1 financial implications of contracting for acquisition programs professor gerry land cpa, cdfm-a...
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Financial Implications of Contracting for Acquisition
ProgramsProfessor Gerry Land
CPA, CDFM-ADefense Acquisition University
Capital & Northeast Region
Fort Belvoir, VA
(703) 805-3755; DSN 655-3755
E-mail: [email protected]
Workshop #45 2010 PDI – June 2010
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• Basic Contracting Information– Contract Families and Types in those Families
– Characteristics of Contract Types
– Elements of Contract Types
– Broad Policies of Contracting
• Budgeting for Acquisition Contracts • Special Topics
– Multi-Year Contracts
– Planning for Contract Award
– Unique Contract Provisions and Clauses
– “Contracting” Through use of MIPRs
– Management of on-going Acquisition Contracts
• Summary
Workshop Topics
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• Fixed Price Contracts
• Cost Reimbursement Contracts
– Provides for firm price or, in appropriate cases, an adjustable price
– Contractor’s profit built into price– Use when specific requirements known before award
– Provides for payment of allowable incurred costs
– Contractor’s profit = fee
– Use when uncertainties in contract performance prevent sufficiently accurate estimate of costs for fixed-price contract
Two Families of Contracts
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Two Families of Contracts
Cost Reimbursement FamilyCost Reimbursement FamilyFixed Price FamilyFixed Price Family
Types Within the Families
Firm Fixed Price (FFP)
Fixed Price (EPA)
Fixed Price Incentive (FPI)
Types Types
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Cost Plus Award Fee (CPAF)
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Fixed Price
Contractor’s Promise Best Efforts Deliver specifics
Financial Risk to Contractor Low High
Financial Risk to Government High ? ? ?
Cash Flow to Contractor As Cost Incurred On Delivery
Progress Payments ------ % Incurred Performance Based Payments ------ Milestones
(Preferred)
Government Administration High Low
Fee or Profit ? Fee Profit
Characteristics of Contract Families
Cost Reimbursement
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Elements of Contract Types
• Firm Fixed Price (FFP)– Negotiated Price (Includes cost and profit)
• Fixed Price Economic Price Adjustment (FP-EPA)– Negotiated Price (Includes cost and profit)– Price Adjustment (+ or - based on stated economic conditions)
• Fixed Price Incentive (FPI)– Target Cost – Target Profit– Share Ratio (Government / Contractor)– Ceiling Price
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• Cost Plus Fixed Fee (CPFF)– Estimated Cost– Fixed Fee
• Cost Plus Award Fee (CPAF)– Estimated Cost – Base Fee (< 3% of estimated cost)– Award Fee Pool
• Cost Plus Incentive Fee (CPIF)– Target Cost– Target Fee– Share Ratio (Government / Contractor)– Minimum Fee– Maximum Fee
Elements of Contract Types(Continued)
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Schematics Showing Elements of Contract Types
Cost
Profit
0/100 Share
FFP
(PTA)
CeilingPrice
TargetProfit
Fee Adjustment Formula (Ratio)
FPIF
Target Cost
Target Cost
CPIF
TargetFee
Max Fee
Min Fee
Fee Adjustment Formula (Ratio)
Estimated Cost
Fixed Fee
100/0 Share
CPFF
Base Fee (0-3%)
Award Fee Pool
Estimated Cost
CPAFMaxFee
Base Fee
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• Contracting Officers have relatively broad discretion in determining best type contract for a particular requirement
• Contract type selected should be based on appropriate criteria
• Contract should promote Government’s interests and motivate contractor to achieve objectives
• Restrictions on contract types:– “Cost-Plus-Percentage-of-Cost” contracts are not authorized– Fixed Price development contracts > $25M must be approved by
USD (AT&L) – Limitations on Fees for Cost Reimbursement Contracts
• CPAF – Base Fee may be “0-3%” of the estimated cost• CPFF – Maximum Fixed Fee Percentages
R&D Effort: 15% Production: 10% Architectural & Engineering (A&E) : 6%
Broad Policies Relative to Contracts
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Factors in Selecting Type Contract
• Timing on the acquisition continuum
• Degree of complexity to satisfy requirement
• Risk of successful performance
• Shared responsibility of risk involved
• Cost, schedule, performance and other incentives
• Fair and reasonable prices through competition
• Contracting Officer determines “best” contract type for required work effort and “most reasonable” cost to the government
For Acquisition Programs
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Defense Acquisition Management System
• The Materiel Development Decision precedes entry into any phase of the acquisition management system
• Entrance Criteria met before entering phase
• Evolutionary Acquisition or Single Step to Full Capability
IOC: Initial Operational CapabilityFOC: Full Operational Capability
PDR: Preliminary Design ReviewCDR: Critical Design ReviewFRP: Full Rate Production
IOCBA
Technology Opportunities & Resources
MaterielSolutionAnalysis
FRPDecisionReview
FOC
Materiel DevelopmentDecision
User Needs
PDR CDR
CDD CPD
ICD
AoA
Pre-Systems Acquisition Systems Acquisition Sustainment
Post CDRAssessment
PDR
Technology Development
Production & Deployment
Operations & Support
Engineering and Manufacturing Development
Post PDRAssessment
C
or
With Emphasis on Contract Type Appropriate to Phase
CPFFFFP (LOE)
CPFFCPIF
CPAF FPI FFPFFPFPI
Generally Preferred Contract Type For Different Phases
Based on DoDI 5000.02; 8 Dec 08
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Cost and Pricing
• Government policy is to pay a “fair and reasonable” price for goods and services for which a contract is awarded
• One responsibility of the contracting officer is to determine the “fair and reasonable” price
• Key Question: What is a “fair and reasonable” price and how is it determined?
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Price Analysis vs. Cost Analysis
Price Analysis• Fast and “cheap” to perform
• Used to analyze sealed bids, small purchases and competitive proposals
Cost Analysis• Slow and costly to perform
• Used to analyze sole source and, occasionally, competitive proposals
Used when Purchasing:
• Research and Development efforts
• Unique sole source items
• Purchases > $500,000
• Standard, off-the-shelf items
• Repeat buys of other items
• Purchases < $500,000
Used when Purchasing:
Performed by Government Contracting Officer
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Funding Policies forAcquisition - Related Contracts
• For Research and Development Efforts
• RDT&E Appropriation
• Incremental Funding Policy: Budget on basis of cost expected to be incurred during given fiscal year
• For Production
• Procurement Appropriation
• Full Funding Policy: Budget on basis of all cost for specific quantity of militarily usable end items expected to be put on contract during given fiscal year
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Relationship Between Budgeting and Contracting
• Budgeting
• Accomplished well in advance of planned contract award
• In compliance with funding policies of appropriation to be used
• Amount based on “most likely price” of planned work effort
• Funds above budgeted amount may be needed for contract modifications, overruns, requests for equitable adjustments, claims and litigation judgments; request funds when known
• Contracting
• Action during execution phase of the acquisition process
• Upon contract award or modification, must have – and obligate – total amount of funds (budget authority) for “price” of work effort appropriate for contract type (i.e., cost reimbursement vs. fixed price)
• Contract “price” = contractor’s “cost” plus company profit or fee
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FFP Negotiated Price
FP – EPA Negotiated Price (not including EPA)
FPI Target Cost + Target Profit
CPFF Estimated Cost + Fixed Fee
CPIF Target Cost + Target Fee
CPAF Estimated Cost + Base Fee + Maximum Award Fee
Budgeting for Different Contract TypesGeneral Rule: Budget to Most Likely Price
Contract Type Budgeted Amount
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• Elements of Contract:– Estimated Cost: 2,000– Fixed Fee: 150– Budget Estimate:
Budgeting for a CPFF Contract
• Step One: Determine Estimated Cost
• Step Three: Determine Budget Estimate
• Step Two: Determine Fixed Fee
Estimated Cost
Fixed Fee
100/0 Share
CPFF
2,150
Fixed Fee Limitations:
• R&D - 15%
• Production - 10%
• A&E - 6%Budget Estimate = Estimated Cost
plus Fixed Fee
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• Elements of Contract:– Target Cost: 1,000– Target Fee: 80– Maximum Fee: 100– Minimum Fee: 60– Sharing Arrangement: 80/20
Target Cost10001000
Budgeting for a CPIF Contract
– Target Price: 1,080
• Step One: Determine Target Cost
• Step Three: Determine Other Elements
Target Price = Target Cost + Target Fee
• Step Two: Determine Target Fee
• Step Four: Determine Target Price
• Step Five: Determine Budget Estimate
Budget Estimate = Target Price
100100
6060
8080Target Fee
80/2080/20
Slope%CPIF
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• Elements of Contract:– Estimated Cost: 2,000– Base Fee: 80– Maximum Award Fee: 120
Budgeting for a CPAF Contract
– Budget Estimate: 2,200
• Step One: Determine Estimated Cost
• Step Three: Determine Maximum Award Fee
• Step Two: Determine Base Fee
• Step Four: Determine Budget Estimate
Budget Estimate = Estimated Cost; Base Fee; and Maximum Award Fee
Base Fee (0-3%)
Award Fee Pool
Estimated Cost
CPAFMaxFee
Base Fee
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Budgeting for Severable
• DoD may budget for and enter into a contract for severable services that begin one fiscal year and ends during the next fiscal year if the contract period does not exceed one year
• Funds made available for a given fiscal year may be obligated for the total amount of that contract
References: (1) Title 10, U.S. Code, Section 2410a(2) Comptroller General Decision B-259274 (22 May 96)
Services Contracts
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Budgeting for Termination Liability
• Unliquidated obligation on incrementally funded contract must be sufficient to cover cost of terminating for convenience (if action required)
• Termination costs can not increase total budget needed• If contract terminated, termination costs to be financed
from unliquidated obligations without reprogramming • Exceptions (expected to be rarely used):
– Statutory Waivers: When exempted by Public Law (then budgeted on a pay-as-you-go basis)
– Special Termination Cost Clause: Permitted by DFAR in fixed-price incentive and incrementally funded cost reimbursement contracts; approval requires notification of House and Senate Appropriations Committees
On Incrementally Funded RDT&E Contracts
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• Cost Plus Award Fee (CPAF) contract most suitable when government wants to incentivize contractor in areas other than just cost (e.g., subjective areas such as timeliness and technical performance)
• Total Award Fee consists of two elements:– Base Fee (0 – 3% of estimated cost of contract minus Award Fee) – Award Fee Pool (from which contractor earns fee based on
superior performance in satisfying criteria stated in Award Fee Plan)
• Amount of fee actually paid is judgment decision made in accordance with criteria in Award Fee Plan
• Fee to be paid contractor is a unilateral government decision; generally, decision is not subject to “Disputes” clause
• Can be contentious topic for both contractor and government
BackgroundAward Fees
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Base Fee (0 - 3%)Base Fee (0 - 3%)
PeriodsPeriods
Award Fee PoolAward Fee Pool
11 22 33 44 55• Elements of Award Fee
• Award Fee Base (0 – 3 %)
• Award Fee Pool • Evaluation Periods
• Total Award Fee must be available at contract award
• Financial actions re Award Fee• Commitment made before start of award period
• Obligation made after end of award period (but before payment)
Application of Award Fees
• Payment action may be based on:• Specific milestones• Time periods • Combination of milestones and time periods
• Evaluation Criteria
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• Criteria for earning specified in Award Fee Plan Criteria for earning specified in Award Fee Plan
• Frequency is important to the processFrequency is important to the process
• Time based periods (usually 6, 9 or 12 month periods)Time based periods (usually 6, 9 or 12 month periods)
• Milestone or event-based periodsMilestone or event-based periods
• BothBoth time-based and milestone/event-based periods time-based and milestone/event-based periods
• Unearned Award Fee – How can it be used? Unearned Award Fee – How can it be used?
Determination for Earning Award Fee
• FAR prohibits “rollover” of unearned award fee to future FAR prohibits “rollover” of unearned award fee to future evaluation periods or events evaluation periods or events
• Unearned award fee may be used by PMO or returned to Unearned award fee may be used by PMO or returned to higher command level for other requirements higher command level for other requirements
*
Paragraph 16.401(e)(4), dated 14 Oct 2009 *
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Special Topics
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Multi-Year Service Contracts
• Must be a continuing requirement for the services
• Furnishing of services will require a substantial initial investment in plant or equipment, or the incurrence of substantial contingent liabilitiesfor the assembly, training, or transportation of a specialized work force
Criteria for This Type Service Contract
• Use of such a contract will promote the best interest of the U.S. by encouraging effective competition and promoting economies of operation
Chapter 137 of title 10, United States Code, Sec 2306C, Multiyear Services Contracts.(Originated in 2000 Authorization language)
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• Operation, maintenance and support of facilities and installations
• Maintenance or modification of aircraft, ships, vehicles, and other highly complex military equipment
• Specialized training necessitating high quality instructor skills (e.g., Pilot and aircrew members; foreign language training)
• Base services (e.g., Ground maintenance; plane refueling; bus transportation; refuse collection and disposal)
Multi-Year Service ContractsType Services Appropriate for Such Contracts
Chapter 137 of title 10, United States Code, Sec 2306C, Multiyear Services Contracts.(Originated in 2000 Authorization language)
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Cancellation Ceiling for
• Cancellation Ceiling may cover: – Non-recurring Costs
– Recurring Cost (with approval of Agency Head and USD (C))
• Cancellation Ceiling is:– Negotiated along with other provisions of the contract– A decreasing amount each year– Not an additional amount to be budgeted
Multiyear Procurement Contracts
• MYP contracts with Cancellation Ceiling > $100M require 30 day written notice to Congressional Defense Committees prior to award
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Planning for Contract Awards
• Consider contract type and award timing early– Factor this information into cost and budget estimates
– Avoid execution issues resulting from planned contract award in first or fourth quarter of fiscal year
• Initial planning done as part of obligation plan• Consult contracting officer when preparing obligation
plans
• Proper planning usually results in better execution
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• Two formal methods to change a contract:– Preferred is the “Supplemental Agreement”: Fully negotiated
agreement on specific work, price and schedule. – Less preferred is the “Undefinitized Change Order”: Tentative
agreement on work and schedule but final agreements not yet negotiated; usually has a “not-to-exceed” price.
Contract Changes
• Constructive change: government action causes contractor to perform work differently than required by written contract
• Standard changes clause: allows contracting officers to unilaterally direct changes in specification (what), shipping destination (where) and packing (how packaged); contractor may request equitable adjustment in cost and/or schedule
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• Contractor required to notify government 60 days prior to incurring costs equal to 75% of amount obligated – Incrementally Funded Cost-Reimbursement Contracts
• Called “Limitation of Funds Clause (LOF)”– Fully Funded Cost-Reimbursement Contracts
• Called “Limitation of Cost Clause (LOC)”
Contract Clauses that ProvideSome Control over Unliquidated Obligations
• Contractor required to notify government 90 days prior to incurring costs equal to 85% of amount obligated– Incrementally Funded Fixed Price Contracts
• Called “Limitation of Government Obligation Clause (LOGO)”
• Notification allows termination liability to be covered by unliquidated obligations on that specific contract
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“Contracting” of Goods and Services through Use of MIPR
• Three types of actions by which DoD activities can use Military Interdepartmental Purchase Requests (MIPRs) to obtain goods and services:– Project Orders– Economy Act Orders – Non-Economy Act Orders
• A MIPR (DD Form 448) is normally used to transfer budget authority from one DoD activity (requesting agency) to another DoD activity (servicing agency) to provide specific goods or services
• The servicing agency signs and returns DD Form 448-2 (MIPR Acceptance) to requesting agency to indicate agreement to provide the goods or services
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Project Order
• MIPR must specifically state the request for goods or services is a Project Order
• MIPR is then treated as if it were a contract• Funds identified on MIPR considered obligated when servicing
agency signs and returns DD Form 448-2
• Three tests must be satisfied for action to be considered a Project Order: – Request must be for specific, identifiable supply, material,
equipment, work or service;
– Servicing agency must be capable of performing requested action;
– Requested work must be started within 90 days of acceptance or by first of January of following year.
References: US Code, Title 41, Section 23 and DoDI 7220.1
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Economy Act Order
• An Economy Act Order is not treated as if it were a contract but, rather, an interagency acquisition agreement
• While funds on the MIPR are normally considered obligated when accepted by servicing agency, the servicing agency is simply an extension of requesting agency
• Funds on the MIPR retain original period of availability for obligation purposes
• Required criteria for requesting agency to use this type order: – Required amount of funding must be available;
– Head of requesting agency decides the order is in best interest of the government;
– Servicing agency is capable of filling the order or getting by contract the requested goods or services;
– Head of requesting agency decides ordered goods or services can not be provided as conveniently or cheaply by contract with a commercial enterprise
References: US Code, Title 31, Chapter 15, Section 1535; FMR, Volume 11A, Chapter 3; and FAR at Sub-part 17.5
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Non-Economy Act Order
• Non-Economy Act Orders are for intra-governmental support where a DoD activity obtains required goods or services from a Non-DoD agency by sending funds to that servicing agency with understanding it will award a contract on its behalf.
• There must be specific statutory authority to place an order with a Non-DoD agency for this type action and to pay associated fees (there are limited such statutory authorities)
• Required criteria for requesting agency to use this type order: – Proper funding must be available;
– The Non-Economy Act Order does not conflict with another agency’s designated responsibilities;
– Requesting agency determines order is in best interest of DoD;
– Servicing agency is able and authorized to provide requested goods or services
Reference: FMR, Volume 11A, Chapter 18 (new chapter as of Feb 08)
• Non-Economy Act Orders are subject to same fiscal limitations as appropriation from which the funds are provided
Highly Controversial Method of DoD “Contracting”
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Managing On-Going Contracts
• As with other DoD entities, Acquisition Program Offices forecast obligations and expenditures in Obligation and Expenditure Plans
• Acquisition Program Offices are responsible for managing obligations and expenditures associated with contracts awarded for their programs
• Better (i.e., more realistic) forecasts usually result in better execution of those plans
• Deviations from planned obligations and expenditures must be reported and justified to higher headquarters
From Resource Management Perspective
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Managing On-Going Contracts
• Vast majority of Program Office funding is obligated against contracts
• Proper management of fiscal aspect of contracts requires close coordination with contractors
• Contractors provide status reports on many contracts
• Government Program Offices receive – and should use – information from contractor–provided reports and other government sources (e.g., DCMA) to help manage fiscal aspects of contracts
• Poor execution of contracts usually result in loss of funds
From Contract Management Perspective
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• Many acquisition-related contracts require contractors to provide periodic reports reflecting status of contract work effort and costs
• Earned Value Management– IAW DoDI 5000.02 (Enclosure 4, Table 5):
• cost or incentive contracts valued at or greater than $20M in then-year dollars are required to implement EVMS
• whenever implementation of EVMS is required on a contract, a Contract Performance Report (CPR) and Integrated Master Schedule (IMS) is a requirement of that contract
• EVM related reports not required for firm-fixed price, level of effort or time and materials contracts (use must be approved by MDA)
– CPR compares actual work performed on contract and actual cost incurred to planned work and budgeted cost at same point in time
– Variances between plans and actuals show potential schedule slips and/or cost overruns
– Cost overruns usually impact near term budget requirements
Information Available to Improve Management of On-Going Contracts
ThresholdsContracts Requirements
> $50M
Cost orIncentiveEqual to or Above Threshold
- Compliance with industry EVM standard- Formal EVM system validation- Contract Performance Report- Integrated Master Schedule - Integrated Baseline Reviews - Ongoing surveillance
< $50Mbut
> $20M
Cost orIncentiveLess Than UpperThreshold butEqual to orAbove LowerThreshold
- Compliance with industry EVM standard- No formal EVM system validation- Contract Performance Report (tailored)- Integrated Master Schedule (tailored)- Integrated Baseline Reviews- Ongoing surveillance
< $20M
Cost orIncentiveLess ThanThreshold
- EVM optional (risk-based decision)- Cost-benefit analysis required
DoD EVM Application Thresholds(DoDI 5000.02, Enclosure 4, Table 5)
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• Contract Funds Status Report (CFSR)– Applicable for contracts over six months in duration– Normally not required for firm fixed price contracts unless
circumstances require specific funding visibility– Generally required quarterly unless contract states otherwise– Contractor-prepared report provides basic fiscal information:
• Initial and adjusted contract price
• Funds obligated to date
• Accrued expenditures
• Contract work authorized and forecast
• Projected total price of contracted work
• Forecast of billings to the government by period
• Estimated termination costs by period
Information Available to Improve Management of On-Going Contracts
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• Contracting environment is continually changing
• Contracting is a team effort in partnership with contractor to meet mission needs
• Fair and realistic prices under competition
• Contracting Officers have broad discretion in determining contract type
• Contracting requires knowledge of policy and regulations plus business judgment
• Actions of contracting personnel are limited to authority delegated for specific purposes
SummaryFrom Contract Management Perspective
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Summary
• Government requires some contractors – by terms of the contract – to periodically report on status of work actually accomplished and at what cost and projected data
• Government can and should make maximum use of data contained in those reports to better manage execution of the program, to include management of resources
• Acquisition program offices must follow provisions of Financial Management Regulation (DoD 7000.14-R) for fiscal matters and FAR/DFAR for contracting matters
• Vast majority of budget authority provided defense acquisition programs is obligated against contracts
• Resource management in acquisition program offices requires active management of fiscal aspects of contracts
From Resource Management Perspective
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