Study of Multiyear Contracts Awarded Under Public Law 90-378

Published by the Government Accountability Office on 1971-03-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                  UNITED STATES GENERAL ACCOUNTING OFFICE
                                           WASHINGTON,   D.C.   20548


                                                                                   MAR 30 B7i

           The Honorable

           The Secretary of Defense
                     Attention:     Assistant Secretary of Defense
           Dear Mr. Secretary:
                  The General Accounting Off&e has made a&udv *A of multiyear contracts
           awarded-nacted                             in July 196o. The law authorizes
           the Department of Defense to aw7Rdcontracts for periods up to 5 years for
           certain overseas services and related supplies for which only first year
           funds are available.    The primary purpose of the law is to increase com-
           petition and thereby reduce costs to the Governmentwhere there is a fore-
           seeable need for the services or supplies for more than 1 year and where a
           substantial initial   investment by a new contractor is required.
                Our study was performed at seven procurement offices located in
           Europe, the Far East, and the United States. Wewanted to find out the
           extent of multiyear contracting, the effect of multiyear contracting, and
           the problems that may have occurred in using this authority under existing
           Defense regulations and practices.
                 We examined X?j contracts totaling about $140 million awarded for ser-
            vices overseas during the period November1.968 to December196~. Nine of
            the contracts totaling about $30.7 million had been awarded on a multiyear
            basis. Eleven other contracts that appeared susceptible to solicitation
            for multiyear procurement were awarded on l-year bases. It appeared that
            many of the other contracts were not considered for multiyear awards be-
            cause of the uncertainties as to continuing requirements.
                  The limited number of multiyear procurements we examined into did not
            provide a realistic basis for evaluating the effect of the law on increas-
            ing competition and on savings to the Government. Ln our study, however,
            we observed a number of practices and problems which, if revised or re-
            solved, might contribute to more extensive and effective use of multiyear
            contracting.    These matters are presented below for your consideration.

                                         50TH   ANNIVERSARY     1921-   1971 m=d

     Current regulations require that multiyear contracting be approved
by higher authority than the procurement officer before the award is made.
The regulations are silent as to whether approval shall be obtained prior
to or after solicitation   of multiyear bids. Our study indicated that pro-
curement officials   are requesting approval prior to the solicitation.
     We believe the regulations should be clarified to provide that, where
procurement officials determine that there is a continuing need, they
should solicit l-year and multiyear bids and the offeror's estimated ini-
tial investment before requesting approval. This information would be
helpful to the approving authority in determining whether the conditions
exist for multiyear procurement and whether this method is advantageous
to the Government.
      Under current regulations the lowest projected l-year bid is compared
with the lowest multiyear bid to determine whether to award a l-year or a
multiyear contract.   This procedure is satisfactory for formally advertised
procurements, since the award must be madeat the price offered without dis-
cussion. Most overseas procurements, however, are awarded by negotiation,
which permits the contracting officer to analyze and discuss available
      The analysis should recognize that, to avoid a loss if a contract for
only l-year is awarded, a contractor would have to include its initial
investment in the l-year price.
      In analyzing the price, procurement officials   should multiply the
l-year price (less initial   investment) by the number of years of the multi-
year contract, add back the initial    investment, and compare the result with
the multiyear price.    If the multiyear price is higher, procurement offi-
cials would have a sound basis for inquiring into the difference and, if
warranted, negotiating a lower price.
      Our &u&J has indicated that someprocurement officials were reluctant
to use multiyear contracts because of the uncertainity of the availability
of funds for all years subsequent to the first year of the award. Multi-
year contracts awarded under the authority of Public Law 90-378 are funded
either when the Congress approves the succeeding year's budget or when a
joint resolution to continue expenditures is approved. Quite often such
approvals occur close to, or after, the end of the fiscal year.
      Multiyear contracts provide for their cancellation in the event that
funds for each succeeding year are not available.     Notification of non-
availability   of funds must be made in sufficient time to permit the con-
tractor to stop work by the end of the fiscal year. If the contract is to
be continued, the contracting officer may have to notify the contractor
that funds are available before they have been approved by the Congress.