B-206570.OM, APR 26, 1982

B-206570.OM, APR 26, 1982

SUBJECT: ARMY'S PROPOSED MULTIYEAR CONTRACT FOR BLACK HAWK HELICOPTERS (B-206570) DIGEST: TERMINATION LIABILITIES ASSOCIATED WITH ADVANCE PROCUREMENT EFFORTS FOR FUTURE YEAR REQUIREMENTS UNDER MULTIYEAR CONTRACTS WHICH ARE FULLY FUNDED DO NOT CONSTITUTE CANCELLATION COST OR CEILING WITHIN MEANING OF DEFENSE AUTHORIZATION ACT OF 1982.

DIRECTOR, PLRD - DONALD J. HORAN:

THE PROPOSED CONTRACT FOR BLACK HAWK HELICOPTERS IS A THREE-YEAR MULTIYEAR CONTRACT WHICH AUTHORIZES ADVANCE PROCUREMENT TO BE FULLY FUNDED AT THE BEGINNING OF EACH PROGRAM YEAR. THE CONTRACT CONTAINS NO CANCELLATION CEILING. AS A RESULT OF CONVERSATIONS WITH MR. ROBERT BONTEMPO OF YOUR STAFF, WE UNDERSTAND THAT YOU REQUEST OUR OPINION AS TO WHETHER THE ADVANCE PROCUREMENT IS SUBJECT TO THE REPORTING REQUIREMENT OF SECTION 909 OF THE DEPARTMENT OF DEFENSE AUTHORIZATION ACT OF 1982. FIND THAT IT IS NOT SUBJECT TO THE REPORTING REQUIREMENT.

SECTION 909 AUTHORIZES THE USE OF MULTIYEAR CONTRACTS UNDER CERTAIN CIRCUMSTANCES AND PROVIDES THAT SUCH CONTRACTS MAY BE USED FOR THE ADVANCE PROCUREMENT OF COMPONENTS, PARTS AND MATERIALS NECESSARY FOR THE MANUFACTURE OF A WEAPONS SYSTEM. THE ACT ALSO REQUIRES DEFENSE AGENCIES, PRIOR TO ENTERING INTO A CONTRACT WITH A CANCELLATION CEILING IN EXCESS OF $100,000,000, TO GIVE NOTICE TO THE ARMED SERVICES AND APPROPRIATIONS COMMITTEES OF THE HOUSE AND THE SENATE.

CANCELLATION CHARGES AND CEILINGS TRADITIONALLY HAVE BEEN CONTINGENT LIABILITIES WHICH BECOME ACTUAL LIABILITIES ONLY IN THE EVENT OF CONTRACT CANCELLATION. THESE LIABILITIES ALSO TRADITIONALLY HAVE NOT BEEN FUNDED. THIS PRACTICE IS RECOGNIZED BY SECTION 909 WHICH DOES NOT REQUIRE CANCELLATION CEILINGS TO BE FUNDED. SEE SECTION 2306(H)(5) AS ADDED TO TITLE 10 BY SECTION 909. SINCE CANCELLATION COSTS REPRESENT UNFUNDED CONTINGENT LIABILITIES, WE BELIEVE CONGRESS IN SECTION 909 REQUIRES AGENCIES TO GIVE ADVANCE NOTICE OF PROPOSED CONTRACT AWARDS WITH CANCELLATION CEILINGS IN EXCESS OF $100,000,000 SO THAT IT WILL BE AWARE OF PROPOSED LARGE CONTINGENT LIABILITIES WHICH IT MIGHT HAVE TO FUND. STATED ABOVE, THE BLACK HAWK CONTRACT DOES NOT CONTAIN A CANCELLATION CEILING. SINCE THE BLACK HAWK ADVANCE PROCUREMENT EFFORTS FOR EACH PROGRAM YEAR ARE TO BE FULLY FUNDED AT THE OUTSET OF EACH YEAR WITH MONIES ALREADY APPROPRIATED FOR THE PROGRAM, IT APPEARS THAT CONGRESS DID NOT INTEND TO ENCOMPASS SUCH CONTRACTUAL LIABILITIES IN THE NOTICE PROVISION OF SECTION 909, AS IT WILL ALREADY BE AWARE OF THE COSTS ASSOCIATED WITH THE PROGRAM.