Now more than ever, units seek to acquire the latest technological advances to communicate with ease across geographically dispersed footprint and to more efficiently accomplish their mission. Funding an information technology (IT)2 acquisition, however, is a complex area of fiscal law. Army fiscal law attorneys must carefully analyze the underlying facts related to an IT acquisition under a scattered array of legal authorities. This article consolidates the various legal guidelines and provides a framework for the fiscal analysis crucial to an ever-changing military IT environment.
The most common appropriations for IT acquisitions are operation and maintenance, Army (OMA);3 other procurement, Army (OPA); and research, development, testing, and evaluation (RDT&E).4 Generally, OMA funds expense items;5 OPA funds investment items;6 and RDT&E funds research and development (R&D) activities required to create new products and capabilities.7
The correct appropriation for funding IT acquisitions is determined by analyzing the intended purpose, underlying tasks, and cost of the requirement. These factors must be considered in applying the expense/investment threshold (E/I-T) and systems analysis, as appropriate.8
The Expense/Investment Threshold Exception
All costs are classified as either expenses or investments.9 Expenses are the costs of resources consumed to operate and maintain an organization,10 whereas investments are the costs that result in the acquisition of an end item that benefits future periods and are long-term in nature.11
The general fiscal law rule is that OMA can only be used to pay for expenses, and OPA can only be used to pay for investment items.12 However, the E/I-T exception is the colloquial term for the statutory authority that allows the Army to use OMA to purchase investments with a unit or system cost of $250,000 or less.13 This statutory authority is an exception to the general fiscal law rule that all investment items must be purchased with OPA, instead enabling the use of OMA for these investment items.14 The E/I-T exception does not apply to any costs funded with RDT&E. Instead, both expenses and investment costs involving R&D activities are funded using RDT&E funds, regardless of any unit or system cost.15
All activities that are not centrally managed16 must apply the E/I-T exception to determine the correct appropriation for all IT investments that do not involve R&D.17 This means OMA must be used to purchase all such investments that cost $250,000 or less, and OPA is used for investment items that cost over $250,000.18
Certain activities that are centrally managed must purchase non-R&D IT investments using OPA, regardless of the cost.19 If a centrally managed investment item is not purchased via a Defense Working Capital Fund (DWCF),20 it must be purchased with the most specific procurement appropriation, regardless of cost.21 If a centrally managed item is purchased via a DWCF, and the item is not part of a full funding effort,22 then the item must be purchased with OMA if the unit or system cost is $250,000 or less. If a centrally managed item is purchased via a DWCF, and the item is part of a full funding effort, then the item must be purchased with the most specific procurement appropriation, regardless of cost.23 One way of determining whether an investment item is centrally managed is by asking a unit’s logistics representative.
Systems Analysis for Information Technology Acquisitions
The systems analysis needs to be applied when an activity is attempting to purchase multiple IT investment items and the cost of the items may need to be aggregated.24 A system is “a number of components that . . . function within the context of a whole to satisfy a documented requirement.”25 The function and relationship of each individual investment item to one another must be fully defined to determine if the sum of the component parts will function together or separately.26 If the components are installed so that the end item is intended to create something that causes all items to function together and rely on each other, then they form one system, and all of the costs must be aggregated.27 If the individual investment items are end items in their own right and operate independently, then they are each considered separate systems, and the costs are not aggregated.28
Systems analysis for IT hardware acquisitions consists of determining whether the primary purpose of the hardware is to function as a component of a larger system (i.e., interconnected and primarily designed to operate as one) or designed primarily to operate independently. For example, individual employees’ personal computers (PC) and stand-alone printers are considered “ancillary IT equipment” that form individual systems unto themselves when their primary purpose is to operate independently from other IT equipment.29 When PCs are primarily used for systems administration, however, they are not considered as ancillary IT equipment and are likely considered as part of a larger system.30 Ultimately, a systems analysis for IT hardware depends on the intended function as stated in the requirements document and not on whether the equipment has the capability to operate independently.31
Generally, the systems analysis for software acquisitions becomes relevant under two sets of circumstances: first, the acquisition of commercial-off-the-shelf (COTS)32 software for use “as is,” and second, the development of new software capabilities, whether or not COTS software is incorporated into the development effort.33
The purchase of COTS software products that are used “as is” are generally considered investment items.34 Therefore, if the COTS software costs less than $250,000 use OMA, and if it costs more than $250,000, use OPA.35 However, if the use of a COTS software product is financed on an annual fee basis, then it is considered an expense and should be financed with either OMA or RDT&E funds, as appropriate, regardless of total cost.36
The creation or development of completely new software programs and capabilities must be funded with the RDT&E appropriation because it involves developmental efforts regardless of whether the costs involve expense and/or investment items.37 “The procurement of engineering, design, integration, test, and evaluation services to enhance a [COTS] IT item to meet the government IT system’s objective performance is funded with RDT&E. In other words, if modifying COTS for Army-unique functionality, use RDT&E.”38 Finally, for software modifications of currently-operational IT software, “RDT&E funds should be used to develop major upgrades increasing the performance envelope of existing systems.”39
Hybrid systems are IT requirements that include both hardware and software components, and they are analyzed in the same way as hardware and software systems. In the case of hybrid systems, the requiring activity must determine whether the primary purpose of the components is to function independently or as part of a larger system. Therefore, the requiring activity must examine the factors described above, including whether the components (both hardware and software) will operate independently to satisfy the documented requirement and whether the components are necessary to satisfy the documented requirement.40 For example, assume the Headquarters, Department of the Army, G-2 wants to build a vehicle capable of gathering various forms of intelligence. The requirement includes both hardware collection devices and software necessary to manage the activities within the vehicle. Although some of these components may be able to operate independently from each other, they function as part of a larger system and would be considered one system to satisfy the documented requirement for funding determination purposes.
Potential costs could entail the purchase of all new items to create a brand new system (e.g., purchase all new components for a new video teleconference (VTC) system) or the purchase of new components to make additions, modifications, and/or upgrades to an existing item (e.g., making improvements to an existing VTC system).41 Other costs to take into consideration include equipment, integration, engineering support, and software that form the system.42 Additionally, the costs for installation of IT systems (software, hardware, or hybrid) may need to be included as part of the aggregated system cost.43 Installation costs for investment systems may be considered a stand-alone expense—and thus not aggregated with the investment system cost—if a contractor, other than the prime contractor, that developed or produced the system installs the system.44
An activity may not split or fragment the acquisition of an IT system so it can remain under the E/I-T of $250,000 in an effort to use OMA.45 Failing to properly aggregate the costs of an IT system could result in violating the Purpose Statute46 and/or the Anti-Deficiency Act.47 The determination of whether an IT investment is a system is fact-specific, depending heavily upon the documented requirement. As a result, ensure the documented requirement is correct and sufficiently detailed in order to properly conduct a systems analysis to aggregate all costs before applying the E/I-T to determine if the $250,000 threshold exception applies.48
Examples of Common Information Technology Acquisitions and Appropriations
Below are common IT acquisitions and the appropriations that are generally used to fund each purchase. These examples are no substitute for conducting a full E/I-T and systems analysis to the particular facts and circumstances governing a specific IT acquisition.
Operations and Maintenance, Army appropriation funds are generally appropriate for the following IT acquisitions: services for the installation of IT (if the contractor installing the system is not the prime contractor or direct subcontractor that sold the hardware and/or software);49 costs of component parts replaced or repaired during routine maintenance and repair of an IT end item;50 updates to software previously procured, that do not result in significant capability improvements or require extensive programming to incorporate;51 studies and analyses;52 ancillary IT equipment;53 and software use licenses that do not support RDT&E efforts and whose licensing periods do not exceed one year in length.54
Other Procurement, Army appropriation funds are generally appropriate for the following IT acquisitions: centrally managed IT equipment (regardless of the cost of the IT unit/system);55 the initial procurement of COTS items (including software);56 replacing existing IT systems in their entirety;57 modifying, upgrading, and replacing components or component parts during a system modification or upgrade;58 and software use licenses that do not support RDT&E efforts and whose licensing periods exceed one year in length.59
Research Development, Test, and Evaluation60 appropriation funds are generally appropriate for the following IT acquisitions: R&D of IT equipment and software, initial and follow-on operational testing of IT systems, designing and producing prototype IT equipment and software, and initial manufacturing processes of IT equipment;61 modifications of COTS that create a new capability, including for Army-unique functionality; 62 development of software not in existence via software development services;63 acquisition, operation, and sustainment of IT systems and equipment used exclusively to support RDT&E-funded activities;64 and software use licenses that support RDT&E efforts, regardless of the period of the licenses.65 When there is doubt as to the proper appropriation to fund the costs of an acquisition between the RDT&E appropriation and other appropriations, the issue should be resolved in favor of the RDT&E appropriation.66
It must be noted that developmental IT efforts involving Microsoft SharePoint67 are not exempt from funding determination rules. Microsoft SharePoint is simply a COTS IT software system68 and any purchase, use, modification, and/or development of Microsoft SharePoint requires a fiscal analysis to determine the proper appropriation.
The three most commonly used Army appropriations for IT acquisitions are OMA, OPA, and RDT&E. Generally, OMA funds are used for IT expense item acquisitions, OPA funds are for IT investment items and system acquisitions, and RDT&E funds are for all expense and investment items of IT development efforts. The E/I-T exception allows activities to use OMA to purchase non-R&D and non-centrally funded investment items that cost $250,000 or less. A systems analysis is required to determine if the cost of component parts needs to be aggregated in determining if the E/I-T of $250,000 has been exceeded concerning non-R&D investment items. TAL
1. This article was prepared by the Contract and Fiscal Actions Division (KFAD), Office of the Judge Advocate General (OTJAG), U.S. Army, as a collaborative effort with contributions from Captain (CPT) Lyn P. Juarez, CPT James T. Casey, CPT James C. Coghlan, and CPT Dustin D. Harrison; edits by Mr. Randy E. Poole, CPT Benjamin D. Williams, Mr. Peter D. P. Vint, and Lieutenant Colonel Mark J. Oppel; and approval by Mr. Brian E. Bentley.
2. Information technology (IT) is
[a]ny equipment or interconnected system or subsystem of equipment, that is used in the automatic acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information by the Army or [Department of Defense (DoD)]. This includes equipment that is used directly or is used by a contractor under a contract with the Army or DoD which requires either the use of such equipment or the use, to a significant extent, of such equipment in the performance of a service or the furnishing of a product. [It] also includes computers, ancillary equipment, software, firmware, and similar procedures, services (including support services), and related resources.
Defense Finance and Accounting Service—Indianapolis (DFAS-IN) Manual 37-100-19, The Army Management Structure, App. A, para. D.9.b (22 Aug. 2018), https://www.asafm.army.mil/dfas.aspx?doc=37-100 [hereinafter DFAS Manual].
3. This article provides Army-specific guidance and will use the acronyms that are commonly known in the Army such as “OMA” instead of the more general “O&M” acronym.
4. DFAS Manual, supra note 2, para. D.2.c.
5. U.S. Dep’t of Def., 7000.14-R, DoD Financial Management Regulation, vol. 2A, ch. 01, paras. 010201.B.1., C.3., D.1 (Oct. 2008), http://comptroller.defense.gov/FMR/fmrvolumes.aspx [hereinafter “DoD FMR”].
6. Id. paras. 010201.B.2., C.3.
7. Id. para. 010212.B.3.; DFAS Manual, supra note 2, para. D.3.c.
8. Working Capital Fund activities and research, development, testing, and evaluation (RDT&E)-funded organizations follow specialized funding procedures for IT acquisitions, whereas organizations funded with operating funds must budget for IT efforts based upon the underlying purpose of the IT effort. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.
9. Id. para. 010201.B.
10. Id. para. 010201.B.1.
11. Id. para. 010201.B.2.; Matter of: Army—Availability of Army Procurement Appropriation for Logistical Support Contractors, B-303170 at 4-5 Comp. Gen. (Apr. 22, 2005), https://www.gao.gov/decisions/appro/303170.htm.
12. DoD FMR, supra note 5, vol. 2A, ch. 01, paras. 010201.B.1., B.2, C.2, C.3., D.1.
13. Congress has annually authorized the use of operation and maintenance, Army (OMA) appropriation funds to purchase investment items with a unit or system cost of up to $250,000 through appropriations acts. See, e.g., Consolidated Appropriations Act, 2018, Pub. L. No. 115-141, § 8031, 132 Stat. 348, 470 (Mar. 23, 2018) (operations and maintenance, Army funds “may be used to purchase investment items having an investment item unit cost of not more than $250,000.”). Congress permits OMA funds to be used to purchase investment items having a unit cost of $500,000 or less if the Secretary of Defense determines this increased threshold is necessary to support contingency operations overseas. See id. § 9010.
14. DoD FMR, supra note 5, vol. 2A, ch. 01, paras. 010201.B.2., C.3, D.1.f.
15. DFAS Manual, supra note 2, paras. D.3.c-d.
16. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010224. “Centralized Item Management and Asset Control” is defined as
[t]he management in the central supply system or a DoD-wide or Service-wide acquisition and control system in which the manager has the authority for management and procurement of items of equipment. This includes such functions as requirement determination, distribution management, procurement direction, configuration control and disposal direction. Asset control includes the authority to monitor equipment availability and take such actions as necessary to restock to approved stockage levels.
17. See id. para. 010201.F. (using a chart to summarize DoD elections).
18. See DoD FMR, supra note 5, vol. 2A, ch. 01, paras. 010201.F, D.1.f.
19. See id. para. 010201.F.; DFAS Manual, supra note 2, paras. D.4.c.
20. DoD FMR, supra note 5, vol. 11B, ch. 01, paras. 010101, 010102 (“The Defense Working Capital Funds (DWCF) are established under the authority of 10 U.S.C. [§] 2208 . . . [and] consist of individual activity groups that are managed by [DoD] Components for providing goods and services, on a reimbursable basis, to other activities within DoD and to non-DoD activities when authorized.”). Army Working Capital Funds (AWCF) follow the same rules as DWCF. DFAS Manual, supra note 2, fig. 3.
21. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.F.
22. “Full funding effort” looks at whether the item purchased is “intended for use in weapon system outfitting, government furnished material on new procurement contracts or for installation as part of a weapon system modification, major reactivation, or major service life extension.” DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.F; see also id. para. 010202 (full funding is a “budgeting rule that requires the total estimated cost of a military useable end item be funded in the fiscal year in which the item is procured”).
24. Id. para. D.3.c.
25. DFAS Manual, supra note 2, para. F.9; see also id. para. F.1 (defining system as “any combination of components/items which work together to perform a function or to satisfy an approved requirement . . .”).
26. See id. paras. D.6.a, F.1; DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.D.1.f.
27. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.D.1.f.
28. DFAS Manual, supra note 2, para. D.6.a.
31. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.D.1.f.
32. Commercial-off-the-shelf (COTS) is defined as
(1) . . . any item of supply (including construction material) that is—
(i) A commercial item . . .;
(ii) Sold in substantial quantities in the commercial marketplace; and
(iii) Offered to the Government, under a contract or subcontract at any tier, without modification, in the same form in which it is sold in the commercial marketplace; and
(2) Does not include bulk cargo, as defined in 46 U.S.C. 40102(4), such as agricultural products and petroleum products.
FAR 2.101 (2005). See also DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010209 (defining a COTS as an item “purchased directly from a commercial source that can be utilized without alteration or modification . . .”).
33. See DFAS Manual, supra note 2, paras. D.4.e., D.8.e.
34. Id. para. D.8.c.
36. Id. An example of financing COTS software on an annual fee basis is using software COTS products commonly called software as a service (SaaS). A
SaaS provides a complete software solution that you purchase on a pay-as-you-go basis from a cloud service provider. You rent the use of an app for your organization, and your users connect to it over the Internet, usually with a web browser. All of the underlying infrastructure, middleware, app software, and app data are located in the service provider’s data center. The service provider manages the hardware and software, and with the appropriate service agreement, will ensure the availability and the security of the app and your data as well. Software as a service allows your organization to get quickly up and running with an app at minimal upfront cost.
What is a SaaS?, Microsoft Azure, https://azure.microsoft.com/en-us/overview/what-is-saas/ (last visited Sept. 4, 2019).
37. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.3.; DFAS Manual, supra note 2, para. D.3.c. (clarifying that the E/I-T exception does not apply to RDT&E items).
38. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.3.b.; DFAS Manual, supra note 2, para. D.4.e.
39. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.3.
40. See generally id. para. 010201.D.1.f. (every component that functions together to create the system must be aggregated); DFAS Manual, supra note 2, para. D.8.c. (software is an investment item subject to the E/I-T exception). Since software is an investment item, it needs to be taken into consideration when conducting a systems analysis to see if it is one of the necessary components that functions with other components to create the system.
41. DFAS Manual, supra note 2, para. D.5.b.
42. Id. paras. D.4.b., F.9; DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.D.
43. DFAS Manual, supra note 2, para. D.4.f.
44. Id. para. D.4.f.2.
45. Id. para. D.3.e.
46. The Purpose Statute provides that “appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law.” 31 U.S.C. § 1301(a) (2018).
47. The Anti-Deficiency Act (ADA) is a series of statutes that prohibit obligations and expenditures in excess of an appropriation or before an appropriation is available. See 31 U.S.C. §§ 1341, 1342, 1517 (2018). Any violation of the Purpose Statute may also result in an ADA violation. DoD FMR, supra note 5, vol. 14, ch. 2, para. 020102.B.1.
48. See DFAS Manual, supra note 2, paras. D.6.a, F.1; DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010201.D.1.f.
49. DFAS Manual, supra note 2, para. D.4.f.2.
50. Id. para. D.7.
51. Id. para. D.8.d. These types of software releases are considered maintenance efforts. “Minor improvements in software functionality accomplished during routine maintenance may also be [OMA] funded. For example, the creation/purchase of a small plug-and-play application or script that fine tunes or optimizes the existing application service provider capability are financed with [OMA].” Id.
52. Id. para. D.3.d. However, “[a]ny [R&D] costs that result in a prototype should be funded with RDT&E” regardless of amount. Id.
53. DFAS Manual, supra note 2, para. D.6.a (provided the E/I-T exception and system analysis finds the total cost is less than or equal to $250,000).
54. See DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.4.b.
55. DFAS Manual, supra note 2, para. D.4.c. para. F.2.
56. See id. para. D.4.f. However, the initial procurement of COTS requires application of the E/I-T and Systems Analysis. Id. para. D.4.f.(1). The Computer Hardware, Enterprise Software and Solutions (CHESS) is the Army’s designated primary source for the procurement of COTS IT hardware, software and, services. U.S. Dep’t of Army, Reg. 25-1, Army Information Technology para. 2-16h (5 June 2013). To purchase any IT hardware or software outside of CHESS contracts, an Army organization has to obtain a waiver from CHESS. AFARS 5139.101-90(a)(2) (29 Aug. 2016).
57. DFAS Manual, supra note 2, para. D.5.b. (after applying the E/I-T analysis).
58. Id. (after applying the E/I-T analysis).
59. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.4.b.
60. Research, development, testing, and evaluation (RDT&E) falls under seven broad budget activities: Basic Research, Applied Research, Advanced Technology Development (ATD), Advanced Component Development and Prototypes (ACD&P), System Development and Demonstration (SDD), RDT&E Management Support, and Operational System Development. DoD FMR, supra note 5, vol. 2B, ch. 05, para. 050105. The RDT&E budget activity that applies to a particular IT project will depend upon the acquisition milestone that project falls under and influences the annual budget preparation cycle. Id.; U.S. Dep’t of Def., Instr. 5000.02, Operation of the Defense Acquisition System, para. 5.b.(3) (26 Nov. 2013). The Army has issued Army Regulation 73-1 to implement the budgetary guidance contained in DoDI 5000.02. U.S. Dep’t of Army, Reg. 73-1, Test and Evaluation Policy para. 1-1 (8 June 2018). The Army differentiates between two types of tests: Developmental Tests and Operational Tests. Id. para. 4-1. Developmental tests verify the technical specifications for the designed performance, identify the system’s capabilities and limitations, and determines contract compliance. Id. para. 4-2. Operational tests check to ensure the system will operate as designed and intended under realistic operating conditions prior to the system being fielded. Id. para. 5-1.
61. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010213.B.1.a, 010213.C.5.a.
62. See DFAS Manual, supra note 2, para. D.4.e. “Modification” is “the alteration, conversion, or modernization of an end item of investment equipment which changes or improves the original purpose or operational capacity in relation to effectiveness, efficiency, reliability, or safety of that item.” Id. para. F.3.
63. Id. para. D.8.e.
64. Id. para. D.4.d.
65. DoD FMR, supra note 5, vol. 2A, ch. 01, para. 010212.B.3.c.
66. Id. para. 010213.B.
67. Microsoft SharePoint is an IT software system that allows users to share files, data, and resources with others in order to facilitate collaboration on projects. SharePoint, Microsoft, https://products.office.com/en-us/sharepoint/collaboration (last visited Sept. 4, 2019).
68. FAR 2.101 (2005).