Federal Fiscal Law can be complicated and intimidating, but it doesn't have to be. If you can understand a few of the basics, you will be well on your way to having a healthy grasp of the concepts that regulate government spending, and pertain to the majority of contracting situations.
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In this short blog post I want to give a very quick snippet of some of the basics to federal fiscal law that anyone managing federal government contracts should know. This information is also super helpful for contractors who are looking to do business with the federal government, or are currently doing business with the federal government. The important takeaway from this is to have a basic understanding of the money and the limitations attached to the money.
The most important thing to understand is that government agencies cannot spend money without FIRST being authorized by the U.S. Congress to do so. This power of authorization is what is commonly referred to as the "Power of the Purse".
There are volumes upon volumes of books, writings, lectures, research, white papers, historical examples and precedence, and tons of other information, which provide very detailed and intricate information about the power of the purse. I won't go into that level of detail here. However, I challenge you to familiarize and arm yourself with some of that important knowledge.
"The Power of the Purse"
Here are a few definitions and general terms that are important to understand:
Authorization = Either an establishment, or a continuation, of how appropriations or expenditures will be used by a particular federal agency.
Appropriations = Legal authority for federal agencies to incur obligations and make payments from the United States Treasury.
Commitment = An agency reserving allotted funds in anticipation of their obligation.
Obligation = A commitment by a federal agency that creates a legal liability of the government for the payment of goods or services ordered or received.
While federal agencies are given the permission and approval to spend money, from the U.S. Congress, there are limitations placed on that spending that are important to understand. These limitations can be broken down into 3 categories: purpose, time, and amount. The following information is an introduction to those limitations:
1. Purpose - Federal agencies should obligate and spend money for the proper purpose it was intended for. In other words if an agency is provided spending to purchase 25 fighter jets, the agency must use the money for the purpose of 25 fighter jets. This sounds simple enough, but there are some important exceptions to this. One of the most widely known exceptions is the "necessary expense rule", which states that "expenditures not specified, may be permissible if they are necessary for the execution of the general purpose of the appropriation". Google it. It is a very interesting rule. Using my above example regarding the 25 fighter jets, if that agency must transport the parts to make the fighter jets by utilizing a special made ship, then the purchase of that special made ship may be permissible under the "necessary expense rule". This can become complicated, depending on the scenario.
2. Time - Federal agencies may only use appropriations within the time they are available to be obligated. In other words, federal agencies may obligate (commit) funds only within the time limits applicable to the appropriation. This limitation is misunderstood a lot in the world of fiscal law and contracting. First, an agency must require a good or service in order to purchase it. Secondly, money is only available for use during a limited amount of time. Different types of money have different amounts of time for its availability for usage. One of the commonly referred to rules that apply to time is the "bona fide needs rule".
This rule states that there must be a current requirement/need at the point when an agency is authorized to obligate funds, and appropriated funds must be used when (during the time) they are actually available to be obligated. Typically, current year money should be used for current year needs. There are other exceptions to this exception. It's a very intricate rule with lots of caveats.
3. Amount - The other super important limitation to the use of funds is the fact that federal agencies are not allowed to use more money than that which is available, and they can't use, or obligate, money in advance. A misuse of the "amount" limitation is a violation of what is known as the Anti-Deficiency Act (ADA). The ADA prohibits any federal employee from making or authorizing an expenditure, or creating or authorizing an obligation over the amount available. ADA also prohibits federal agencies from accepting voluntary services. Any contractor doing business with the federal government knows how important it is to get authorization for any changes directly from written documentation that has the signature of a directly appointed warranted contracting officer. This is a really big deal! Any time an agency, or a person acting on behalf of that agency obligates more than the amount appropriated by Congress, they are subject to severe penalties for violating this ADA statute.
What I wanted to do here is just introduce you to some of the basic terminology and concepts that form the foundation of fiscal law in the federal contracting arena. There are many places to go for additional information and for research into more in-depth learning. I suggest that if you work on behalf of a federal government agency, or if you are a contractor doing business with a federal government agency, you take some time out to research, learn, and understand the information discussed here.
The important thing to do is follow and understand the money, know the basics of federal fiscal law, and be aware of the limitations to expenditures in your particular contracting situation.
Please feel free to reach out to me if you have any questions.
Disclaimer: This article does not reflect nor represent the federal government, or any federal government agency or position. This article represents the thoughts and opinions of the author, and is meant for entertainment and informational purposes only.
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