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

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URL: https://www.frixlaw.com/law-library/documents/crs%3ARL31404

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** June 15, 2007
- **Citation:** RL31404

## 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.

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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

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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.

1

CRS Report RL32776, Navy Ship Procurement: Alternative Funding Approaches—Background and Options for
Congress, by Ronald O’Rourke.

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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

2

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.
3
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.

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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;

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•

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.

4
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.
5
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).
6
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].)

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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.

7

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-.....)
8
DOD information paper on strategic sealift acquisition program provided to CRS by U.S. Navy Office of Legislative
Affairs, January 25, 1995, p. 1.
9
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.

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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.

10

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).
11
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).
12
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.

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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.

13

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).
14
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).
15
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.
16
David A. Fulghum, “Military Budget Boost Yields Marginal Change,” Aviation Week & Space Technology, February
11, 2002, p. 11.

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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
17
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.

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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
18
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.)
19
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.
20
Dale Eisman, “White House Rejects Proposal To Stretch Shipbuilding Funds,” Norfolk Virginian-Pilot, September 6,
(continued...)

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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.
21
H.Rept. 107-298, p. 119.
22
CRS Report RL32776, Navy Ship Procurement: Alternative Funding Approaches—Background and Options for
Congress, by Ronald O’Rourke.

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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

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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

23

Government Accountability Office, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5, November
1996, p. 14.
24
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).
25
H.Rept. 106-754, p. 284. (Emphasis added.)

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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

26
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.
27
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.

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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

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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
28

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.

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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

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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)

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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:

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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

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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.)

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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

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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:
(c) SENSE OF CONGRESS ON FUNDING FOR FOLLOW-ON SHIPS.—It is the sense of
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

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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.

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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)

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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

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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;

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(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

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.

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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,

30

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.

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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

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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)

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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

31
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.

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‘(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)

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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
32
33

Italics as in the original.
Italics as in the original.

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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.

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL31404. Public record. Not legal advice.