FINANCIAL MANAGEMENT POLICY MANUAL

3. ECONOMIC ORDER QUANTITY (EOQ) PROCUREMENT
a. General.
Items which are part of end-items being acquired under multiyear
contracts may be produced in quantities exceeding the current fiscal
year contract requirements when it is more economical to do so, i.e.,
EOQ procurement. It is the general policy of the DoD not to create
unfunded contract liabilities for EOQ procurements (recurring costs)
associated with multiyear contracts. Rather, funding for EOQ
procurements shall be included in advance procurement budget
requests, unless the DON has obtained an exception to the general
policy from the USD (C). Normally, such EOQ procurement should
be fully funded. At a minimum, advance procurement funding for
EOQ procurement must cover the estimated termination liability costs.
This advance procurement technique may be used in all multiyear
contracts, including those funded by the Other Procurement, Navy and
Procurement, Marine Corps appropriations. Normally, EOQ
procurement may not be used as an advance procurement exception to
the full funding policy outside of multiyear contracts. However, it
may be requested for annual procurements under unusual
circumstances (such as a combined parts buy for a block of satellites).
This does not affect procurement of items being acquired as end-items
themselves, such as spare parts, when EOQ is a consideration in the
requirements calculation.
b. Budgeting.
A MYP contract must budget for production at not less than the
minimum economic rate given the existing tooling and facilities.
Each budget request shall cover the estimated termination liability of
the EOQ procurement, unless it would be more effective to fully fund
the EOQ or an exception has been approved by USD (C) to include
EOQ costs in an unfunded cancellation ceiling.
4. CANCELLATION CEILINGS AND CONGRESSIONAL NOTIFICATION.
a. Under 10 U.S.C. 2306b, the DoD is authorized to enter into
multiyear contracts containing cancellation charges, which may
include both nonrecurring and recurring costs. This law requires
written notification of the congressional defense committees and a
30-day waiting period before award of a multiyear contract that
contains a clause setting forth a cancellation ceiling exceeding
$100 million. Contract cancellation ceilings may be created up to
this congressional limitation for nonrecurring costs. Inclusion of
an unfunded cancellation ceiling in the contract acquisition
strategy is an exception that must be approved by USD (C).
Justification provided to USD (C) must include what costs are
included in the unfunded ceiling, and why these costs are not fully
Financial Management Policy
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