Professor Gerry Land CPA, CDFM-A Defense Acquisition University Capital & Northeast Region

2. Programming and Budgeting Policies for Acquisition Programs Professor Gerry Land CPA, CDFM-A Defense Acquisition University Capital & Northeast Region Fort Belvoir, VA (703) 805-3755; DSN 655-3755 E-mail: gerry.land@dau.mil 2010 PDI – June 2010

3. Exceptions to Full Funding - Advance Procurement - Multiyear Procurement (economic order quantity) • Funding Policies for Unique Items - Communications and Information Systems - LRIP Articles - Product Improvements Funding Policies Workshop Topics • Budgeting Building Blocks • Funding Policies - Annual Funding - Incremental Funding - Full Funding

4. Resource Management Flow from Identification of Capability Need to Achieving Operational Capability Planning, Programming, Budgeting and Execution Process Annual Funding Life Cycle Cost Funding Policies FYDP GDF POM FOL CP Estimate MFP JPG BES PDM PBD Cost Analysis Full Funding (Exceptions) ICE MBIs Incremental Funding CCE Fiscal Environment CAIV POE Congressional Enactment A o A HAC HASC HBC President’s Budget SAC SASC SBC Operational Capability Force Structure Modernization Readiness Sustainability Budget Authority Obligation Reprogramming Feedback Commitment Expenditure Outlay Budget Execution Budget Resolution Authorization & Appropriation Laws Acquisition Program Baseline Operational Capability Need Capabilities- Based Assessment Capability Docs

5. What is Needed to Build a Program Budget? Program Direction: A statement of what the program manager is expected to do – the Acquisition Program Baseline (APB) Work Breakdown Structure (WBS): A translation of the program direction into a statement of the tasks required to achieve the program objectives Schedule: The sequence of tasks in the WBS – • Showing when each task begins and ends • How tasks are related to each other • How workload/cost for each task is distributed within the time period

6. Appropriation Categories • Definition: Broad, generic terms pertaining to general “types” of Federal Government funds. • Examples of interest to Acquisition Community: • Research, Development, Test and Evaluation (RDT&E) • Procurement • Military Construction (MILCON) • Appropriation Accounts • Definition: Specific designation of Federal Government funds as contained in an Appropriations Act passed by Congress and signed into law by President. Each account has a unique four digit code preceded by a two digit prefix. • Examples of interest to Acquisition Community: • Research, Development, Test and Evaluation (RDT&E), Army(2040) • Aircraft Procurement, Navy(1506) • Operations & Maintenance (O&M), Air Force(3400) Appropriation Categories vs. Appropriation Accounts

7. Army 21 - 2040 2031 2032 2033 2034 2035 2010 2020 2050 Navy 17 - 1319 1506 1507 1508 1611 1810 1453 1804 1205 USMC 17 - 1109 1105 1106 Air Force 57 - 3600 3010 3020 3011 3080 3500 3400 3300 DoD Wide 97 - 0400 0300 N/A 0100 0500 DoD Appropriation Account Codes Appropriation Account RDT&E Procurement Aircraft Missiles Weapons W&TCV Ammunition SCN Other USMC MILPERS O&M MILCON

8. Underlying Assumptions in Budgeting • “Color of money” (i.e., Appropriation) requested in the budget is based on type of work to be performed • Normally, funding is requested for a 12 month fiscal year (1 October – 30 September of following year) • Correct level of funding requested (i.e., budgeted) for a fiscal year is based on required level of work effort plus application of proper funding policy for that Appropriation • Funding is requested (i.e., budgeted) for the fiscal year when the organization honestly “requires” the funds in accordance with proper funding policy • Application of proper funding policy implies that funds will be obligated during the first year of availability

9. Year Budget Prepared $$ $$$ Budget Estimate = “Price Today in Base Yr $” plus inflation plus economic effects of outlays occurring in future years “Notional” Example of Preparing Input for FY 2012 Budget - Applying Escalation Target Fiscal Year FY10FY11FY12FY13FY14TOTAL Price Today (Base Yr $ ) Outlay Rate ( % ) Cumulative Inflation ( % ) Dollar “Value” ( $ ) When Outlaid “Required Budget” Estimate (Current/Then Yr $ ) To go from “Price Today” to “Required Budget”, multiple “ Price Today” by proper Weighted (Composite) Index of Appropriation Account

10. Major Appropriation Categories Period Available for Obligation Funding Policy Control Level (Budgeting) Appropriation Category Scope / Type of Work Effort Program Element R&D Activities and Expenses 2 Years RDT&E Incremental Useable End Items >= $250K system unit cost; Centrally managed items; Initial Spares; Labor for certain production-related functions (e.g., item assembly, quality assurance) Procurement Line Item Full 3 Years (5 Years) (SCN) Replenishment Spares; Fuel; Civilian Pay; Travel; Construction Projects <$750K; Non-Centrally managed end items <$250K system unit cost 1 Year O&M Annual Sub-Activity Group 1 Year Budget Activity Military Personnel Expenses MILPER Annual 5 Years Full Major Construction Projects >$750K MILCON Project

11. Annual FundingPolicy • Appropriations: • Operations and Maintenance • Military Personnel • Budgeting Policy: • Annual budget request will be limited to obligation authority necessary to cover all expenses during a 12 month budget period (usually the fiscal year).

12. Service ContractException toAnnual Funding Policy • Exception to budgeting for “Fiscal Year” period • U.S. Code, Title 10, Section 2410a provides authority for DoD to budget for and obligate funds for severable service contracts for periods crossing fiscal years --provided the contract period does not exceed 12 months

13. FY 1 FY 2 FY 3 FY 4 Expense $ 25 K $ 35 K $ 30 K $ 35 K Annual Funding Policy Simple Application – O&M Appropriation Expenses by Fiscal Year $ 520 K $ 525 K $ 510 K Civ Pay $ 500 K Supplies $ 30 K $ 40 K $ 35 K $ 40 K TDY $ 40 K $ 50 K Service Contract 12 Month Budget Request $ 645 K $ 585 K $ 585 K $ 600 K Period when expenses are being incurred

14. Incremental Funding Policy • Appropriation: Research, Development, Test & Evaluation (RDT&E) • Budgeting Policy: • Annual budget request will be limited to budget authority necessary to cover all costs expected to be incurredduring that fiscal year • Incremental Funding Policy provides flexibility to the government in the uncertain environment of RDT&E

15. Purposes of theIncremental Funding Policy • Allows Congress to review progress of every R&D project – each year – and decide if the project should continue and, if so, at what dollar amount • Does not require one Congress to “tie the hands” of a future Congress • Provides DoD flexibility to fund R&D projects on a year-by-year basis

16. 18 Month Exception toIncremental FundingPolicy • For requirements with no logical way to divide the work to limit contract to a shorter period, or • If the planned technical effort is such that no responsible contractor will accept a contract for less than completion of the total requirement • For these types of efforts that take longer than 12 months, but less than 18 months, the Service or Defense Agency Comptroller may approve financing the total requirement in one fiscal year

17. How does a Program Office Prepareits Budget under Incremental Funding ? • Create a good estimate of expected future costs to be incurred (even though system design may be unstable and contractor may not be chosen) • Use 9-months or less of effort for first year increment of a “new start” program (due to nature/timing of budget approval) • For second and succeeding yearly increments, budget for entire year, taking into account any changes (slippages) that may have occurred from previous budget submission Note: Service or Agency comptroller may approve up to 15 months of costs for second and succeeding fiscal years (i.e., 3 months beyond end of fiscal year)

18. FY 1 FY 2 FY 3 FY 4 Task Cost $ 100 K $ 100 K $ 50 K TASK 1 $ 300 K $ 25 K $ 100 K $ 25 K TASK 2 $ 150 K $ 50 K $ 40 K $ 10 K TASK 3 $ 100 K Incremental Funding Policy Simple Application – RDT&E Appropriation Cost Incurred by Contractor by Fiscal Year $ 50 K 36 month effort 18 month effort 24 month effort Budget Request $ 50 K $135 K $250 K $ 115 K Planned Period of Performance (i.e, planning for costs to be incurred)

19. Governing Concepts • Usable End Items - Piecemeal procurement of systems is not permitted • Funded Delivery Period - 12 month period starting with projected deliveryof first item • Exceptions to Policy • Advanced Procurement (For Long Lead Items) • Economic Order Quantity (With Multiyear Procurement) Full Funding Policy • Applies to Procurement and Military Construction Appropriations • Annual budget request must cover the total cost to deliver a given quantity of complete, militarily usable end items in a 12 month funded delivery period

20. Purposes of Full Funding Policy • Allows Congress to understand the full cost of a complete weapon system through budget process • Does not require one Congress to “tie the hands” of a future Congress • Avoids purchase of a large number of partially completed systems, followed by the need for more money to complete these systems • Achieves better program stability - but on a year by year basis

21. Concept of “Usable End Items”Which Program is Correct Under Full Funding? Program A Program B Year 1 Year 1 Year 2 Year 2

22. Contract Award Date Full Funding PolicyConceptual - Procurement Category FY 1 FY 2 FY 3 FY 4 Production Lead Time 10 Items 2 2 3 3 LOT 1 ($400K) Start Up Costs: ($400K) How We Expect the Contractor to Incur Cost by FY $ 40 K $ 30 K $ 0 K $140 K $ 0 K $140 K $ 0 K $ 50 K Recurring Production Costs: $140 K $ 70 K $140 K $ 50 K Budget Request:

23. Full Funding PolicySimple Application - Procurement Appropriation FY 1 FY 2 FY 3 FY 4 Lot Cost $ 400 K LOT 1 10 ITEMS 2 2 3 3 = 10 $ 600 K LOT 2 20 ITEMS 5 5 5 5 = 20 $ 900 K = 18 LOT 3 40 ITEMS 8 10 + 22 Budget Request $ 400 K $ 600 K $ 900 K - 0 -

24. X X X X X X Defer to Later Fiscal Years Contract Action 5 5 5 5 LOT 2 QTY 20 Production Lead Time 12 Months Of Deliveries Contract Action 8 10 LOT 3 QTY 18 Production Lead Time Application of Funded Delivery Period Policy “Requirement” is for 48 Tanks Delivered by End FY 5 FY 1 FY 2 FY 3 FY 4 FY 5 Proposed Deliveries Funded Delivery Period Contract Award 2 2 3 3 5 5 5 5 8 10 LOT 1 QTY 10 12 Months of Deliveries Production Lead Time Deliveries

25. Advance ProcurementLong Lead-time Items • Exception to Full Funding Policy • Explanation why an exception: the PMO is not buying usableenditems • Shown in Acquisition Strategy • Approved in Milestone Decision • Circumstances that justify use: • When necessary to maintain (protect) planned production schedule • Lead-time of component greater than life of the appropriation • Lead-time of component significantly longer than remainder of end item • Budgetary Implications: • Minimum amount budgeted = termination liability of total cost of long lead-time items being procured • Budgeted amount generally requested one fiscal year in advance of related end item contract • Budgeted amount is shown as a separate line entry on various budget exhibits (e.g., P-1, P-5, P-40)

26. - $ 10M $ 685M $ 390M Advance Procurement Application with Procurement Appropriation FY 1 FY 2 FY 3 FY 4 LOT 3 ($400M) 20 Items LOT 4 ($700M) 38 Items ADVANCE PROCUREMENT * BA ADV PROC BA SYS BA TOTAL (FY) $ 400M $ 700M - $ 15M + $ 10M + $ 15M $ 10M $ 405M $ 685M $ - 0 - * Separate Budget Line Line Item one fiscal year in advance of associated production contract

27. Source: DoD 7000.14-R, Vol 2A, Chap 1, Section 010203 Economic Order Quantity (EOQ) Associated with Multiyear Procurement (MYP) • Exception to Full Funding Policy • Explanation why an exception: Contracted deliveries will exceed the 12 month funded delivery period • Definition of MYP • A generic term that describes the process, planning and ultimate contract by which the government may contract for the purchase of supplies or services that satisfy requirements for more than one but normally not more than five years.

28. Multiyear Procurement (MYP) Continued • Commitment to buy a specific quantity of useable end items of a weapon system over a specified number of years (normally, maximum of five years) • Annual Appropriation by Congress for same specified number of years • Purpose: - To reduce program cost growth - To counteract adverse effects of the annual budget and procurement process - To bring stability to acquisition process

29. Multiyear Procurement (MYP) Continued • Benefits: • Provides assurance to contractor of future years procurement • Encourages contractor investment • Facilitates economic order quantities • Increases contractor productivity • Potential problems: • Government liable for a penalty (in a decreasing amount) for early cancellation of contract • Can not budget for that cancellation/termination liability • Controversial concept (both in Congress & OSD)

30. Contract Award Production Lead Time Deliveries of Production Items 1 2 3 4 5 $ $ $ $ $ Notification to Contractor and Obligation of Funds 1 4 5 6 9 9 9 9 9 9 9 9 9 9 9 9 9 9 8 Budget in same method as Full Funding $M End Items $M Except for items budgeted under “EOQ” rules EOQ Items Multiyear Procurement (MYP) Contract (Example of Budget Preparation for a MYP Contract) FY 1 FY 2 FY 3 FY 4 FY 5 FY 6 FY 7 Funded Units 16 36 36 36 26 $250 $ 514 $ 523 $ 508 $ 356 $ 60 Assumes a 92% Learning Curve and composite indices appropriate to given fiscal years

31. Multiyear Procurement (MYP) Recent Example • Program: F/A-18 Super Hornet and E/A-18 Growler • Proposed quantity of aircraft: 124 total • Time period: FY 2010 through FY 2013 • Contractor: Boeing • Projected contract award: NLT 30 Sep 2010 • Potential savings compared to annual contract actions: $590 Million (approximately 10% of basic contract with annual options) • Congress provided conditional authority in FY 2010 NDAA and FY 2010 Defense Appropriations Act • On 14 May 2010 OSD notified Congressional leaders of intent to award the MYP contract for aircraft

32. Funding Rules for Communications and Information Systems • RDT&E • - Development, test and evaluation costs • - Development of major upgrades • - Hardware/Software for RDT&E facilities • Procurement - Investment • - New equipment / SW > $250K • - Upgrades / replacement equipment > $250K • O&M - Expenses • - New equipment / SW < $250K • - Upgrades / replacement equipment < $250K • - Routine maintenance • - Equipment leases

33. Low Rate Initial Production Primary Purpose and Proper Appropriation PURPOSEAPPROPRIATION To permit an orderly increase in production ramp-up Procurement Procurement To establish an initial production base RDT&E is default, but use . . . . . To provide production configured representative articles for operational test - RDT&E * Articles planned to be destroyed during testing – or planned to not go into operational inventory Procurement * Articles scheduled to go into operational inventory

34. Funding for Product Improvements Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? NO IF . . . . NO YES YES SYSTEM IN PRODUCTION? THEN . . . . YES NO Fund Development and Testing with . . . (including MOD Kits used for Testing) RDT & E PROCUREMENT O & M AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . PROCUREMENT

35. YES THEN . . . . Fund Development and Testing with . . . (including MOD Kits used for Testing) AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . Funding for Product Improvements Decision Tree MOD INCREASES PERFORMANCE? IF . . . . RDT & E PROCUREMENT

36. NO YES THEN . . . . Fund Development and Testing with . . . (including MOD Kits used for Testing) RDT & E AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . Funding for Product Improvements Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? IF . . . . PROCUREMENT

37. NO NO YES Funding for Product Improvements Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? IF . . . . SYSTEM IN PRODUCTION? THEN . . . . Fund Development and Testing with . . . (including MOD Kits used for Testing) PROCUREMENT AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . PROCUREMENT

38. NO NO NO Funding for Product Improvements Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? IF . . . . SYSTEM IN PRODUCTION? THEN . . . . Fund Development and Testing with . . . (including MOD Kits used for Testing) O & M AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . PROCUREMENT

39. Funding for Product Improvements Decision Tree INDEPENDENT DT OR IOT&E REQUIRED? MOD INCREASES PERFORMANCE? NO IF . . . . NO YES YES SYSTEM IN PRODUCTION? THEN . . . . YES NO Fund Development and Testing with . . . (including MOD Kits used for Testing) RDT & E PROCUREMENT O & M AND . . . . Fund MOD Kits for End Items and the installation of Kits with . . . PROCUREMENT

40. Summary • Each appropriation category has a specific set of policies pertaining to budget formulation. • Budgeting policies are based on agreements between Congress and OSD. • Budget requests in the Budget Estimate Submission (BES) and the President’s Budget (PB) should be prepared in accordance with applicable policies.

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