The Indispensable Red Book
Without it on your shelf, your contracting library is incomplete.
By Jennifer W. Elkins, Ph.D., CPCM, CFCM
Principles of Federal Appropriations Law by the Government Accountability Office is a fiscal law compendium that dissects true-life cases and rulings. Known colloquially as the “Red Book,” it is an essential companion to the Federal Acquisition Regulation (FAR) in every contracting professional’s toolbox.
Fifteen years ago, I helped a contracts team leader document her response to a review finding for improperly failing to immediately issue a task order after the award of an indefinite-delivery-indefinite-quantity (IDIQ) contract. My colleague had waited five days after awarding the IDIQ to issue the first order. Her initial response to the compliance team was that because the rule on immediate awards did not appear in the FAR, it should not have appeared in a finding against her.
I provided her the correct reference on immediate awards from the Red Book,1 a multi-volume work covering federal fiscal law. Many regulations, statutes, and case law are not present in the FAR, but we are still bound to comply with them. The incident is just one of many demonstrating how important it is for contracting professionals to master fiscal law in addition to the FAR.
Contracting officers’ decisions rest upon a daunting breadth of knowledge. The FAR is a lot to absorb, but there are many tools beyond it that we must learn and understand. The Red Book is a crucial tool and home to original sources underlying much of what we do as contracting officers.
My colleague and I worked for a Department of Defense agency, but conversations like ours occur routinely across the government, and the responses rarely differ. Few contracting officers know what the GAO Red Book is or how to use it. However, they should view it as an essential and necessary tool they should learn and use as often as the FAR.
Fiscal Law and Contracting Professionals
While we have legal advice and financial certification, contracting officers and program managers are directly responsible for and privy to the totality of a contract action. FAR 1.602-1(b) states, “No contract shall be entered unless the contracting officer ensures that all requirements of the law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.” Contracting officers must understand and act from a broader perspective to protect taxpayers.
On many occasions, tricky, nuanced fiscal law issues have sent me beyond the FAR for answers. The GAO Red Book has been invaluable, but it operates differently from the FAR. The FAR often offers flexibility when rules are not explicitly defined. But for fiscal law, “The established rule is that the expenditure of public funds is proper only when authorized by Congress, not that public funds may be expended unless prohibited by Congress.”2 Understanding the nuances between the two sources enables contracting officers to ensure both innovative solutions and compliant contracts.
Inside the Red Book
The Red Book provides a framework for analyzing and solving appropriations law problems through the lens of GAO legal decisions and opinions. The issuance of contract obligations and legal advice, management and control of property accountability, and oversight of program direction must comply with the Red Book as they all involve federal spending.
The Red Book uses cases to illustrate legislative intent. It is written in plain language and uses everyday problems encountered by acquisition teams to explain critical concepts in appropriations law. Clarity and understanding of appropriations law are particularly important for contract professionals who sign their names to obligate funds. The following Red Book sections are especially useful to contracting personnel:
Legal Framework. Chapter 2 defines budget authority, which “grants agencies authority to enter into financial obligations that will result in immediate or future outlays of government funds.”3 It is essential to understand where the authority to obligate funds is derived and the statutory language surrounding the obligation of funds. This language includes constraints on funds as well as providing flexibility.
Time, Purpose, Amount. Contracting professionals often are faced with financial challenges in verifying the time, purpose, and amount of funds for a particular action. These three concepts aren’t discussed in the FAR and are almost always nuanced in practice. Nearly every case detailed in the Red Book stems from a situation where FAR guidance is unclear.
Contracting officers periodically take appropriations law refreshers, but regularly thinking through scenarios provides a basis for decisions when real-life problems arise. The topics of time, purpose, and amount are addressed as separate chapters within the Red Book.
Chapter 5: Time. The concept of time is driven by the bona fide needs rule, which derives from 31 USC 1502. The bona fide needs rule states, “Appropriations made for a definite period of time may be used only for expenses properly incurred during that time.”4 In most cases, Congress defines fixed periods during which obligations are available. This fundamental concept provides that the time of need must match availability. Chapter 5 provides the reader with an in-depth understanding of how funds can be used to address prior, current, and future year needs.
Severability Determination. The FAR discusses the severability of services but does not provide the basis for the determination. Most offices will provide a template to make this determination as a part of the contract file. The basis is found in the Red Book. However, this is only sometimes apparent to the contracting workforce, as it doesn’t often appear in our training, even though it is key to what we do. This determination is tied to “whether [an effort] represents a single or multiple undertaking.”5
For example, a contract for the production of the build of a launch system can be considered non-severable as the government doesn’t gain value from a half-built system. Thus, a launch system is a single undertaking. However, landscaping services can be broken into multiple projects or undertakings. The government receives value each time the vendor mows the grass or plants flowers. Severability is a crucial concept for understanding time. A contracting officer’s decision on the appropriate year of funds is tied to this determination.
Obligation or expenditure in advance of appropriation is prohibited.6 A contracting officer cannot obligate in advance of appropriations being signed. However, the Red Book denotes flexibilities through the use of conditional contracts.
Conditional contracts are executed with two conditions: 1. A provision is included to provide that no legal liability on the part of the government arises until the appropriation is made available in the agency to fund the obligation. 2. The agency provides a notice to the contractor before it is authorized to proceed.6 This flexibility is a way to more expediently meet mission partner needs and often presents in the form of availability of funds provisions and options.
Chapter 4: Purpose. “Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law.”7 This concept appears to be simple; however, in practice, the statutory language can be specific or broad.
Every object covered by an appropriation cannot be written into statutory language. Contracting officers, with the assistance of their finance counterparts, must ensure that purpose analyses are clean. These analyses are accomplished through the necessary expense rule and a three-step analysis defined within the Red Book. When a potential issue arises, it is best to document the analysis that went into the decision.
Step 1. Is there a logical relationship to the appropriation that is to be charged? It should be apparent that an expense is justified under one program or entirely inappropriate under others. Making this decision requires an examination of the appropriations and statute language.
The expenditure can be one of many ways to accomplish a given acquisition, but it should fall within the agency’s legitimate range of discretion. Further, the Red Book covers nuances of law regarding many types of purchases, such as food, entertainment, books, and periodicals. This detail helps contracting officers understand appropriate charges and activities.
Step 2. The expenditure must not be prohibited by law. Regardless of the necessary expense consideration, it is unallowable if another law has prohibited a purchase.
Step 3. The expenditure must not be otherwise provided for under the scope of another appropriation or funding scheme. 8
Chapter 6: Amount. Amount often gives contracting officers problems. It relates to the Antideficiency Act (ADA), which provides that the U.S. government may not: “(a) Make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation, or (b) involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law.”9
This might seem to require a simple review of whether sufficient funds are available to accomplish an action before executing. The nuances don’t rear their heads until something unexpected happens. One nuance, indemnification agreements, appears in the Red Book but is tied to FAR procedures.
In indemnification agreements, one party promises to cover the risk of another. Many vendors request indemnification, which is sometimes necessary due to the nature of the work. Still, the government “may not enter into an agreement to indemnify where the amount of the government’s liability is indefinite, indeterminate, or potentially unlimited.”10
One of three conditions must exist for indemnity clauses to be included in a contract:
1. The potential liability was limited to a definite amount known at the time of award, available in appropriations, and not otherwise prohibited.
2. The indemnification was a legitimate object within appropriations.
3. Congress has expressly authorized the agency to indemnify.10
Beyond Time, Purpose, and Amount
While time, purpose, and amount are key concepts for contracting professionals, the Red Book provides additional crucial information.
For example, the key factors for a binding agreement and the concept of contingent liabilities can be found in Chapter 7 under a review of the nature of an obligation. Chapter 8 informs contracting officers of the idiosyncrasies of continuing resolutions. Chapter 10 details considerations for grants and cooperative agreements. Chapters 12 and 13 examine the use of public funds for property. Chapter 14 guides claims and debt collection.
Appropriations law is considered an elective class for federal certification programs. A qualified contracting officer might never attend a full version of the appropriations class where fiscal law scenarios are pulled apart and thought through. However, with the Red Book, contracting professionals can review how others have approached these fiscal challenges and how the courts and GAO have decided the outcomes.
Using the Red Book
It can be helpful to think of the Red Book as a rung in the policy research ladder. Contracting officers can be most innovative when they clearly know where the hard lines of policy are drawn. When trying to understand policy questions or determinations, many contracting officers review applicable guidance through the layers of this policy ladder, with higher guidance levels feeding the FAR and the more complex problems requiring an understanding of intent.
Intent derives from three higher-level areas:
1. Regulations from stakeholder communities
2. Statutes
3. Case law
Each rung must be reviewed or understood when making decisions.
The Red Book is a summarized version of case law for fiscal matters. To understand current GAO intent, it isn’t necessary to read and understand every case. The Red Book provides typical problems encountered in the ordinary course of business by topic type. Then each problem is addressed with definitions and intent illustrated by GAO bid protest decisions. Most of the scenarios directly apply to situations regularly faced by contracting officers. Further, each declaration is accompanied by cases that provide the basis of GAO intent for further study – no searching through years of cases required.
To efficiently use the Red Book, review it based on chapter topics. While there are simple mechanisms for researching the FAR (e.g., acquisition.gov) and statutes (e.g., Cornell Law), the Red Book can be trickier. Chapters appear in Adobe Acrobat, so a find search within Adobe can be used to pinpoint a topic. Chapter numbers are embedded within the page numbers for ease of reference, and references work much like the FAR. For example, a Chapter 5 topic discussion found on page 25 would have a 5-25 page number and would have a letter/number designation for paragraphs.
Tough Questions and Red Book Answers
The GAO publishes an annual report on ADA violations across agencies. These reports can provide key insights into questions acquisition teams and contracting officers face. The cases typically call out the party responsible for a violation and the discipline meted out. The accountable member can be anyone from the multifunctional acquisition team, not just the legal and financial partners.
Real-world examples of violations reported in the GAO 2021 ADA Report and summarized below illustrate that not every question is limited to time, purpose, and amount.11 While these are just three of many scenarios, they provide recent examples of nonstandard issues that are indeed ADA violations.
Scenario 1. An agency converted a large covered lighter barge into a berthing and messing barge as a modernization under repair and maintenance. The project required several years to complete, but the acquisition was accomplished with multiple increments of one-year funds. The agency had funds to cover the action each year. Still, there was no guarantee that the government would receive anything of value if funds were not allotted to the initial award in subsequent years. Violations were attributed to the program manager and resulted in a letter of caution.
Red Book Chapter 5 provides guidance for considering severability and purpose. How often do contracting officers examine actual funding lines? Do they depend on others to do this? Had the acquisition team reviewed and better understood the Red Book in concert with decision-making, this violation might have been avoided.
Scenario 2. An agency was found in violation for awarding 42 contracts and 104 other transaction agreements without notifying Congress in advance. The agency had the appropriate authority to issue and the funds to cover the awards but did not act in strict alignment with the appropriate timing of announcements.
This is a nuance in the ADA. The ADA not only refers to the time, purpose, and amount of funds. The ADA can be violated simply by not following all instructions within the statutory language. In this case, a notification before obligation was required. Violations were attributed to the contracting officer and resulted in a warrant suspension.
Red Book Chapter 1 provides a list of critical considerations when approaching statutory language tied to appropriation. Consulting it might have prevented this mistake. This is an easy error to make when contracting officers depend solely on financial partners for funding decisions.
Scenario 3. An agency instituted leases with escalation and indemnification clauses without limitations, creating a potential for unlimited liability and potential ADA violations. Red Book Chapters 6 and 7 provide guidance for understanding and managing contingent liability and indemnification. Contingent liabilities “do not create an obligation unless and until a contingency materializes.”
These liabilities do not violate the ADA until the contingency occurs. Still, agencies have a legal obligation to reasonably mitigate or avoid contingent liabilities through administrative reservation or commitment of funds and taking actions to prevent the contingencies from materializing. The assistant commandant for engineering was found to be at fault in this case, but no disciplinary action was taken.
The contracting profession requires continual learning. Contracting professionals must have a clear foundational understanding of the FAR. But learning cannot stop with the FAR. By better understanding other regulations, case law, and statutes, in addition to FAR, we can provide our multifunctional teams solutions that work and are also compliant. The GAO Red Book is an essential tool to help us do this. CM
Dr. Jennifer W. Elkins, Ph.D., CPCM, CFCM, is Senior Procurement Analyst and Procurement Portfolio Manager for the National Aeronautics and Space Administration leading oversight and execution of a $150 billion procurement portfolio. She has 22 years of military and civilian service in contracting, program management, and programming and budgeting activities. She holds DAWIA Level III certifications in contracting and program management, a tier 1 international affairs certification.
ENDNOTES
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.7 § C.1e, GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.1 § A., GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.1 § A.1., GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.1 § B., GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.5 § B.5, GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.5 § A.3, GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.3 § A., GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.3 § C., GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.6 § C.2, GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Principles of Federal Appropriations Law, 5th ed., 2016 rev, ch.6 § C.2.c, GAO-16-464SP (Washington, D.C.: Mar. 2016).
GAO, Fiscal Year 2021 Antideficiency Act Reports Compilation, B-333630 (Washington, D.C.: Apr 2022).