Understanding Obligation and Deobligation in Resou

Obligation: legally reserving funds for expenses e.g: travel orders. Deobligation: adjusting obligations downward when actual costs are less, freeing funds for other needs. Ensures efficient effective use of finite resources in government operations.

Mason Bennett
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Obligation vs DeobligationIt is important to remember that resources are finite, and because of this we must distinguishbetween "wants" and "needs".Obligationrefers to the legally binding setting aside of funds towards a requirement, such as goodsor services. For example, an obligation is created when travel orders are approved for a Soldierheading to a school. This obligation reserves their plane ticket, lodging, rental car, and otheranticipated expenses.Deobligationsare downward adjustments of previously incurred obligations. Using the previousexample, when the Soldier returns from the school, he or she files a voucher for the actual expensesoccurred. Iftheactual expenses are less than the original estimate from the travel orders,thenadeobligation needs to occur to ensure the excess funding is returned and is made available for theunitto spend towards another requirement.The Army operates under the mandate to use all available resources in the most effective andefficient means possible to support the combatant commander. Although not mutually exclusive,these two goals—effectiveness and efficiency, do not have the same meaning.*Effectiveness describes how well consumed resources achieve the desired outcomeorendstate or simply stated, "doing the right thing."*Efficiency speaks to the manner in which those resources are consumedin order toproduce the maximum amount of output regardless of whether the output achieves thedesired outcome—"doing things the right way."ObligationA legal liability of the government for the payment of goods and services ordered or received,or a legal duty on the part of the United States that could mature into a legal liabilityby virtueof actions on the part ofthe otherparty beyondthecontrol oftheUnited States. Paymentmaybe made immediately or in the future. An agency incurs an obligation, for example,when it places an order, signs a contract, awards a grant, purchases a service, or takes otheractions that require the government to make payments to the publicorfrom one governmentaccount to another.Deobligation*An agency's cancellation or downward adjustment of previously incurred obligations.Deobligated funds may be reobligated within the period of availability of the appropriation.For example, annual appropriated funds may be reobligated in the fiscal year in which thefunds were appropriated, while multiyear or no-year appropriated funds may be reobligatedin the same or subsequent fiscal years.

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Contracting ExampleYjar 1Ystr urn; EEfWBils I'cr maifteraiet: supportertd j * a t ;a ccnttaetfa* S‘nrjlkzn. Tfas 11:Fe test isllmaic af cns-.s- L*f gzods arid i c-.iLzs41r ng th,- Im.jth -t-c <n nFnirtYtoira ?- 5Y-i r nninhcr.-n-.r mitmnt rrntir Kis ir (Kimrrtqnrsi w nr,fljrcwftKls ' (i f *> m M fmf• *jrtretir«wnd»tfkcalwiiy m r Y M r1 jficr3F‘l*flf’*'iContract EndsAt the end of the contract, everything is complete, but the contractor only billed $900,000, not the fullSI million. The remaining $100,000 is deobligated. If the obligation occurs within the five-yearexpired state, the funds can only be used towards adjustment of other requirements that occurred inthe same year of the contract. If the deobligation occurs after the fifth expired year, the amount iscancelled and returned to the Treasuryn the class Resource Management you discussed the Operations and Maintenance, orO&M, category of funding and may recall that this is generally where battalions and brigadesspend the majority of their budget. Appropriations can generally be spent or obligated in thefirst year and then enter an "expired status" for five more years, before finally beingcancelled. During the "expired status" no additional obligations can occur, but funds can stillbe disbursed against existing obligations.Remember, deobligated funds may be reobligated only within the period of availability of theappropriation, or the first year, which means funds deobligated in the "expired status" yearscannot be applied toward other unit priorities. At the end of this five years any money thathas not been disbursed is returned to the treasury. The Army is averaging a 3 - 5%deobligation rate after five expired years in its Operations and Maintenance account. Thisrepresents a noticeable loss of purchasing power and impacts readiness.EHere are some of the top sources of O&M dollars lost to units and the Army throughdeobligation.Contract EndsoAt the end of the contract, everything is complete, but the contractor only billed $900,000,not the full $1 million. The remaining $100,000 is deobligated. If the obligation occurs withinthe five-year expired state, the funds can only be used towards adjustment of otherrequirements that occurred in the same year of the contract. If the deobligation occurs afterthe fifth expired year, the amount is cancelled and returned to the Treasury.

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Contractmg ExampleTop D*ot)li(;*tkor»s Seine**Conlr AcrmlS e r v i c e *43%Maximizing Buying PowerTips to Help Maximize your Unit's Purchasing Powerz Integrate other staff sections in budget development.Z Align expenditure with commanders' priorities and desired outcomes.Perform historical cost analysis and apply to future spend plans.z Prioritize expenditure.z Seek other funding sources.Minimize deobligating funds in the expired, or cancelling, years.Remember, currently the Army is averaging a 3 - 5% deobligation rate after 5 expired years inits Operations and Maintenance account. This may seem small, but if you look at theDepartment of the Army budget as a whole, it represents S4.5 billion in buying power.Cost Driver
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