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End-of-Year Funding Explained, Part One: The Federal Fiscal Year

End-of-Year Funding Explained, Part One: The Federal Fiscal Year

For most of the working world, the summer is a time to relax with friends and vacation with family.  However, for government contractors summer is one of the busiest — if not the busiest — times of the year.  This is because the Federal Fiscal Year ends September 30th and Federal Agencies have to spend any money they have left before then creating an all summer race to capture the 10s of billions that will be awarded in the last weeks of September.

In honor of fiscal 15’s imminent end this month’s blog posts will discuss:

  1. The Federal Fiscal Year
  2. What it takes to win your piece of the billions that are spent in the last month, and in particular the last week, of the fiscal year and,
  3. The impact this system has on our nation and the small businesses trying to work with government.

The Federal Fiscal Year Explained

Every large organization has to schedule their projects and budget their finances and most do that in one year increments and the Federal Government is no different.  Federal agencies submit their requested budget to OMB who consolidates and massages them before handing a proposed budget to the President who in turn presents it to Congress in the first week of February.  Congress then reviews and approves it before the new Fiscal Year starts on October 1 and agencies and contractors keep working in smooth continuity year over year.

Of course that isn’t how it happens and even if it does Federal budget policy still creates massive problems for the nation.  First Congress does not have to approve a budget, and if they don’t the previous year’s budget remains in force.  Which means that programs that are no longer relevant could continue to be funded, or a new initiative might not be.  Or Congress can pass a budget after the year begins which forces agencies to revise their plans, delay programs, and push spending further back in the year.

Then there is use-or-lose funding.  In a private company if a manager is able to achieve all their objectives without spending all their money that is considered to be a good thing and grounds to give that manager more authority and opportunity.  Conversely if a Federal Agency finishes the year with money in the bank they will most likely have their next-year’s budget cut by the amount they saved encouraging agency leaders to spend every penny so that they receive a full measure of money the next year.

The last major peculiarity of the Federal Budget is that funds allocated in one year have to be spent in that year (the one exception here is for the Department of Justice who is exempted from this policy).  As a result if an Agency has a couple billion left in the account at the end of the year they can’t use it to buy products or services that will be used in the next year.

As you can imagine these peculiarities lead to numerous negative consequences.

First, it encourages agency leaders to focus on projects that can be completed in one year since funding may not come through in the next year to complete work that has already begun.

Second, this system forces Agency leaders to create a new emergency fund every year.  Because agency budgets expires at the end of the year they cannot create an emergency fund and then let it roll along till there is an emergency.  Instead during the beginning of each Fiscal Year agencies under spend to create a reserve which can be used in case of emergency.  And if there is no emergency they have to spend it rapidly or risk losing budget the next year.  To give a sense for the magnitude of this in the last week of the fiscal year agencies spend approximately 10% of their total budget.

This 10% of annual budget spend that is used in the last week of the year represents 10s of billions of dollars of contract award and in next week’s piece we will talk about how to win a piece of it.

geoff_circle Geoff Orazem is co-founder and managing partner of Eastern Foundry.