general provision mentioned above (Section 8150) was not included in the final version of

the bill that was passed by Congress and signed into law (P.L. 107-117 of January 10, 2002).

For discussion of proposals from Navy officials in 2005 for using advance appropriations for

procuring Navy ships, see CRS Report RL32776, Navy Ship Procurement: Alternative Funding

Approaches—Background and Options for Congress, by (name redacted). 22

Issues and Options for Congress

Options

Responding to Specific Non-Conforming Proposals

In response to the proposals listed above to procure ships and aircraft with funding profiles that

do not conform to the policy as traditionally applied to DOD procurement programs, Congress

has six basic options:

•

Approve procurement of the items using the proposed non-conforming

approach without added bill or report language. This option, if implemented,

might well be viewed by DOD or others as setting a precedent for applying nonconforming funding approaches to other DOD procurement programs in the

future.

•

Approve procurement of the items using the proposed non-conforming

approach, but with added bill or report language intended to limit the

application of the approach strictly to the specific program in question. This

option would accommodate DOD’s request for FY2003 while attempting to

avoid setting such a precedent. The success of this option in not setting such a

(...continued)

2001; Christian Bohmfalk, “Advance Appropriations, Not Part of FY-02 Request, May Resurface,” Inside the Navy,

July 16, 2001.

H.Rept. 107-298, p. 119.

CRS Report RL32776, Navy Ship Procurement: Alternative Funding Approaches—Background and Options for

Congress, by Ronald O’Rourke.

Congressional Research Service

Defense Procurement: Full Funding Policy

precedent could depend on the forcefulness of the wording used in the bill or

report language.

•

Approve procurement of the items with a conforming funding approach, but

without added bill or report language. This option would avoid setting a

precedent for using non-conforming approaches in the future and perhaps, by

inference, also affirm Congress’s preference for the full funding policy.

•

Approve procurement of the items with both a conforming funding

approach and added bill or report language affirming Congress’s preference

for the full funding policy. This option would avoid setting a precedent for using

non-conforming approaches in the future and positively affirm Congress’s

preference for the full funding policy.

•

Reject procurement of the requested items entirely, without added bill or

report language. This option might or might not be interpreted by DOD as

affirming Congress’s preference for the full funding provision, depending on

other issues relating to the program (e.g., concerns about need for the program, or

its cost) that might be viewed as having influenced Congress’s decision on it.

•

Reject procurement of the items with added bill or report language affirming

Congress’s preference for the full funding policy. This option would positively

affirm Congress’s preference for the full funding provision, particularly if the

added legislation or comment makes it clear that Congress’s decision to not

procure the items was directly related to the proposal to fund them using a nonconforming approach.

General Legislative Options

In addition to responding to specific proposals for procuring ships and aircraft with nonconforming approaches, Congress may consider options for addressing legislatively the

application of the full funding policy to DOD procurement programs generally. In this regard,

Congress could decide to either maintain the status quo or add new bill or report language.

New bill or report language could be aimed at any of the following basic objectives:

•

Terminating the application of the full funding policy to DOD procurement

programs. This option could involve dropping the current policy preference for

full funding and permitting DOD to employ either full funding, incremental

funding, or some other funding approach, depending on which approach DOD

deems most appropriate for the program in question. Alternatively, this option

could involve instituting a new policy that prohibits the use of full funding and

perhaps establishes a new policy preference for using incremental funding or

some other funding approach.

•

Relaxing or otherwise modifying the application of the policy to DOD

procurement programs. This option could involve permitting non-conforming

approaches to be used for certain categories of weapons or equipment, or for

procurements conducted under certain circumstances. It could also involve

permitting DOD to make greater use of alternative budgeting mechanisms, such

as revolving funds, for procurement of weapons and equipment. As discussed in

Appendix B, a 1996 GAO report examined some alternative mechanisms used at

Congressional Research Service

Defense Procurement: Full Funding Policy

certain government agencies other than DOD and recommended that “The

Congress should consider enabling agencies to use more flexible budgeting

mechanisms that accommodate up-front funding over the longer term while

providing appropriate oversight and control.”23

•

Strengthening or expanding the scope of application of the policy as it relates

to DOD programs. This option could involve giving the full funding provision a

specific basis in statute for DOD (or federal) programs, or applying it to DOD

programs funded outside the procurement title of the DOD appropriations act,

such as those funded in the RDT&E account or the National Defense Sealift

Fund.

One recent example of proposed legislation relating to the use of full funding in DOD

procurement programs, mentioned earlier, was Section 8150 of the FY2002 defense

appropriations bill (H.R. 3338) as reported by the House Appropriations Committee (H.Rept.

107-298 of January 10, 2002), which stated:

None of the funds appropriated in this Act may be used to prepare a budget request for

submission to Congress by the Department of Defense for fiscal year 2003 that contains any

proposal to acquire ships for the Department of the Navy through the use of incremental

funding amounts or advanced appropriations. The limitation against incremental funding

does not apply to the specific shipbuilding programs that were funded on an incremental

basis in fiscal year 2002.

As mentioned earlier, this provision was not included in the final version of the bill that was

passed by Congress and signed into law (P.L. 107-117 of January 10, 2002).

A second example concerns the National Defense Airlift Fund (NDAF)—a revolving fund outside

the procurement title of the DOD appropriations act that was similar to the NDSF, but intended

for airlift aircraft such as the C-17. The NDAF was established by report language on the FY2001

defense appropriations bill (H.R. 4576/S. 2593).24 The conference report on the bill directed that

C-17s be procured in the NDAF rather than the Air Force’s aircraft procurement account, where

airlift planes traditionally had been procured, but also directed that C-17 procurement conform to

the full funding policy:

The conferees direct that the Department of Defense budget for all future C-17 procurement

and support costs within the National Defense Airlift Fund. The conferees direct that future

budget documents for the NDAF should conform to the requirements for other DOD

procurement accounts including the content and format of budget exhibits, reprogramming

thresholds among procurement, advanced procurement, and interim contractor support line

items, application of the procurement full funding policy, and Congressional notification for

changes in quantity.25

Government Accountability Office, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5, November

1996, p. 14.

See pages 136-137 of the Senate Appropriations Committee’s report (H.Rept. 106-298 of May 18, 2000) on the

FY2001 defense appropriations bill (S. 2593), and page 284 of the conference report (H.Rept. 106-754 of July 17,

2000) of the bill (H.R. 4576).

H.Rept. 106-754, p. 284. (Emphasis added.)

Congressional Research Service

Defense Procurement: Full Funding Policy

The NDAF was disestablished as part of Congress’s action on the FY2002 defense appropriations

bill, 26 and procurement of C-17s reverted to the Air Force’s aircraft procurement account.

A third example is Section 1007 of the FY1996 defense authorization bill (H.R. 1530) as reported

by the House National Security Committee (H.Rept. 104-131 of June 1, 1995), which would

amend 10 USC 114 at the end by adding the following new subsection:

(f) (1) No funds may be appropriated, or authorized to be appropriated, for any fiscal year for

a purpose named in paragraph (1), (3), (4), or (5) of subsection (a) using incremental

funding.

(2) In the budget submitted by the President for any fiscal year, the President may not

request appropriations, or authorization of appropriations, on the basis of incremental

funding for a purpose specified in paragraph (1).

(3) In this subsection, the term ‘‘incremental funding’’ means the provision of funds for a

fiscal year for a procurement in less than the full amount required for procurement of a

complete and usable product, with the expectation (or plan) for additional funding to be

made for subsequent fiscal years to complete the procurement of a complete and usable

product.

(4) This subsection does not apply with respect to funding classified as advance procurement

funding.

This provision was not included in the final version of the bill (S. 1124) that was passed by

Congress and signed into law (P.L. 104-106 of February 10, 1996).27

Issues

In considering options for responding to specific DOD proposals for non-conforming approaches,

or for addressing the issue of full funding in DOD procurement generally, Congress can consider

several factors, including Congress’s power of the purse, congressional oversight of DOD

procurement programs, future Congresses, DOD budgeting and program-execution discipline,

and the potential impact on weapon procurement costs.

Congressional Power of the Purse

As shown in the excerpts from the congressional hearings and reports presented in Appendix B,

the full funding policy has long been considered important to Congress’s ability to control

executive branch spending. DOD spending forms a large part of overall federal spending (and an

even larger share of discretionary federal spending). Procurement of weapons and equipment in

turn forms an important part of overall DOD spending (and an even larger share of the portion of

the DOD budget that is considered more “discretionary” in nature). Congressional hearings and

See the House Appropriation Committee’s report (H.Rept. 107-298 of November 19, 2001) on the FY2002 defense

appropriations bill (H.R. 3338), p. 261.

The conference report on H.R. 1530 (H.Rept. 104-406 of December 13, 1995) was passed by Congress but vetoed by

the President on January 28, 1995. Congress then passed the conference report on S. 1124, a new version of the bill

(H.Rept. 104-450, January 22, 1996), which the President signed into law.

Congressional Research Service

Defense Procurement: Full Funding Policy

GAO reports over the years suggest that circumscribing the application of the full funding policy

to DOD procurement programs could reduce congressional control over spending.

Congressional Oversight of DOD Procurement Programs

As also shown in the excerpts presented in Appendix B, the full funding policy has traditionally

been viewed as beneficial in terms of making the total cost of DOD weapons and equipment more

visible to Congress. As mentioned earlier, understanding total costs and how previously

appropriated funds are used are key components of Congress’s oversight capability. Incremental

funding or other non-conforming funding approaches, by spreading the costs of individual

weapons or pieces of equipment over several years, could complicate the task of understanding

and tracking total weapon costs and the uses of previously appropriated funds, particularly if such

approaches are applied to numerous weapon acquisition programs.

As also shown in the excerpts from the 1996 GAO report presented in Appendix B, however,

GAO’s case studies of certain federal agencies other than DOD suggests that there may be room

under certain circumstances for using alternative funding mechanisms, such as revolving funds, in

a way that preserves congressional control of spending and congressional oversight. The issue is

whether these alternative mechanisms would be appropriate for DOD, which has a much larger

budget and much larger annual capital needs than most other federal agencies.

Future Congresses

As discussed in the excerpts presented in Appendix B, use of incremental funding or other nonconforming approaches could commit future Congresses to providing funding for programs

initiated by previous Congresses, and thereby reduce the flexibility of future Congresses to adapt

current-year budgets to changing needs. Alternatively, as mentioned earlier, it could be argued

that incremental funding can enhance Congress’s ability to respond to changing circumstances by

giving future congresses the ability to stop funding the construction of a weapon that suddenly

becomes unnecessary or inappropriate due to unanticipated shifts in U.S. strategy or the

international security environment. Incremental funding, in this view, could permit Congress to

stop throwing good money after bad.

DOD Budgeting and Program-Execution Discipline

Independent of its importance to congressional powers and responsibilities, the full funding

policy is viewed by DOD and others as imposing discipline on DOD budgeting practices. As

shown in the excerpts presented in Appendix B, full funding is often viewed as helping to ensure

that DOD officials identify, make investment trade-offs on the basis of, and budget adequately for

the full costs of its weapons and equipment. In addition, DOD has sometimes stated that full

funding is a source of discipline on DOD program managers that encourages them to execute

their programs within cost.

Alternatively, as mentioned earlier, it could be argued that use of incremental funding can assist

in the making of unbiased investment trade-offs by avoiding a potential bias against the

procurement of very expensive items that might result from an item’s large up-front procurement

cost (which appears in the budget) overshadowing its long-term benefits (which do not appear in

the budget) or its lower life cycle operation and support (O&S) costs compared to alternatives

with lower up-front procurement costs. It could also be argued that some DOD procurement

Congressional Research Service

Defense Procurement: Full Funding Policy

programs incorporate significant amounts of advanced technology and that GAO, in a 2001 letter

report and briefing on incremental funding of capital asset acquisitions, stated that it “recognizes

that some incremental funding for high technology acquisitions is justified because, while such

projects are intended to result in a usable asset, they are closer in nature to research and

development activities.”28

In addition, it could be argued that use of incremental funding would be advantageous in DOD

budgeting because, as mentioned earlier, it reduces the amount of unobligated balances associated

with DOD procurement programs. Finally, it could be argued that use of incremental funding can

be advantageous in DOD budgeting because it implicitly recognizes potential limits on DOD’s

ability to accurately predict the total procurement costs of items, such as ships, that take several

years to build.

Potential Impact on Weapon Costs

Funding approaches like incremental funding and advance appropriations can permit the military

services to start construction on a greater number of weapons in the near term than would be

possible under full funding. This could make incremental funding and advance appropriations

attractive in the near term to service officials, industry officials, and their supporters, particularly

given the decreased rates of weapon procurement that began in the early 1990s and are currently

programmed by DOD to continue for several more years. The full costs of weapons started under

these approaches, however, would eventually have to be paid in later years (along with the costs

of weapons procured in those later years).

As reflected in some of the excerpts presented in Appendix B, incremental funding traditionally

has been viewed as creating a potential for increasing weapon procurement costs due to

uneconomic start-up and stop costs that can occur when budget reductions or other unexpected

developments cause one or more of the planned increments to be reduced or deferred. A related

argument is that if firms are uncertain about approval of future funding increments for a particular

weapon, they may be less inclined to invest in new and more efficient production technologies for

that weapon, effectively increasing its cost.

It could also be argued, however, that incremental funding or advance appropriations can help

reduce weapon procurement costs in at least two specific cases. The first concerns a very

expensive item, such as a large ship, that is usually procured once every few years. The examples

usually cited are aircraft carriers and amphibious assault ships. If the Navy is not permitted to

have a one-year “spike” in the SCN account in the year that it procures such a ship, then fully

funding the ship within the SCN account could require other planned ship-procurement efforts to

be delayed to the following year. Such a delay, it can be argued, could disrupt the production lines

for those other ships, which could increase their procurement prices due to the resulting shutdown and start-up costs.

The second concerns a very specific (and perhaps rare) scenario under which a weapon that is

beyond its initial “ramp-up” period of procurement (i.e., a program that is ready from a technical

Letter dated February 26, 2001, to Honorable Pete V. Domenici, Chairman, Committee on the Budget, United States

Senate, from Paul L. Posner, Managing Director, Federal Budget, Strategic Issues, Government Accountability Office,

on the subject “Budget Issues: Incremental Funding of Capital Asset Acquisitions.” (GAO-01-432R Incremental

Funding of Capital Assets), p. 3.

Congressional Research Service

Defense Procurement: Full Funding Policy

and managerial standpoint to execute higher rates of procurement) is, due to near-term budget

constraints, planned for procurement at a very uneconomic rate in the near term, but at a morethan-economic-rate a few years later. Under such a specific scenario, use of incremental funding

or advance appropriations could permit the service to shift the start of production of some of the

units planned for later years into the near term, improving production economies of scale in the

near term while preserving adequate production economies of scale in later years. If the near-term

gains in economies of scale are greater than the downstream losses in economies of scale, the

result could be a reduced combined procurement cost for all of the weapons in question.

Two factors bear upon the current debate over whether to procure DOD weapons using nonconforming funding approaches: The first is the relatively low rates at which many DOD weapon

and equipment programs are currently planned for procurement. The second is the interest that

some Members of Congress have in modernizing DOD’s weapons and equipment more quickly

than now planned and in maintaining the financial health of U.S. defense firms, particularly those

that have experienced several years of reduced production rates. One potentially important

question is whether the military services or defense firms are taking advantage of these two

factors to induce Congress to adopt non-conforming funding approaches that could permit

increased weapon-procurement rates in the near term, but also, by reducing adherence to the full

funding policy, permanently weaken Congress’s ability to conduct oversight of DOD programs.

Military and defense-industry officials likely would not admit openly to pursuing such a strategy.

Indeed, they might not even be aware that proposals for non-conforming funding approaches

could pose such a trade-off for Congress. Nevertheless, addressing such proposals may involve

balancing a need to meet DOD procurement goals within available funding against the goal of

preserving Congress’s control over DOD spending and its ability to conduct oversight of DOD

programs.

Legislative Activity For FY2008

FY2008 Defense Authorization Bill (H.R. 1585/S. 1547)

House

The House Armed Services Committee, in its report (H.Rept. 110-146 of May 11, 2007) on the

FY2008 defense authorization bill (H.R. 1585), approved the Navy’s FY2008 request for the

second of two increments of procurement funding for the amphibious assault ship LHA-6, the

second of two increments of procurement funding for the first two DDG-1000 destroyers, and the

first of two increments of procurement funding for the aircraft carrier CVN-78.

Senate

The Senate Armed Services Committee, in its report (S.Rept. 110-77 of June 5, 2007) on the

FY2008 defense authorization bill (S. 1547), approved the Navy’s FY2008 request for the second

of two increments of procurement funding for the amphibious assault ship LHA-6, the second of

two increments of procurement funding for the first two DDG-1000 destroyers, and (with a

recommended $20-million reduction) the first of two increments of procurement funding for the

Congressional Research Service

Defense Procurement: Full Funding Policy

aircraft carrier CVN-78. With regard to Space-Based Infrared Satellite System (SBIRS) High

satellites, the committees report states:

The budget request included $587.0 million in Research, Development, Test, and

Evaluation, Air Force (RDTEAF), PE 64441F, for Space-Based Infrared Satellite System

(SBIRS) High. The committee recommends an increase of $100.0 million to address

nonrecurring and other obsolescence issues to support SBIRS High GEO satellites three and

four. As a result of the time elapsed between the acquisition of the SBIRS High GEO

satellites one and two and the planned acquisition of satellites three and four, some

significant redesign work is necessary. This gap has served to highlight an issue in the

allocation between research and development funding for constellations with a small number

of satellites. While the committee does not support incremental funding of satellite programs,

production or acquisition gaps in these small constellations, in certain limited circumstances

may dictate treatment of these later satellites as research and development satellites. This

problem is limited to constellations of no more than four satellites and occurs when

substantial nonrecurring costs are incurred.

The committee directs the Secretary of Defense to submit a report no later than August

1, 2007 outlining the budgetary and programmatic implications of utilizing Research and

Development funds for small constellations of satellites in limited circumstances, including

when such a funding approach might be appropriate. The committee also directs the

Secretary to address in the report alternative approaches and options to fund satellite

development and testing, including the establishment of a single Air Force budget line for

space research, development, and testing. (Page 230)

Congressional Research Service

Defense Procurement: Full Funding Policy

Appendix A. Prior-Year Legislative Activity

FY2007

FY2007 Defense Authorization Act (H.R. 5122/P.L. 109-364)

House

In its report (H.Rept. 109-452 of May 5, 2006) on H.R. 5122, the House Armed Services

Committee recommended approval of the Administration’s proposed use of split funding FY2007

and FY2008 for procuring the amphibious assault ship LHA-6, but did not recommend approval

of the Administration’s proposal to use split funding in FY2007 and FY2008 for procuring the

two lead DDG-1000 destroyers. The committee for FY2007 instead recommended full funding

for one DDG-1000, and design funding for a second. The committee also did not recommend

approval of the Administration’s request to use incremental funding for procuring F-22 aircraft.

Regarding shipbuilding programs, the committee’s report also states:

The budget request recommends incremental funding for 3 of the 7 ships in the request,

including for the first time construction of a surface combatant, the next-generation destroyer

DD(X). Furthermore, during the consideration of the National Defense Authorization Act for

Fiscal Year 2006 (P.L. 109-163), the Navy sought and was granted the authority to use

incremental funding for the next aircraft carrier [CVN-78], which will be recorded as

procured in 2008.

The committee remains concerned that the use of incremental funding is not a solution

to the Navy’s problem in funding shipbuilding. While incremental funding can allow the

Navy to smooth out the dramatic spikes in shipbuilding funding required as a result of

aircraft carrier construction every four or five years, it does not fundamentally increase the

number of ships that a given amount of money will purchase. During the committee’s

hearings on shipbuilding, all witnesses emphasized the importance of program and funding

stability as the top priority for reducing the cost of shipbuilding and sustaining the

shipbuilding industrial base. The committee notes that Congress adopted the full funding

policy in the 1950s in part because of a concern that incremental funding was detrimental to

funding stability. Future congresses may find themselves unwilling, or unable, to fund

completion of ships begun in prior years and only partially funded. The committee remains

convinced that the full funding policy is the correct policy for funding shipbuilding.

The committee understands that the Department of Defense this year considered

submission of a legislative proposal that would permanently authorize the use of “split

funding” for aircraft carriers and large deck amphibious ships, and the Navy’s fiscal year

2007 shipbuilding plan already assumes such authority for the second LHA class amphibious

assault ship. The committee has approved the use of split funding for certain ships in certain

cases. However, the committee does not believe that a blanket policy supporting incremental

funding for any class of ship is appropriate, and has not included such a provision in the bill.

(Pages 68-69)

Regarding the F-22 program, the committee’s report states:

Congressional Research Service

Defense Procurement: Full Funding Policy

The committee notes that the Fiscal Year 2007 budget request included $2 billion for the

Department of the Air Force’s F-22 aircraft program. However, despite the Fiscal Year 2006

projection for procurement of 29 F-22’s in Fiscal Year 2007, the funds requested for Fiscal

Year 2007 were for subassemblies and not aircraft. Rather than authorize incremental

funding for major aircraft programs, which Congress has not done in decades, the committee

recommends an additional $1.4 billion for the full funding for procurement of 20 F-22

aircraft. (Page 14)

The report also states:

The budget request contained $1.5 billion for the F-22 aircraft procurement program, but

included insufficient funds to procure 20 F-22 aircraft in fiscal year 2007....

The budget request included an F-22 multiyear acquisition strategy to procure 3 lots,

numbered as lots 7 through 9, each consisting of 20 aircraft, between fiscal years 2008 and

2010. As part of this strategy, the budget request included a plan to incrementally fund each

of these three lots over a three year period through budgeting for advance procurement two

years prior to full funding, subassembly activities to be budgeted one year prior to full

funding, and final assembly to be budgeted in the third year. The committee understands that

the Department of Defense’s F-22 multiyear acquisition strategy is inconsistent with the fullfunding policy which would allow for advance procurement of long-lead items to protect a

delivery schedule, and require a budget for procurement of complete and useable end items

in a fiscal year.

The committee considers the F-22 incremental funding acquisition strategy to be wholly

unacceptable. The committee believes that the full-funding policy should apply to the F-22

aircraft procurement program, and any other Department of Defense aircraft procurement

program contemplated in the foreseeable future. The committee further believes that

incremental funding of aircraft procurement programs presents an unacceptable budgeting

risk that, due to unforeseen circumstances, future funding increments may not be authorized

and appropriated to provide the required funding increments which would result in partially

completed end items that are of no military value to the Department of Defense or to

warfighting commands.

Therefore, the committee recommends $2.9 billion to fully fund and procure 20 F-22

aircraft in fiscal year 2007, an increase of $1.4 billion. The committee very strongly urges

the Department of Defense and the Department of the Air Force to restructure its future F-22

procurement budget plans to comply with the full-funding policy. (Page 105)

The report also commented on the use of incremental funding for military construction programs,

which are not procurement programs, but rather programs for building military bases and

facilities. Military construction programs are funded through a military construction

appropriations bill that is separate from the DOD appropriation bill, and consequently are not

subject to the full funding policy that covers items funded through the procurement title of the

DOD appropriation bill. Military construction programs have made regular use of incremental

funding. With regard to military construction programs, the report states:

The committee is troubled by the January 10, 2006, guidance from the Office of

Management and Budget to cease use of incremental funding of military construction

projects except for the purposes of base realignment and closure activities and projects that

have “major national security impacts.”

Due to the implementation of this guidance during the fiscal year 2007 budget process,

Department of Defense components were forced to cut a number of important projects from

Congressional Research Service

Defense Procurement: Full Funding Policy

the fiscal year 2007 program. As a result, several construction projects that are critical to

military readiness, important to the effective conduct of military operations, or necessary to

enhance quality of life have been indefinitely deferred. In at least one such case, incremental

execution would likely be the more efficient means of funding and constructing the project.

The committee notes that the Department has a record of effective management while

utilizing incremental funding for military construction projects. As such, the committee

recommends “re-incrementing” two projects contained in the budget request, including

recapitalization of hangar 5 at Naval Air Station Whidbey Island, Washington. While this

would result in a funding reduction in fiscal year 2007 of $31,153,000, the committee

recommends full authorization for the project of $57,653,000 and expects the Secretary of

the Navy to execute the project under proven incremental funding practices. (Page 431)

The report similarly states:

As noted [earlier in the report], the committee is troubled by the January 10, 2006,

guidance from the Office of Management and Budget to cease use of incremental funding of

military construction projects except for the purposes of base realignment and closure

activities and projects that have “major national security impacts.”

In light of the Department of Defense’s proven record of effective management while

utilizing incremental funding for military construction projects, the committee recommends

“re-incrementing” the project to replace a clinic at MacDill Air Force Base, Florida. While

this results in a funding reduction in fiscal year 2007 of $41,400,000, the committee

recommends full authorization for the project of $92,000,000 and expects the Secretary of

Defense to execute the project under proven incremental funding practices. (Page 434)

Senate

Section 121 of the Senate version of the FY2007 defense authorization bill (S. 2766 would

authorize the use of four-year incremental funding for procuring CVN-78 and future aircraft

carriers, rather than split funding (i.e., 2-year incremental funding) as proposed by the Navy.

Under 4-year incremental funding, the main portion of the procurement cost of CVN-78, for

example, would be divided into four increments that would be provided in FY2008, the ship’s

year of procurement, and the three following years.

Section 121 would also authorize the Navy to contract in FY2007 for the procurement long-lead

items for CVN-79 and CVN-80, aircraft carriers that the Navy plans to procure in FY2012 and

FY2016, respectively. This authority resembles an economic order quantity (EOQ) arrangement,

except that EOQs normally take place within the context of a multiyear procurement (MYP).

These ships have not been approved for MYP, and under past practice would not qualify for it

under the requirements set forth in the law governing MYP arrangements. MYP arrangements are

permitted to cover items to be procured over a period of up to five years, while the authority

granted under Section 121 would cover three ships that the Navy wants to procure over a period

of nine years (FY2008-FY2016).

Section 146 of the bill would prohibit the use of incremental funding for procuring F-22 aircraft.

(The section would also prohibit the Air Force from entering into a multiyear procurement (MYP)

contract for the program in FY2007.)

Congressional Research Service

Defense Procurement: Full Funding Policy

In its report (S.Rept. 109-254 of May 9, 2006) on S. 2766, the Senate Armed Services Committee

recommended approval of the Administration’s proposed use of split funding FY2007 and

FY2008 for procuring LHA-6 and the two lead DDG-1000s.

With regard to Section 121 on aircraft carriers, the report states:

The committee recommends a provision that would authorize the Secretary of the Navy

to incrementally fund procurement of CVN-21 class aircraft carriers over four year periods,

commencing with CVN-78 procurement in fiscal year 2008. The budget request included

$739.1 million in Shipbuilding and Conversion, Navy (SCN) for CVN-78 advance

procurement and $45.1 million in SCN for CVN-79 advance procurement. The provision

would also authorize advance procurement for CVN-80, commencing in fiscal year 2007.

In reviewing the budget request for fiscal year 2006, the committee received testimony

from the Navy and industry that the low rate of shipbuilding was driving higher costs, which

in turn further reduced shipbuilding rates, creating a downward spiral. The committee

believes that stable ship requirements, increased funding in the shipbuilding budget, and

increased flexibility for funding large capital ships are critical elements of any strategy to

reverse this trend.

The Secretary of the Navy’s fiscal year 2007 report to Congress on the long-range plan

for the construction of naval vessels identifies a requirement to procure the CVN-21 class

aircraft carriers at 4-year intervals, commencing in fiscal year 2008. The Navy originally

planned to procure the first CVN-21 class aircraft carrier, CVN-78, in fiscal year 2006. Since

then, the Navy has delayed procurement to 2008, which has delayed fielding this vital

capability, while significantly increasing the aircraft carrier’s procurement cost. The

committee believes that procuring and delivering the CVN-21 class aircraft carriers over 4year periods in accordance with the Navy’s long-range plan is vital to the National Defense

Strategy, and is vital to the affordability of these capital ships.

Elsewhere in this report, the committee has expressed concern with cost growth on the

CVN-77 program, and has urged the Navy and the shipbuilder to identify opportunities to

improve affordability of future aircraft carriers. Procurement delays, excess inflation, and

material escalation have been reported as significant contributors to CVN-77 cost growth.

The shipbuilder has proposed to achieve significant CVN-21 class program savings through

a stable procurement plan, and through procurement of economic order quantity material for

CVN-79 and CVN-80 in conjunction with CVN-78 procurement.

In view of the potential for significant program savings, the committee recommends an

increase of $50.0 million in SCN for CVN-21 class advance procurement, and directs the

Secretary of the Navy to review economic order quantity and long lead time material

procurement for the CVN-21 class. The Secretary is to submit a report to the congressional

defense committees with the fiscal year 2008 budget request, outlining the advance

procurement requirements to potentially optimize economic order quantity savings and

escalation avoidance (to include offsetting factors) for the first three vessels of the CVN-21

class. Of the amount authorized to be appropriated for advance procurement for CVN-79 and

CVN-80, none of the funds are available for obligation prior to 30 days following receipt of

the Secretary’s report. (Page 67)

With regard to Section 146’s prohibition of incremental funding for the F-22 program, the report

states:

The committee recommends a provision that would prohibit the Secretary of the Air

Force from using incremental funding for the procurement of F-22A aircraft. In the past, the

Congressional Research Service

Defense Procurement: Full Funding Policy

Congress has approved of incremental funding of certain space programs and a select

number of shipbuilding programs. Notwithstanding assertions to the contrary, authorizing

incremental funding for the F-22A would set a precedent for funding aircraft. The committee

sees no justification for setting such a precedent in the case of the F-22A, where the

Department of Defense has proposed incremental funding merely as a way of alleviating

cash flow pressures on the overall Department. (Page 94)

The report similarly states:

The budget request included $1,981.3 million in Aircraft Procurement, Air Force

(APAF) as part of an incremental funding strategy that would lead to a production profile of

20 aircraft per year for a three-year multiyear procurement of 60 aircraft, beginning in fiscal

year 2008. No complete F-22A aircraft were to be procured in fiscal year 2007....

The committee does not agree with the Department of Defense acquisition strategy to

incrementally fund the F-22A. The committee sees no justification for setting a precedent for

funding aircraft, as in the case of the F-22A, where the Department of Defense has proposed

incremental funding merely as a way of alleviating cash flow pressures on the overall

Department. (Pages 96-97)

Conference Report

Section 121 of the conference report on H.R. 5122 (H.Rept. 109-702 of September 29, 2006)

authorizes four-year incremental funding for the CVN-21 class aircraft carriers CVN-78, CVN79, and CVN-80. Section 124 authorizes the procurement of the first two DDG-1000 destroyers

in FY2007 using split funding in FY2007 and FY2008, as requested by the Navy. The section

states in part:

Congress that there is sufficient benefit to authorizing the one-time exception provided in

this section to the full funding policy in order to support the competitive procurement of the

follow-on ships of the DDG-1000 Next-Generation Destroyer program. However, it is the

expectation of Congress that the Secretary of the Navy will structure the DDG-1000 program

so that each ship, after the first two ships, is procured using the method of full funding in a

single year.

Section 134 prohibits the use of incremental funding for the procurement of F-22A fighter

aircraft.

With regard to funding of military construction projects, the conference report states:

The conferees note that, in a memo dated January 10, 2006, the Associate Director of

National Security Programs in the Office of Management and Budget (OMB) provided

guidance to the Under Secretary of Defense (Comptroller) and Chief Financial Officer about

requests for incremental funding of military construction projects. OMB has stated the intent

to limit incremental funding of military construction projects to an exceptional practice, as

intended by OMB Circular A—11. This guidance represents a change in policy for the

budgeting of certain military construction projects.

The conferees acknowledge that requesting full funding to ensure a military construction

project results in a complete and useable facility, or useable improvement to an existing

facility, should be the preferred practice consistent with law and current policy to ensure an

accurate accounting of all obligations incurred by the Federal Government. The conferees

Congressional Research Service

Defense Procurement: Full Funding Policy

also acknowledge that, for certain military construction projects estimated to exceed $50.0

million and where the construction period is planned to exceed 2 years, Congress has

supported the use of incremental funding to address the fact that not all military construction

funds appropriated by Congress for a project will be expended in the first year. In these

cases, the Department of Defense has had the option of requesting only those appropriated

amounts expected to be expended in the budget year, and notifying potential contractors that

the project’s completion is subject to subsequent appropriations. This option then allows the

Department to address additional military requirements in the military construction budget

request; and accelerating the completion of critical projects for military readiness, operations,

and service members’ quality of life. Because of the efficiencies gained by this method, the

conferees’ agreement includes the use of incremental funding not proposed in the budget

request for certain military construction projects.

The conferees also note that the Department has requested incremental funding for

single military construction projects that will construct multiple complete and useable

facilities. The conferees are concerned that this practice will encourage the bundling of

facility requirements into very large contracts, thereby curtailing contractor competition.

Therefore, the conferees encourage the Department to avoid the use of incremental funding

requests for projects with multiple complete and useable facilities, except in cases where

operational requirements dictate a compelling need for facilities. (Pages 929-930)

FY2007 Defense Appropriations Act (H.R. 5631/P.L. 109-289)

House

Section 8008 of H.R. 5631 as reported in the House states in part

That none of the funds provided in this Act may be used for a multiyear contract executed

after the date of the enactment of this Act unless in the case of any such contract—

(1) the Secretary of Defense has submitted to Congress a budget request for full funding

of units to be procured through the contract and, in the case of a contract for procurement of

aircraft, that includes, for any aircraft unit to be procured through the contract for which

procurement funds are requested in that budget request for production beyond advance

procurement activities in the fiscal year covered by the budget, full funding of procurement

of such unit in that fiscal year....

In its report (H.Rept. 109-504 of June 16, 2006) on H.R. 5631, the House Appropriations

Committee recommended approval of the Administration’s proposed use of split funding FY2007

and FY2008 for procuring the amphibious assault ship LHA-6, but did not recommend approval

of the Administration’s proposal to use split funding in FY2007 and FY2008 for procuring the

two lead DDG-1000 destroyers. The committee for FY2007 instead recommended full funding

for one DDG-1000. The committee also did not recommend approval of the Administration’s

request to use incremental funding for procuring F-22 aircraft. The committee’s report states:

For fiscal year 2007, the Committee faces several challenges in recommending

appropriations for the Department of Defense and the intelligence community. First, the

President’s budget proposes an unorthodox approach to funding two major procurement

programs, the F-22 fighter of the Air Force and the DD(X) destroyer of the Navy. In both

cases, the budget request includes incremental or partial funding, for these two programs. In

the case of the F-22, incremental funding is requested in the middle of the production run.

Congressional Research Service

Defense Procurement: Full Funding Policy

The use of incremental funding mortgages the future of the procurement budget of the

Defense Department in a manner that is not acceptable to the Committee. In addition, the

precedent of incremental funding for these programs could be applied to a variety of other

procurements, leading to a loss of budget transparency and reducing the ability to perform

oversight. Therefore, the recommendations in this bill include full funding for one DD(X)

destroyer and the F-22 fighter program.

Funding of $2,568,111,000 is recommended to complete full funding of one DD(X)

vessel. This is the same level as the funding request for this item, but under the President’s

budget these funds would have been allocated on an incremental basis against two ships. In

the case of the F-22, the Committee has added $1,400,000,000 to fully procure 20 additional

aircraft. In combination with the section 302(b) allocation for the Subcommittee on Defense,

which is $4,000,000,000 below the President’s request, this has necessitated difficult

tradeoffs within the budget for the Department of Defense generally and the Air Force

specifically. However, providing full funding for these programs this year avoids more

difficult choices in the years ahead. (Page 4)

Regarding the DD(X), the report states:

The Committee recommends $2,568,111,000 for the procurement of 1 DD(X) destroyer.

The budget requested $2,568,111,000 to incrementally fund 2 ships, with the balance of

funding to be provided in fiscal year 2008. The Committee cannot support such a farreaching policy change which has implications beyond the Navy’s shipbuilding program.

Further, the Navy’s proposal requires special legislative authority to be executed, and this

authority is not included in the House-passed National Defense Authorization Act, 2007

(H.R. 5122). (Page 139)

Regarding the F-22, the report states:

The budget request proposes to incrementally fund the F-22 fighter procurement

program. This proposal is contrary to the full funding requirement the Congress has required

for aircraft procurement programs. The Department of Defense presented the Committee

with essentially two options—agree to incremental funding, or find $1,400,000,000 in

savings from other programs to fully fund F-22 procurement. The Committee has chosen the

latter option and recommends an additional $1,400,000,000 for the procurement of 20 F-22

aircraft in fiscal year 2007. In making these changes and providing the additional funds, the

Committee is reiterating the long standing requirement for full funding of major weapon

system procurements. (Page 163)

Senate

In its report (S.Rept. 109-292 of July 25, 2006) on H.R. 5631, the Senate Appropriations

committee recommends rejecting the Air Force’s request to incrementally fund the next lot of F22 fighter aircraft, and approving the Navy’s request to incrementally fund the first two DDG1000 destroyers. Regarding the F-22 program, the report states:

The fiscal year 2007 budget requests $1,981,302,000 to begin incrementally funding the

next lot of F-22A aircraft. The Committee finds no compelling reason to ignore the full

funding policy and incrementally fund this program. Therefore, $1,400,000,000 was added to

the budget estimate to fully fund the proposed multiyear procurement of aircraft consistent

with the guidance in S. 2766, the National Defense Authorization Act for Fiscal Year 2007.

(Page 135)

Congressional Research Service

Defense Procurement: Full Funding Policy

Regarding the DDG-1000 program, the report states:

Consistent with the Senate-passed authorization bill and the Navy’s current acquisition

strategy, the Committee recommendation supports the budget request of $2,568,111,000 for

[incremental funding of the] dual lead ships. The Committee reminds the Navy that this is a

unique acquisition strategy and should not be used as a precedent for incrementally funding

any future DDG-1000 or any other shipbuilding program. (Page 115)

In addition, regarding the Navy’s Littoral Combat Ship (LCS), program, the report states:

With the fiscal year 2007 budget submission of $520,670,000 for the fifth and sixth LCS

flight 0 ships, the Navy revealed the LCS unit cost estimate used as a basis for last year’s

appropriation was exclusive of contract change orders, planning and engineering services,

program management support and other costs not included in the ship construction contract

... As a result, the Navy is unable to procure both the third and fourth LCS flight 0 ships

without the availability of additional funding. The Committee is troubled by this revelation

and recommends rescinding [in Section 8043] the insufficient fiscal year 2006 funds

currently allocated to the fourth LCS flight 0 vessel.

The Committee is further troubled by reports that the first two LCS flight 0 ships under

construction are exceeding their cost as previously budgeted.... As a result, the Committee

believes the fiscal year 2007 budget request is insufficient to procure two ships and

recommends $300,670,000 to fully fund procurement of one LCS seaframe, which is a

reduction of $220,000,000 and one seaframe from the request. The Committee notes that this

recommendation puts the Navy on its previously established path of procuring four LCS

flight 0 ships by the end of fiscal year 2007. (Pages 115-116)

Conference Report

Section 8008 of the conference report on H.R. 5631 (H.Rept. 109-676 of September 25, 2006)

states in part that

That none of the funds provided in this Act may be used for a multiyear contract executed

after the date of the enactment of this Act unless in the case of any such contract—

(1) the Secretary of Defense has submitted to Congress a budget request for full funding

of units to be procured through the contract and, in the case of a contract for procurement of

aircraft, that includes, for any aircraft unit to be procured through the contract for which

procurement funds are requested in that budget request for production beyond advance

procurement activities in the fiscal year covered by the budget, full funding of procurement

of such unit in that fiscal year;...

The conference report approves the Navy’s request for the initial (FY2007) increment of

procurement funding for the LHA(R) amphibious assault ship, which the Navy wants to procure

in FY2007 using split funding in FY2007 and FY2008. The conference report approves the

Navy’s request for the initial (FY2007) increment of procurement funding for the first two DDG1000 destroyers, which the Navy wants to procure in FY2007 using split funding in FY2007 and

FY2008. The report states:

The conferees agree to provide $2,568,111,000 for the DDG-1000 (formerly DDX)

Destroyer Program, and agree to delete language proposed by the House requiring full

funding of a single lead ship. The effect of the conference agreement would allow the Navy

to split fund twin lead ships of the DDG-1000 class, if authorized in separate legislation by

Congressional Research Service

Defense Procurement: Full Funding Policy

the Congress. This action is being taken based upon the expectation that the total cost of

these two ships is well understood and low risk. The conferees are willing to make this onetime exception to the full funding principle because of the unique situation with the

shipbuilding industrial base and with the DDG—1000 program. The conferees will not

entertain future requests to fund ships other than under the full funding principle, except for

those historically funded in this manner (aircraft carriers and some large deck amphibious

ships).

The unusual procurement of twin lead ships raises the risk that future design changes or

production problems will impact two ships under construction simultaneously. This could

raise costs significantly compared to other lead ship programs. However, the Navy believes

the cost and schedule risk in the DDG-1000 program is low enough to permit the twin lead

ship acquisition strategy. The Navy has identified the total cost to procure the twin lead ships

of the DDG—1000 class as $6,582,200,000. The conferees insist that the Navy manage this

program within that total cost, and will be unlikely to increase funding through a

reprogramming or an additional budget request except in the case of emergency, natural

disaster, or other impact arising from outside the Navy’s shipbuilding program. (Page 180)

FY2006

FY2006 Defense Authorization Act (H.R. 1815/P.L. 109-163)

House

In its report (H.Rept. 109-89 of May 20, 2005) on the FY2006 defense authorization bill (H.R.

1815), the House Armed Services Committee states:

[Chief of Naval Operations] Admiral [Vernon] Clark, in his posture statement before the

House Committee on Appropriations, Subcommittee on Defense stated, “We need to partner

with Congress and industry to regain our buying power. Acquisition and budget reforms,

such as multi-year procurement, economic order quantity, and other approaches help to

stabilize the production path, and in our view, reduce the per unit cost of ships and increase

our shipbuilding rate.” The committee does not agree that creative financing methodologies

that delay recognizing the true cost of shipbuilding or that provide ever-increasing amounts

of funding to cover the explosion in ship costs are responsible actions. Incremental funding,

advanced procurement, multiyear procurement, and various creative shipyard work

allocation arrangements have failed to control the cost growth of vessel classes such as the

Virginia class submarine, the replacement amphibious assault ship (LHA(R)), the future

major surface combatant ship (DD(X)), and the future aircraft carrier CVN-21. (Page 63)

Section 1004 of the bill as reported by the committee states:

SEC. 1004. REPORTS ON FEASIBILITY AND DESIRABILITY OF CAPITAL

BUDGETING FOR MAJOR DEFENSE ACQUISITION PROGRAMS.

(a) Capital Budgeting Defined- For the purposes of this section, the term ‘capital budgeting’

means a budget process that—

(1) identifies large capital outlays that are expected to be made in future years, together

with identification of the proposed means to finance those outlays and the expected benefits

of those outlays;

Congressional Research Service

Defense Procurement: Full Funding Policy

(2) separately identifies revenues and outlays for capital assets from revenues and

outlays for an operating budget;

(3) allows for the issue of long-term debt to finance capital investments; and

(4) provides the budget authority for acquiring a capital asset over several fiscal years

(rather than in a single fiscal year at the beginning of such acquisition).

(b) Reports Required- Not later than July 1, 2006, the Secretary of Defense and the Secretary

of each military department shall each submit to Congress a report analyzing the feasibility

and desirability of using a capital budgeting system for the financing of major defense

acquisition programs. Each such report shall address the following matters:

(1) The potential long-term effect on the defense industrial base of the United States of

continuing with the current full up-front funding system for major defense acquisition

programs.

(2) Whether use of a capital budgeting system could create a more effective

decisionmaking process for long-term investments in major defense acquisition programs.

(3) The manner in which a capital budgeting system for major defense acquisition

programs would affect the budget planning and formulation process of the military

departments.

(4) The types of financial mechanisms that would be needed to provide funds for such a

capital budgeting system.

Senate

Section 122 of the Senate version of the FY2006 defense authorization bill (S. 1042) as reported

by the Senate Armed Services Committee (S.Rept. 109-69 of May 17, 2005) would permit the

aircraft carrier CVN-78 to be procured with split funding (i.e., incremental funding) during the

period FY2007-FY2010. The section states:

SEC. 122. SPLIT FUNDING AUTHORIZATION FOR CVN-78 AIRCRAFT CARRIER.

(a) AUTHORITY TO USE SPLIT FUNDING- The Secretary of the Navy is authorized to

fund the detail design and construction of the aircraft carrier designated CVN-78 using split

funding in the Shipbuilding and Conversion, Navy account in fiscal years 2007, 2008, 2009,

and 2010.

(b) CONDITION FOR OUT-YEAR CONTRACT PAYMENTS- A contract entered into for

the detail design and construction of the aircraft carrier designated CVN-78 shall provide that

any obligation of the United States to make a payment under the contract for a fiscal year

after fiscal year 2006 is subject to the availability of appropriations for such fiscal year.29

For more on the CVN-21 program, see CRS Report RS20643, Navy Ford (CVN-78) Class Aircraft Carrier Program:

Background and Issues for Congress, by (name redacted), Navy CVN-21 Aircraft Carrier Program: Background and

Issues for Congress, by Ronald O’Rourke.

Congressional Research Service

Defense Procurement: Full Funding Policy

Section 123 of the bill would permit an amphibious assault ship LHA(R) to be procured with split

funding (i.e., incremental funding) in FY2007 and FY2008. The section would also permit

FY2006 funding to be used for advance construction of the ship. The section states:

SEC. 123. LHA REPLACEMENT (LHA(R)) SHIP.

(a) AMOUNT AUTHORIZED FROM SCN ACCOUNT FOR FISCAL YEAR 2006- Of the

amount authorized to be appropriated by section 102(a)(3) for fiscal year 2006 for

shipbuilding and conversion, Navy, $325,447,000 shall be available for design, advance

procurement, and advance construction with respect to the LHA Replacement (LHA(R))

ship.

(b) AMOUNTS AUTHORIZED FROM SCN ACCOUNT FOR FISCAL YEARS 2007

AND 2008- Amounts authorized to be appropriated for fiscal years 2007 and 2008 for

shipbuilding and conversion, Navy, shall be available for construction with respect to the

LHA Replacement ship.

(c) CONTRACT AUTHORITY(1) DESIGN, ADVANCE PROCUREMENT, AND ADVANCE CONSTRUCTIONThe Secretary of the Navy may enter into a contract during fiscal year 2006 for design,

advance procurement, and advance construction with respect to the LHA Replacement ship.

(2) DETAIL DESIGN AND CONSTRUCTION- The Secretary may enter into a

contract during fiscal year 2007 for the detail design and construction of the LHA

Replacement ship.

(d) CONDITION FOR OUT-YEAR CONTRACT PAYMENTS- A contract entered into

under subsection (c) shall provide that any obligation of the United States to make a payment

under the contract for a fiscal year after fiscal year 2006 is subject to the availability of

appropriations for that purpose for such fiscal year.30

S.Rept. 109-69 states:

The CVN-78 will be a new class of aircraft carrier, incorporating numerous new

technologies. This budget request reflects the second one-year slip in the program in recent

years. This slip would cause a delay in the delivery of the CVN-78 until fiscal year 2015,

with the ship it is scheduled to replace, the USS Enterprise (CVN-65), scheduled to be

decommissioned in fiscal year 2013. Additionally, this slip translates into a cost growth for

CVN-78 of approximately $400.0 million, according to the Navy.

The committee is concerned about this delay. The committee has been told there is no

technical reason for the delay, but that the delay was driven by budget considerations. Both

the Secretary of the Navy and the Chief of Naval operations testified that large capital assets

such as aircraft carriers are difficult to fund under the traditional full-funding policy, and that

more flexible methods of funding must be found and used. The program of record for CVN78 has the detail design and construction funding split between two years. This provision

would authorize that same funding to be split over four years, thereby allowing needed

funding flexibility. The committee directs the Navy to provide an updated funding profile,

For more on the LHA(RE) program, see CRS Report RL32513, Navy-Marine Corps Amphibious and Maritime

Prepositioning Ship Programs: Background and Oversight Issues for Congress, by Ronald O’Rourke.

Congressional Research Service

Defense Procurement: Full Funding Policy

fully funding the remaining costs of the ship from fiscal years 2007 through 2010, with

delivery of the fiscal year 2007 budget request.

FY2006 Defense Appropriations Act (H.R. 2863/P.L. 109-148)

House

In its report (H.Rept. 109-119 of June 10, 2005) on H.R. 2863, the House Appropriations

Committee stated, in the section on Navy shipbuilding, that it “supports the LHA(R) [amphibious

assault ship] program, and it directs the Navy to reconsider its proposal to request split funding

for LHA(R) over the FY2007-08 timeframe, and instead follow the full funding principle for this

ship class, to ensure an adequate budget is in hand before contract award.” (Page 146)

In the section on Air Force aircraft procurement, the report stated:

The budget request includes $152,400,000 for procurement of long lead items to support

the low rate initial production of five conventional take-off and landing variants of the Joint

Strike Fighter. The Committee notes that under the revised aircraft build sequence all of

these aircraft do not require full funding prior to the beginning of fiscal year 2008.

Accordingly, a request to begin advance procurement of long lead items two years prior, in

fiscal year 2006, is funding early to need and contrary to a conventional aircraft procurement

strategy. Advance procurement funds should be requested in the Air Force’s fiscal year 2007

budget submission. Full funding for these five aircraft should be requested in the fiscal year

2008 budget. (Page 172)

Senate

In its report (S.Rept. 109-141 of September 29, 2005), the Senate Appropriations Committee

stated, in a section relating to Navy shipbuilding:

For fiscal year 2006, the Committee recommends providing the Navy additional

reprogramming authority. This authority allows the Navy, through above threshold

reprogramming procedures, to increase funding for programs experiencing unforeseen

shortfalls. The Committee understands that in fiscal year 2005 after exhausting the

$100,000,000 of the transfer authority the Congress provided, the Navy sought to use dollars

specifically appropriated for outfitting and post delivery [of completed ships] to address

[ship-construction] funding shortfalls. The Committee is concerned about this change in

Navy policy as it will only further obscure actual program costs. The new reprogramming

authority is provided only with the understanding that this change will not be implemented in

the future.

The additional reprogramming authority essentially provides the Navy a reactive

mechanism or approach to cost management. The Committee believes the situation requires

more proactive program, budgetary and contract management and encourages the

Department of Defense to consider whether using advance appropriations in future budgets

will improve the shipbuilding program. (page 126)

The committee also stated:

The fiscal year 2006 President’s budget requests $225,427,000 for [the]DDG-51 [destroyer

program] for what the Navy describes as “program completion requirements and shutdown

costs.” These funds are requested for a mix of Class and ship specific plan, basic

Congressional Research Service

Defense Procurement: Full Funding Policy

construction, ordnance, certification, and inspection costs. Such costs are traditionally

included in the budget request for each ship. However, when signing the multiyear contract

for the construction of the final DDGs of the Class, the Department decided to change its

policy and budget for these costs after the last ship was appropriated. The Committee finds

this decision troubling. First, budgeting for such costs after procurement of the last vessel

obscures the actual cost to procure each ship and overstates savings attributable to the

multiyear contract authority under which these ships were purchased. The Congress

approved the Navy’s request for multiyear procurement authority in fiscal year 2002

assuming a level of savings to the taxpayer that are now not being realized. Most

disconcerting about this change in policy and resultant budget request is the Navy’s assertion

that if these costs are not funded, the Navy will not be able to meet its contractual obligations

and the Chief of Naval Operations will not be able to accept delivery of these ships. The

Committee is alarmed that the Navy would knowingly sign a multibillion dollar contract for

ships that would be both non-operational and undeliverable unless additional dollars, outside

the contract, were provided. The Committee directs the Secretary of the Navy to provide a

detailed report of all the costs required to complete each of the remaining 11 ships and a

rationale for such a contractual arrangement by December 1, 2005. Until sufficient

explanation is provided, the Committee recommends only providing funds for plans and

those costs directly attributable to ships scheduled to deliver in the near-term. As such the

Committee recommends reducing the budget request by $195,654,000. (Page 127)

Concurrent Resolution on FY2006 Budget (H.Con.Res. 95)

Conference Report

The conference report (H.Rept. 109-62 of April 28, 2005) on H.Con.Res. 95, the budget

resolution for FY2006, states:

The conference conferees understand the Navy may review whether advance

appropriations can improve its procurement of ships and provide savings as it designs its

2007 budget. In addition, the conferees intend to request the Government Accountability

Office [GAO] to assess the implications of using advance appropriations to procure ships.

The report notes that

Section 401 [of H.Con.Res. 95] reflects an overall limit on advance appropriations of

$23.158 billion in fiscal year 2007, which is the same limit on advance appropriations as has

been included in all previous limitations on advance appropriations in past budget

resolutions.

The report includes the Shipbuilding and Conversion, Navy (SCN) appropriation account in the

list of accounts identified for advance appropriations in the Senate.

S.Amdt. 146 to S.Con.Res. 18

S.Con.Res. 18 is the earlier Senate version of the budget resolution. Senate Amendment (S.Amdt.

146) to S.Con.Res. 18 was sponsored by Senator Warner, co-sponsored by several other members,

and submitted on March 15, 2005. It would amend Section 401 of S.Con.Res. 18—the section

that restricts use of advance appropriations—to increase the amount of advance appropriations in

FY2007 and FY2008 by $14 billion, to $37.393 billion. The amendment would also insert a new

provision (Section 409) that would include the Shipbuilding and Conversion, Navy (SCN)

Congressional Research Service

Defense Procurement: Full Funding Policy

appropriation account on a list of accounts identified for advance appropriations in the joint

explanatory statement of the managers to accompany S.Con.Res. 18. The amendment was

ordered to lie on the table. The Senate passed S.Con.Res. 18 on March 17, 2005.31

FY2005

FY2005 Defense Authorization Act (H.R. 4200/P.L. 108-375)

House

In marking up H.R. 4200, the House Armed Services Committee included a provision (Section

804) that, as stated in the committee’s report on the bill (H.Rept. 108-491 of May 14, 2004, page

346), “would amend section 2306b(g) and section 2306c(d) of title 10, United States Code

[provisions relating to DOD multiyear procurement contracts], to require the head of the agency

concerned to provide written notification, to the congressional defense committees, in those

instances when cancellation costs that are above $100 million are not fully funded. The written

notification would include a financial risk assessment for not fully funding the cancellation

ceiling.” The section stated:

SEC. 804. FUNDING FOR CONTRACT CEILINGS FOR CERTAIN MULTIYEAR

PROCUREMENT CONTRACTS.

(a) MULTIYEAR CONTRACTS RELATING TO PROPERTY- Section 2306b(g) of title

10, United States Code, is amended—

(1) by inserting ‘(1)’ before ‘Before any’;

(2) by striking ‘Committee’ through ‘House of Representatives’ and inserting ‘congressional

defense committees’; and

(3) by adding at the end the following new paragraph:

‘(2) In the case of a contract described in subsection (a) with a cancellation ceiling described

in paragraph (1), if the budget for the contract does not include proposed funding for the

costs of contract cancellation up to the cancellation ceiling established in the contract, the

head of the agency concerned shall, as part of the certification required by subsection

(i)(1)(A), give written notification to the congressional defense committees of—

‘(A) the cancellation ceiling amounts planned for each program year in the proposed

multiyear procurement contract, together with the reasons for the amounts planned;

‘(B) the extent to which costs of contract cancellation are not included in the budget for the

contract; and

For additional discussion, see “Collins, Warner Team To Fund Shipbuilding,” Defense Today, March 17, 2005; and

Christopher J. Castelli, “Warner Amendment On Advance Appropriations For Ships Is Withdrawn,” Inside the Navy,

March 21, 2005.

Congressional Research Service

Defense Procurement: Full Funding Policy

‘(C) a financial risk assessment of not including budgeting for costs of contract cancellation,

including proposed funding sources to meet such cancellation costs if the contract is

canceled.’

(b) MULTIYEAR CONTRACTS RELATING TO SERVICES- Section 2306c(d) of title 10,

United States Code, is amended—

(1) in paragraphs (1), (3), and (4), by striking ‘committees of Congress named in paragraph

(5)’ and inserting ‘congressional defense committees’ each place it appears; and

(2) by amending paragraph (5) to read as follows:

‘(5) In the case of a contract described in subsection (a) with a cancellation ceiling described

in paragraph (4), if the budget for the contract does not include proposed funding for the

costs of contract cancellation up to the cancellation ceiling established in the contract, the

head of the agency concerned shall give written notification to the congressional defense

committees of—

‘(A) the cancellation ceiling amounts planned for each program year in the proposed

multiyear procurement contract, together with the reasons for the amounts planned;

‘(B) the extent to which costs of contract cancellation are not included in the budget for the

contract; and

‘(C) a financial risk assessment of not including budgeting for costs of contract cancellation,

including proposed funding sources to meet such cancellation costs if the contract is

canceled.’

Senate

In its report (S.Rept. 108-260 of May 11, 2004) on the FY2005 defense authorization bill (S.

2400), the Senate Armed Services Committee stated:

The Future Years Defense Program submitted with the budget request included full funding

for the first LHA(R)-class amphibious assault ship in fiscal year 2008. The committee

understands that acceleration of this ship, by providing the first increment of SCN funding in

fiscal year 2005, would reduce the cost of this ship by $150.0 million. The Chief of Naval

Operations and the Commandant of the Marine Corps have included this acceleration on

their Unfunded Priority Lists. Therefore, the committee recommends an increase of $150.0

million for advance procurement and advance construction of components for the first

amphibious assault ship of the LHA(R)-class. (page 74)

The report also stated:

To ease the [F-22 fighter] production backlog, while maintaining the production rate at that

established for the fiscal year 2004 contract, the committee recommends a decrease in APAF

of $280.2 million, for a total authorization of $3.4 billion for the procurement of at least 22

F/A-22 aircraft in fiscal year 2005. The committee is aware that the Department of Defense

has approved the F/A-22 program as a “buy to budget” program. If the authorized level of

funding is sufficient to procure more than 22 aircraft, the Air Force may do so after the

Secretary of the Air Force provides a letter to the Committees on Armed Services of the

Senate and the House of Representatives certifying that the contractor is delivering aircraft

within the contractual delivery schedule, and that the program is fully funded to include

initial spares, logistics, and training requirements. (page 106)

Congressional Research Service

Defense Procurement: Full Funding Policy

FY2005 Defense Appropriations Act (H.R. 4613/P.L. 108-287)

House

Section 8008 of H.R. 4613 as reported by the House Appropriations Committee granted

permission for multiyear procurement programs, with the following provision, among others:

Provided further, That none of the funds provided in this Act may be used for a multiyear

contract executed after the date of the enactment of this Act unless in the case of any such

contract—

(1) the Secretary of Defense has submitted to Congress a budget request for full funding of

units to be procured through the contract;

(2) cancellation provisions in the contract do not include consideration of recurring

manufacturing costs of the contractor associated with the production of unfunded units to be

delivered under the contract;

(3) the contract provides that payments to the contractor under the contract shall not be made

in advance of incurred costs on funded units; and

(4) the contract does not provide for a price adjustment based on a failure to award a followon contract.32

The Aircraft Procurement, Air Force, paragraph of the bill made funds available for the

procurement of Air Force aircraft and related purposes, with the following provisions:

Provided, That amounts provided under this heading shall be used for the procurement of 15

C-17 aircraft: Provided further, That amounts provided under this heading shall be used for

the advance procurement of not less than 15 C-17 aircraft: Provided further, That the

Secretary of the Air Force shall fully fund the procurement of not less than 15 C-17 aircraft

in fiscal year 2006.33

In its report (H.Rept. 108-553 of June 18, 2004) on H.R. 4613, the House Appropriations

Committee stated, at the beginning of its discussion of procurement programs:

In the Aircraft Procurement, Air Force section of this report the Committee discusses

how the Air Force ignored the law and the express intent of Congress by using the current

multiyear contract for the C-17 aircraft as a vehicle to support an incremental funding

strategy. In so doing, it also has inappropriately committed the government to potential AntiDeficiency Act violations and unfunded liability costs running in the hundreds of millions of

dollars in the event a follow-on contract for this program is not entered into by a date certain,

or if certain production levels are not agreed to.

Regrettably, the Committee has learned the Air Force has also entered into a similar

multiyear contract for the C-130J aircraft. The current production profile includes three

aircraft whose manufacture has been approved in the absence of a fully funded appropriation

for this purpose. In addition, in this contract the contractor has received a commitment on

Italics as in the original.

Congressional Research Service

Defense Procurement: Full Funding Policy

behalf of the government by the Air Force that the annual production rate will be sustained at

16 aircraft from 2007 through 2009, between Air Force, Navy, and Marine Corps purchases

and potential foreign sales. Failure to achieve this rate will significantly increase the cost per

plane to the Air Force, representing a contingent liability the government is obliged to pay.

At present, current projections suggest this rate will not be met, with shortfalls of 4 aircraft

each in 2007 and 2008 and 6 aircraft in 2009. If these projections hold, the Air Force and the

taxpayer will foot the bill. In effect, the Air Force has permitted itself to become a de facto

sales agent for this program, putting it in a position to insist that other elements of the

Department of Defense and the Congress help it find a way to fund this production profile or

pay significant penalties.

The Committee realizes that properly administered multiyear procurements can result in

significant savings. However, the multiple abuses of sound contracting principles and fiscal

responsibility by the Air Force in these instances cannot and will not become a model for

future multiyear acquisitions. Accordingly, the Committee has recommended several

modifications to section 8008 of this bill, and the Committee directs these requirements be

met before future multiyear production contracts can be entered into:

(1) Multiyear contracts must follow full funding policies and not be used as vehicles for

incrementally funding procurement;

(2) Contract cancellation ceilings may not include recurring manufacturing costs of

unfunded units;

(3) Contract payments may not be made in advance of projected manufacturing costs (to

include purchase of materials) for funded units;

(4) Advance procurement funds may not be used to pay the costs of normal fabrication

and assembly of unit components. The use of these funds should be restricted to long-lead

items, economic-order quantity buys, and the one-time non-recurring costs of improving

manufacturing capabilities;

(5) Advance procurement funds are limited to no more than 10 percent of total

procurement costs; and

(6) Regular procurement funds for units should be requested for the appropriate fiscal

year to be obligated to pay for normal fabrication and assembly of funded units and

components.

The Committee also takes exception to the Air Force’s use of a unique provision in the

current C-17 multiyear contract that allows the contractor to add charges to the fixed price

contract if a follow-on contract is not awarded. The amended general provision further

directs that no new multiyear contracts provide for such a price adjustment. (pages 105-107)

In the section of the report concerning the C-17 program in particular, the report stated:

The Committee is extremely displeased by the Air Force’s continued use of a flawed and

irresponsible financial strategy for the C-17 multiyear procurement contract. In fiscal year

2003, the Air Force proposed a budget request it referred to as “transformational”. The

Committee, however, saw it for what it was—an incremental financing scheme that abused

the political support for this program and flaunted acquisition regulations and standard

practices. In that year, the Congress provided full funding for all 15 aircraft, and directed the

Air Force to fully fund the same number in fiscal year 2004.

Congressional Research Service

Defense Procurement: Full Funding Policy

Unfortunately, for fiscal year 2004 and now with the fiscal year 2005 Defense budget

request, the Air Force has continued its financial sleight-of-hand on the C-17 program. Based

on a recently concluded investigation by the Committee’s Surveys and Investigations staff,

the Committee learned the Air Force is using a combination of advance procurement funding

and exorbitant cancellation ceilings to keep the contractor to a production schedule which

has as many as 5 aircraft at any given time in the production line for which funds have not

been appropriated. Not once in the past has the Committee indicated its approval for using

advance procurement funding to proceed with production of aircraft for which full

appropriations have not been approved. Nor is the Committee aware of any change in

Department of Defense (DOD) fiscal policy or regulations that would permit this. As both

DOD and Office of Management and Budget financial officials put it to Committee

investigators, the Air Force had “pushed the envelope.” And, in the Committee’s view, the

‘envelope’ has been pushed too far.

Moreover, the Air Force also included a provision in the second C-17 multiyear

procurement contract that assumes additional funding for aircraft will be approved following

the end of the contract. Otherwise, the Department will be liable to pay the contractor

significant termination costs. This contingent liability places a burden not just on the current

Congress, but on the next Congress as well, and could be interpreted as a violation of the

Anti-Deficiency Act.

In order to prevent such future financial chicanery on the part of the Air Force or any

other military service, the Committee includes a new general provision that significantly

amends authority carried in past Defense Appropriations acts regarding multiyear

procurement contracts. This provision is discussed elsewhere in this report. With regard to

the current funding shortfall in fiscal year 2005, the Committee has added an additional

$158,600,000 and one aircraft. Bill language is also included in the Aircraft Procurement

paragraph directing that funds provided are for the procurement of 15 aircraft in fiscal year

2005, that advance procurement funds are provided for the procurement of 15 aircraft in

fiscal year 2006, and that the Secretary of the Air Force shall fully fund the procurement of

15 aircraft in fiscal year 2006. In placing this requirement upon the Air Force, the Committee

would note the commitment of the Secretary of the Air Force, during a public hearing on this

matter, to work with the Committee to “set it right”. The Committee anticipates that the

Secretary will do just that. (page 192)

In a follow-on section concerning interim contractor support (ICS) for the C-17 fleet, the report

stated:

In the preceding part of this report, the Committee expresses its displeasure with the

funding strategy the Air Force has employed to execute the C-17 program. That strategy has

resulted in an incremental funding scheme for the C-17 that the Committee finds

unacceptable. In order to fully fund 15 aircraft in fiscal year 2005, the budget request must

be amended to provide for one additional aircraft and $158,600,000. Therefore, the

Committee provides increased funding for one additional C-17 in fiscal year 2005, and

reduced funding in this account by a like amount.

The Committee finds it puzzling that the Air Force refuses to fully fund aircraft in

production, yet the fiscal year 2005 request for C-17 ICS includes funding of $176,000,000

in new capability block upgrades and improvements to the existing fleet. In budget

justification materials, the Air Force identifies $114,000,000 of this amount as needed to

address unfunded requirements. The Committee wishes to send a very clear message—it

considers full funding of the aircraft in production to be this program’s number one unfunded

requirement. Once the Air Force understands this message and provides the resources needed

to bring this program in line with a traditional, fully funded procurement program, the

Congressional Research Service

Defense Procurement: Full Funding Policy

Committee will entertain any funding requests for new capability to the existing fleet. (page

193)

In its discussion of the Army’s proposal for funding the construction a theater support vessel

(TSV) through the Army’s research and development account, the report stated:

Fiscal year 2005 is the first year in which funding has been requested to construct such a

vessel. The Committee notes that the total cost of this vessel is approximately $141,600,000,

and the Army had planned to incrementally fund its construction over the course of fiscal

years 2005 through 2007. The Committee firmly believes that the Department should fully

fund major investment items and accordingly has added sufficient funding in the fiscal year

2005 bill to complete this vessel. (pages 254-255; see also page 249)

The committee in the above passage is applying the traditional full funding policy to this vessel

even though it is being acquired through the Army’s research and development account, which

falls outside the procurement title of the DOD appropriations act.

In its discussion of the Navy’s proposal for funding the construction of the lead Littoral Combat

Ship (LCS) through the Navy’s research and development account, the report stated:

The Committee recommendation includes increasing the budget request for the construction

of the first Flight 0 LCS by $107,000,000, fully funding this construction effort at

$214,000,000. The fiscal year 2005 request included only $107,000,000 for the first

increment of the LCS construction. Budget documentation indicates the Navy plans to

request an additional $107,000,000 for the second and final increment for the first ship in

fiscal year 2006. The Committee strongly opposes incremental funding of ship construction

and therefore has provided a total of $214,000,000 in 2005 for construction of the first LCS,

fully funding the construction requirement in one year. (page 288-289; see also page 274)

The committee in the above passage is applying the traditional full funding policy to this ship

even though it is being acquired through the Navy’s research and development account, which

falls outside the procurement title of the DOD appropriations act.

In its discussion of the Navy’s newest plan for procuring a new amphibious assault ship known as

the LHA(R), or more simply as LHA, in FY2008, the report stated that

the Navy’s new plan presumes designing a ship that would alter the amphibious nature of the

LHA, and then, proposing an incrementally funded construction program.... Should the Navy

and Marine Corps determine that the re-structure of the LHA(R) program is the way ahead

for the future, a fully funded program for design and construction of a ship to meet this

requirement should be included in a future budget request. The Committee will not support a

proposal which suggests that construction be incrementally funded. (page 289)

In its discussion of the Navy’s plan to fund the construction of a planned new class of ships

known as Maritime Prepositioning Force (Future) (MPF[F]) ships through the National Defense

Sealift Fund (NDSF) starting in FY2007, the report stated:

Budget documentation provided to Congress in support of the fiscal year 2005 budget

request provided no information detailing how the MPF(F) funds were to be spent. The only

information provided states that lead hull construction costs are to be incrementally funded

beginning in fiscal year 2007. Requests for additional information yielded no detail of the

planned expenditures due to a not yet completed study by the Center for Naval Analysis. The

Committee notes that while detail was not provided to Congress, the trade press was

Congressional Research Service

Defense Procurement: Full Funding Policy

provided some information and printed articles quoting senior Navy officials on plans for the

possible construction of a fleet of MPF(F) ships.

The Committee believes the Navy must provide sufficient justification of its requests for

appropriated funds. While the Committee appreciates that the timing inherent in the budget

process does not always favor rapid transition to new ideas, it is not reasonable to request

Congress provide funds for a program with no justification except that which is printed in the

trade press. Furthermore, the Navy is well aware of the Committee’s views with respect to

incremental funding of programs. The Committee finds little humor in being asked to fund

an unjustified request of nearly $100 million, for what is intended upon its maturation to

become an incrementally funded program. (page 352)

The committee in the above passage is suggesting that it will prefer to apply the traditional full

funding policy to these ships even though they are to be acquired through the NDSF, which falls

outside the procurement title of the DOD appropriations act.

Senate

In its report (S.Rept. 108-284 of June 24, 2004) on the FY2005 defense appropriations bill (S.

2559), the Senate Appropriations Committee stated:

The Committee supports the budget request for the Littoral Combat Ship [LCS] and consents

to the Navy’s request to fund construction of the first prototype ship for each of two ship

designs in the Research and Development, Navy account. Approval for funding LCS in the

research and development account is strictly based on the acknowledgement of the

prototypical nature and high level of technical risk inherent in this program. The Committee

finds LCS to be unique and unlike any other shipbuilding program the Navy has previously

pursued; and therefore, grants the Navy’s request for the increased flexibility that funding

within the research and development account affords. However, the Committee directs that

all follow-on ships beyond one prototype for each LCS ship design be fully funded in the

Shipbuilding and Conversion, Navy account. (Pages 156-157)

Conference Report

The conference report (H.Rept. 108-622 of July 20, 2004) on H.R. 4613 contained bill language

in the Aircraft Procurement, Air Force section stating that

That amounts provided under this heading shall be used for the procurement of 15 C-17

aircraft: Provided further, That amounts provided under this heading shall be used for the

advance procurement of not less than 15 C-17 aircraft: Provided further, That the Secretary

of the Air Force shall fully fund the procurement of not less than 15 C-17 aircraft in fiscal

year 2006: Provided further, That the Secretary of the Air Force shall allocate a reduction of

$158,600,000 proportionately to each budget activity, activity group, subactivity group, and

each program, project, and activity funded by this appropriation. (Page 13)

The conference report stated:

The conferees have provided an additional $158,600,000 in funding for the procurement

of 15 C-17s in fiscal year 2005. Language has also been included in “Aircraft Procurement,

Air Force” requiring the Air Force to procure 15 aircraft in fiscal year 2005; provide advance

procurement for 15 aircraft in 2006; and to fully fund 15 aircraft in fiscal year 2006. The

conferees agree with the House language regarding the Air Force interpretation of multiyear

Congressional Research Service

Defense Procurement: Full Funding Policy

procurement regulations in this and the C-130J program. The conference report includes a

general provision [Section 8008] amending multiyear procurement contract requirements

proposed in the House bill to prevent this approach in the future.

A general reduction in funding for Aircraft Procurement, Air Force, has been included

accordingly with a requirement that the reduction be applied equitably across all elements of

this appropriation. (Page 215)

Section 8008—the usual section in the DOD appropriations bill that grants authority for multiyear

procurement contracts—stated in part

That none of the funds provided in this Act may be used for a multiyear contract executed

after the date of the enactment of this Act unless in the case of any such contract—

(1) the Secretary of Defense has submitted to Congress a budget request for full funding of

units to be procured through the contract.... (Page 21)

With regard to the Navy’s DDG-1000 destroyer program, the report stated:

The conferees agree to provide a total of $305,516,000 for advance procurement for the

DD(X) class of ships instead of $320,516,000 as proposed by the Senate and no

appropriation as proposed by the House. The conferees direct the Navy to include future

funding requests for the DD(X) in the Shipbuilding and Conversion, Navy appropriation.

Within the funds provided, $221,116,000 is only for design and advance procurement

requirements associated with the first ship of the DD(X) class and $84,400,000 is only for

design and advance procurement requirements associated with construction of the second

ship at an alternative second source shipyard. The conferees direct that no funds shall be

available for the procurement of long leadtime material for items that are dependent upon

delivery of a DD(X) key technology unless that technology has undergone testing, thereby

reducing risk to overall program costs.

The conferees direct that full funding of the remaining financial requirement for these

ships, not including traditional advance procurement requirements, shall be included in a

future budget request. (Page 188)

With regard to the Navy’s Littoral Combat Ship (LCS) program, the report stated that “The

conferees agree with the Senate that all follow-on ships, beyond one of each prototype design,

should be fully funded in the Shipbuilding and Conversion, Navy appropriation.” (Page 310)

FY2004

FY2004 Defense Authorization Act (H.R. 1588/P.L. 108-136)

Conference Report

The conference report (H.Rept. 108-354 of November 7 (legislative day, November 6), 2003) on

H.R. 1588 contained a provision (Section 135) that, as stated on page 541 of the report, “would

authorize the Secretary of the Air Force to enter into a lease for no more than 20 aerial refueling

tanker aircraft, and would further authorize the Secretary of the Air Force to enter into a multiyear

Congressional Research Service

Defense Procurement: Full Funding Policy

procurement program, using incremental funding, for up to 80 aerial refueling aircraft for not in

excess of 10 program years beginning as early as FY2004.” Section 135 stated, in part:

(b) MULTIYEAR PROCUREMENT AUTHORITY.—(1) Beginning with the fiscal year

2004 program year, the Secretary of the Air Force may, in accordance with section 2306b of

title 10, United States Code, enter into a multiyear contract for the purchase of tanker aircraft

necessary to meet the requirements of the Air Force for which leasing of tanker aircraft is

provided for under the multiyear aircraft lease pilot program but for which the number of

tanker aircraft leased under the authority of subsection (a) is insufficient.

(2) The total number of tanker aircraft purchased through a multiyear contract under this

subsection may not exceed 80.

(3) Notwithstanding subsection (k) of section 2306b of title 10, United States Code, a

contract under this subsection may be for any period not in excess of 10 program years.

(4) A multiyear contract under this subsection may be initiated or continued for any fiscal

year for which sufficient funds are available to pay the costs of such contract for that fiscal

year, without regard to whether funds are available to pay the costs of such contract for any

subsequent fiscal year. Such contract shall provide, however, that performance under the

contract during the subsequent year or years of the contract is contingent upon the

appropriation of funds and shall also provide for a cancellation payment to be made to the

contractor if such appropriations are not made.

FY2004 Defense Appropriations Act (H.R. 2658/P.L. 108-87)

House

In its report (H.Rept. 108-187 of July 2, 2003) on H.R. 2658, the House Appropriations

Committee stated:

The Committee has altered the presentation of the fiscal year 2004 requested Shipbuilding

and Conversion, Navy (SCN) appropriation language by merging the appropriation for full

funding with the appropriation for advanced procurement. The Committee’s intention is to

provide a certain level of financial flexibility to better accommodate changes based on cost

growth. This recommendation, if properly implemented by the Navy, should allow for

managing costs within the program thereby limiting the necessity of reprogramming funds

from other high priority programs to accommodate cost growth in a ship class. The

Committee reserves the right to revert to the previous method of appropriating funds for

SCN should the Navy not properly manage the merging of these appropriations. (page 150)

Senate

In its report (S.Rept. 108-87 of July 10, 2003) on the FY2004 defense appropriations bill (S.

1382), the Senate Appropriations Committee stated:

The Committee is aware that the Department of the Navy plans to fund the purchase of

ships in fiscal year 2005 within the Research and Development, Navy account. These

ships—the first in their class—the DD(X) next-generation destroyer and the Littoral Combat

Ship [LCS] are currently planned to be procured with research and development dollars with

the second ship in each class to be procured with Shipbuilding and Conversion, Navy [SCN]

funds in fiscal year 2006.

Congressional Research Service

Defense Procurement: Full Funding Policy

The Committee understands that there are seeming advantages to this approach—

reducing prior year shipbuilding costs and providing these programs with the additional

flexibility that is inherent in research and development funding. The Committee is

concerned, however, that the Department will not reap the benefits it seeks. Central to the

argument that supports building the first ship in a class with research and development

funding is the necessity to learn lessons from the research, development and testing being

done. If the Navy plans, as it currently does, to fund the second ship in each of these classes

in fiscal year 2006 in SCN before actual construction even begins on the research and

development funded ships, the distinction between funding in research and development and

SCN only becomes one of full-funding.

Therefore, the Committee directs that if these ships—the DD(X) and LCS—are funded

in research and development, all research and development acquisition rules will apply,

including technology readiness reviews, milestone decisions, and test and evaluation before

these ships may enter Shipbuilding and Conversion, Navy for procurement.

If the Navy chooses not to follow the acquisition policies required of research and

development programs before they enter procurement, funding for these first ships in their

class shall be requested in Shipbuilding and Conversion, Navy, as has been the tradition.

(pages 154-155)

Conference Report

The conference report (H.Rept. 108-283 of September 24, 2003) on H.R. 2658 stated:

The conferees agree with the Senate concerning the Navy’s plans to fund the purchase of

ships—DD(X) and LCS—in fiscal year 2005 within the Research, Development, Test and

Evaluation (RDT&E) appropriation. The conferees believe that the use of research and

development funding to procure first ships of a class is not in keeping with budgetary

guidelines regarding full-funding. The conferees agree that should the fiscal year 2005

request include these ships—DD(X) and LCS—within RDT&E, all research and

development acquisition rules shall apply, including technology readiness reviews, milestone

decisions, and test and evaluation before these ships may transition to procurement. (page

292)

FY2003

FY2003 Defense Authorization Act (H.R. 4546/P.L. 107-314)

House

In its markup of the FY2003 defense authorization bill (H.R. 4546), the House Armed Services

Committee included a provision (Section 141) that specifically requires the use of full funding for

executing multiyear procurement (MYP) arrangements approved in the future, unless otherwise

authorized by Congress. The provision would prohibit, unless specifically authorized by law, the

use in future MYP arrangements of, among other things, funding approaches resembling

incremental funding—including funding approaches like the one the Air Force proposed, as part

of its FY2003 defense budget and FY2003-FY2007 FYDP, for the follow-on MYP arrangement

for the C-17 program. Section 141 would not, however, apply to the follow-on C-17 MYP

arrangement itself, because the section would cover MYP arrangements that are authorized in the

Congressional Research Service

Defense Procurement: Full Funding Policy

future and the follow-on MYP arrangement for the C-17 program was approved by Congress in

2001 as part of its action on the FY2002 defense budget. The provision read as follows:

SEC. 141. REVISIONS TO MULTIYEAR CONTRACTING AUTHORITY.

(a) USE OF PROCUREMENT AND ADVANCE PROCUREMENT FUNDS- Section

2306b(i) of title 10, United States Code, is amended by adding at the end the following new

paragraph:

“(4)(A) Unless otherwise authorized by law, the Secretary of Defense may obligate

funds for procurement of an end item under a multiyear contract for the purchase of property

only for procurement of a complete and usable end item.

“(B) Unless otherwise authorized by law, the Secretary of Defense may obligate funds

appropriated for any fiscal year for advance procurement under a multiyear contract for the

purchase of property only for the procurement of those long-lead items necessary in order to

meet a planned delivery schedule for complete major end items that are programmed under

the contract to be acquired with funds appropriated for a subsequent fiscal year.”.

(b) EFFECTIVE DATE- Paragraph (4) of section 2306b(i) of title 10, United States

Code, as added by subsection (a), shall not apply with respect to any multiyear contract

authorized by law before the date of the enactment of this Act.

Conference Report

The conference report (H.Rept. 107-772 of November 12, 2002) on the FY2003 defense

authorization bill (H.R. 4546) contained a provision (Section 820), similar to Section 141 of the

House-reported version of H.R. 4546, that requires the use of full funding for executing multiyear

procurement (MYP) arrangements approved in the future:

SEC. 820. REVISIONS TO MULTIYEAR CONTRACTING AUTHORITY.

(a) USE OF PROCUREMENT AND ADVANCE PROCUREMENT FUNDS.—Section

2306b(i) of title 10, United States Code, is amended by adding at the end the following new

paragraph:

“(4)(A) The Secretary of Defense may obligate funds for procurement of an end item under a

multiyear contract for the purchase of property only for procurement of a complete and

usable end item.

“(B) The Secretary of Defense may obligate funds appropriated for any fiscal year for

advance procurement under a contract for the purchase of property only for the procurement

of those long-lead items necessary in order to meet a planned delivery schedule for complete

major end items that are programmed under the contract to be acquired with funds

appropriated for a subsequent fiscal year (including an economic order quantity of such longlead items when authorized by law).”

(b) EFFECTIVE DATE.—(1) Paragraph (4) of section 2306b(i) of title 10, United States

Code, as added by subsection (a), shall not apply with respect to any contract awarded before

the date of the enactment of this Act.

Congressional Research Service

Defense Procurement: Full Funding Policy

(2) Nothing in this section shall be construed to authorize the expenditure of funds under any

contract awarded before the date of the enactment of this Act for any purpose other than the

purpose for which such funds have been authorized and appropriated.

In their report, the conferees noted that this section amended the language of the House-reported

Section 141 to

permit the purchase of economic order quantities of long-lead items where authorized by

law. The conference amendment would also clarify that nothing in the section authorizes the

use of funds available under contracts awarded prior to the effective date of the provision for

any purpose other than the purpose for which such funds were authorized and appropriated.

Consequently, although the section would not apply to contracts awarded before the date of

enactment, funds available under such contracts could not be used in a manner that would be

inconsistent with the requirements of the section unless such funds were authorized and

appropriated for such purposes. (page 673)

FY2003 Defense Appropriations Act (H.R. 5010/P.L. 107-248)

House

In its report (H.Rept. 107-532 of June 25, 2002) on the FY2003 defense appropriations bill (H.R.

5010), the House Appropriations Committee stated the following regarding the Air Force’s

FY2003 proposal to procure 60 C-17 airlift aircraft under a follow-on multiyear procurement

(MYP) arrangement approved by Congress in FY2002 that would procure at least some of the

aircraft with funding profiles that resemble incremental funding rather than full funding:

The Air Force has adopted a budgeting approach for the C-17 that delays the need to

request $1,500,000,000 in budget authority until 2007 and 2008. Instead of following the

traditional method of requesting funding equal to the cost of the planes being built, the Air

Force has matched its funding request to when payments are due to the contractor. The Air

Force calls this change “transformation”. The proper term is incremental funding and it is

inconsistent with DOD fiscal policy. Although the planes are delivered on the same schedule

and at the same cost under either approach, incremental funding allows programs to push off

onto future years costs that should be covered now.

Last year, when the Congress was considering multiyear procurement authority for the

C-17, the Air Force sought bill language specifically authorizing this new approach. The

Congress approved the multiyear, but denied the Air Force’s request for special authority.

Nevertheless, the Air Force proceeded with the incremental funding and reinterpreted the

regulations as permitting this approach. For example, while the DOD Financial Management

Regulations (FMR) define Advance Procurement as being for “long leadtime items”, the Air

Force believes that this can be interpreted to apply to any component of the aircraft or even

to final assembly. While the FMR calls for advance procurement to be “relatively low”

compared to the cost of the end item, the Air Force proposal would, in some cases, fund half

of the cost of the airplane with advanced procurement. The Air Force position is not

consistent with any reasonable interpretation of the FMR.

Therefore, the Committee has included bill language requiring that the fiscal year 2003

C-17 Advance Procurement be used to support the acquisition in fiscal year 2004 of 15 C-17

aircraft (the planned production rate) and directs the Air Force to include the funds to

complete the purchase of those 15 C-17s in its 2004 budget submission.

Congressional Research Service

Defense Procurement: Full Funding Policy

The Committee directs the Under Secretary of Defense (Comptroller) to restructure the

outyear funding for the C-17 program to bring it into compliance with the proper use of

advance procurement as defined in the FMR. The Committee is fully supportive of the C-17

program and the multiyear procurement of 60 additional airplanes and directs that these

changes be implemented in a manner that would not adversely affect the cost or delivery of

these planes. (Page 168)

Senate

In its report (S.Rept. 107-213 of July 18, 2002) on H.R. 5010, the Senate Appropriations

Committee “recommends several actions to restore fiscal discipline to the Department [of

Defense].” (Pages 4-5) Among these were recommendations to fully fund the C-17 multiyear

procurement request and to reduce amounts requested for advance procurement for Navy

shipbuilding programs.

With regard to the C-17 multiyear procurement funding request, the committee stated:

The Air Force has not requested sufficient funding in its budget proposal to fully fund

the purchase of 15 [C-17] aircraft per year. Instead, it has chosen to request only the amount

of funds it expects to obligate each year to start the production of 15 aircraft, and finance the

remaining costs in later years. This financing scheme runs counter to the ‘full funding’

principles which guide Federal Government procurement practice, and thus creates a future

liability for the Air Force and Congress. For these reasons, the Committee disapproves the

Air Force’s C-17 financing proposal. Instead the Committee recommends an increase of

$585,900,000 to fully fund the purchase of 15 C-17 aircraft in fiscal year 2003. The

Committee intends to work with the Air Force over the coming months to ensure that plans

for executing the remainder of the C-17 multi-year procurement program are both cost

effective and consistent with full funding principles. (Page 147)

With regard to requests for advance procurement funding for Navy shipbuilding programs, the

committee stated:

The Committee notes that the Navy’s requests for advance procurement funding for

shipbuilding programs have increased in recent years. Almost universally among programs,

the cumulative amount requested for advance procurement funds exceeds 30 percent of the

total cost of the vessel.

As stated in DOD Directive 7000.14-R, advance procurement requests should be limited

to those items whose lead-times are greater than the life of the appropriation and where the

lead-time of an item far exceeds the production time of the end item itself. The regulation

further states that the amounts budgeted for advance procurement should be relatively low

compared to the remaining portion of the cost of the end item. However, based on detailed

information received from the Department, the Committee finds countless inconsistencies in

the Navy’s adherence to this policy.

As the Committee endeavors to assist the Navy in increasing funding for shipbuilding

programs, in addition to providing increased funding over the budget request, it finds that a

portion of the funds requested for advance procurement would be more effectively used to

alleviate the costs associated with completion of prior year [Navy shipbuilding] programs....

The Committee’s recommendation fully funds the increased costs associated with the

“swap” of DDG-51 and LPD-17 class workload among the two main shipbuilders. Further, it

fully funds the entire DDG-51 class prior year completion bill throughout the Future Years

Congressional Research Service

Defense Procurement: Full Funding Policy

Defense Plan, pays $150,000,000 towards the LPD-17 class fiscal year 2004 bill and fully

funds both the fiscal year 2003 and fiscal year 2004 costs associated with the VA [Virginia]

Class submarine program. (Page 127)

Conference Report

The conference report (H.Rept. 107-732 of October 9, 2002) on H.R. 5010 stated the following

with regard to the C-17 multiyear procurement funding request:

In the Department of Defense’s fiscal year 2003 budget submission, the Air Force did

not request a sufficient amount to fully fund the purchase of 15 C-17 cargo aircraft per year.

Instead, it requested only the amount of funds it expected to obligate each year to start

production of 15 aircraft, and financed the remaining costs in later years. This financing

scheme runs counter to the “full funding” principles which guide Federal government

procurement practice, and thereby creates a future liability for the Air Force and Congress.

For this reason, the conferees disapprove the Air Force’s C-17 financing proposal. As such,

the conference agreement includes an increase of $585,900,000 over the budget request to

fully fund the purchase of 15 C-17 aircraft in fiscal year 2003. Additionally, the conferees

agree to retain House language which directs that funds made available within the “Aircraft

Procurement, Air Force” account be used for advance procurement of 15 aircraft. (page 206)

Congressional Research Service

Defense Procurement: Full Funding Policy

Appendix B. Detailed Background on the Policy

This appendix provides a detailed discussion of the origins, rationale, and governing regulations

of the full funding policy, as well as examples of where Congress, GAO, and DOD have affirmed

their support for the policy.

Laws and Regulations

Antideficiency and Adequacy of Appropriations Acts

The full funding policy, also known as up-front funding, is consistent with two basic laws

regarding executive branch expenditures—the Antideficiency Act of 1870, as amended, and the

Adequacy of Appropriations Act of 1861. As summarized in a 1996 GAO report:

The Antideficiency Act, as amended, implements Congress’s constitutional oversight of the

executive branch’s expenditure of funds. The act reflects laws enacted by the Congress since

1870 to respond to abuses of budget authority and to gain more effective control over

appropriations. The central provision of the act (31 U.S.C. 1341(a)(1)) prevents agencies

from entering into obligations prior to an appropriation or from incurring obligations that

exceed an appropriation, absent specific statutory authority. Thus, agencies may not enter

into contracts that obligate the government to pay for goods and services unless there are

sufficient funds available to cover their cost in full. Instead, agencies must budget for the full

cost of contracts up-front. Also, the Adequacy of Appropriations Act (40 U.S.C. 11),

established in 1861, prohibits agencies from entering into a contract unless the contract is

authorized by law or there is an appropriation to cover the cost of the contract.34

OMB Circular A-11 (July 2003)

Circular A-11 from the Office of Management (OMB)35 provides guidance to executive branch

agencies on the preparation of budget submissions to Congress. The current version of the

circular was issued on July 25, 2003. Section 31.4 of the circular, which covers the full funding

policy, states in part:

Requests for acquisition of capital assets must propose full funding to cover the full costs of

the project or a useful segment of the project, consistent with the policy stated in section

300.6(b). Specifically, requests for procurement programs must provide for full funding of

the entire cost.... Remember that Administration policy and the Antideficiency Act require

you to have sufficient budget authority or other budgetary resources to cover the full amount

of unconditional obligations under any contract.

Section 300.6(a) of the circular states (italics as in the original):

(a) Background.

Government Accountability Office, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5, November

1996, p. 28.

For the text of this document on the Internet, go to http://www.whitehouse.gov/omb/circulars/a11/03toc.html.

Congressional Research Service

Defense Procurement: Full Funding Policy

Good budgeting requires that appropriations for the full costs of asset acquisition be enacted

in advance to help ensure that all costs and benefits are fully taken into account when

decisions are made about providing resources. For most spending on acquisitions, this rule is

followed throughout the Government. When capital assets are funded in increments, without

certainty if or when future funding will be available, it can and occasionally does result in

poor planning, acquisition of assets not fully justified, higher acquisition costs, project

(investment) delays, cancellation of major investments, the loss of sunk costs, or inadequate

funding to maintain and operate the assets.

Section 300.6(b) of the circular states in part (italics as in the original):

(b) Full funding policy.

The full funding policy (see section 31.4) requires that each useful segment (or module) of a

capital investment be fully funded with either regular annual appropriations or advance

appropriations. For definitions of these terms, see section 300.4 or the Glossary of Appendix

J. Appendix J elaborates on the full funding concept (see Appendix J section C, Principles of

Financing).

Appendix J, Section C, lists four principles for financing capital assets. Principle 1, on full

funding, states (italics as in the original):

Budget authority sufficient to complete a useful segment of a capital project (investment) (or

the entire capital project, if it is not divisible into useful segments) must be appropriated

before any obligations for the useful segment (or project) (or investment) may be incurred.

Explanation: Good budgeting requires that appropriations for the full costs of asset

acquisition be enacted in advance to help ensure that all costs and benefits are fully taken

into account at the time decisions are made to provide resources. Full funding with regular

appropriations in the budget year also leads to tradeoffs within the budget year with spending

for other capital assets and with spending for purposes other than capital assets. Full funding

increases the opportunity to use performance-based fixed price contracts, allows for more

efficient work planning and management of the capital project (or investment), and increases

the accountability for the achievement of the baseline goals.

When full funding is not followed and capital projects (or investments) or useful segments

are funded in increments, without certainty if or when future funding will be available, the

result is sometimes poor planning, acquisition of assets not fully justified, higher acquisition

costs, cancellation of major investments, the loss of sunk costs, or inadequate funding to

maintain and operate the assets.

DOD Directive 7000.14-R (June 2004)

Section 010202(A) of DOD Directive 7000.14-R on budget formulation and presentation

(updated June 23, 2004) states (underlining as in the original):

Policy for Full Funding. It is the policy of the Department of Defense to fully fund

procurements that are covered within the procurement title of the annual DOD

Appropriations Act. There are 2 basic policies concerning full funding.

1. The first is to provide funds at the outset for the total estimated cost of a given program so

that the Congress and the public can be fully aware of the dimensions and cost when the

program is first presented in the budget.

Congressional Research Service

Defense Procurement: Full Funding Policy

2. The second is to provide funding each fiscal year to procure a complete, usable end item.

In other words, an end item budgeted in a fiscal year cannot depend upon a future year’s

funding to complete the procurement. However, efficient production of major defense

systems has necessitated two general exceptions to this policy—advance procurement for

long lead-time items and advance economic order quantity (EOQ) procurement. EOQ is

normally associated with multiyear procurements but can be requested for annualized

procurements on an exception basis for unusual circumstances (such as combined parts buys

for a block of satellites). Both efforts must be identified in an Exhibit P-10, Advance

Procurement, when the Budget Estimate Submission is submitted to OSD and when the

President’s budget request is submitted to the Congress.36

Congressional Hearings and Reports

This section presents excerpts from five sources that discuss in some detail the origins of and

rationale for the full funding policy. The excerpts also provide examples of how support for the

policy has been periodically reaffirmed over the years by Congress, the Government

Accountability Office (GAO), and DOD. The documents are a 1969 GAO report, a 1973 House

Appropriations Committee report, a 1978 House Budget Committee hearing, a 1996 GAO report,

and a 2001 GAO letter report and briefing.

U.S. Department of Defense, Comptroller, Financial Management Regulation, vol. 2A, Budget Formulation and

Presentation, Washington, 2004. (DOD 7000.14-R, June 2004) pp. 1-13 and 1-14. For the text of this directive on the

Internet, go to: http://www.dtic.mil/comptroller/fmr/02a/.

Paragraphs 3 and 4 of Section 010202(B) define advance procurement and economic order quantity (EOQ)

procurement as follows (underlining as in the original):

3. Advance Procurement (Long Lead-time Items). Advance procurement requests for long leadtime

items shall be limited to the end items in major procurement appropriations. Long lead-time

procurements shall be for components, parts, and material whose lead-times are greater than the life

of the appropriation (3-5 years). In some circumstances, Advance Procurement is also warranted

when items have significantly longer lead-times than other components, parts, and material of the

same end item or when efforts must be funded in an advance procurement timeframe in order to

maintain a planned production schedule. For new development programs, the planned production

schedule should be based on a full funding basis without the use of long lead material. Planning the

program content this way provides additional flexibility should development delays arise. When

advance procurement is part of the program, however, the cost of components, material, parts, and

effort budge

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.