Colors of Money Explained: A Guide for Government Contractors

If you’re selling products or services to government customers, understanding “colors of money” is essential. This concept shapes how federal funds are allocated and spent—and knowing it can make you a more credible partner.

What Are Colors of Money?

In the Department of Defense (DoD), “colors of money” refers to appropriations—funding categories authorized by Congress. Each color has strict rules about purpose, time, and amount:

• Purpose: Spend funds only for their approved use.
• Time: Use funds within their availability window.
• Amount: Never exceed the allocated budget.

These safeguards prevent fraud, waste, and abuse while ensuring taxpayer dollars deliver maximum ROI.

The Most Common Colors of Money

1. Operations & Maintenance (O&M)

• Purpose: Daily operations and sustainment.
• Examples: Base operations, software licenses, SaaS, training, education, travel.
• Timeframe: One-year money—must be obligated within the fiscal year.

Example:
A base needs to renew its cybersecurity software licenses for FY25. This falls under O&M because it’s a recurring operational expense. If the contracting officer tries to use FY24 O&M funds for this FY25 renewal, that’s a violation of the time rule.

2. Procurement

• Purpose: Buying major systems and equipment.
• Examples: Weapon systems, hardware, large-scale acquisitions.
• Timeframe: Three-year money—allows flexibility for phased purchases.

Example:
The Air Force is purchasing a new radar system. The procurement process spans multiple years—initial design, production, and installation phases. Procurement funds allow this flexibility. Using procurement money to pay for a training course for radar operators would violate the purpose rule.

3. Research, Development, Test & Evaluation (RDT&E)

• Purpose: Innovation and technology development.
• Examples: Prototyping, testing new systems.
• Timeframe: Multi-year funding.

Example:
A defense contractor is developing a prototype for an unmanned aerial vehicle (UAV). RDT&E funds cover design and testing. If the contractor tries to use these funds to buy office furniture for the project team, that’s a clear purpose violation.

Why It Matters for Contractors

Understanding colors of money helps you:

• Align your offerings with the right funding streams.
• Avoid compliance mistakes like:
  • Using FY25 O&M funds for FY26 requirements.
  • Paying for training with procurement funds.
  • Exceeding your allocated budget (which can trigger Anti-Deficiency Act violations).

Example:
A program office has $1M in O&M funds for FY25. They accidentally obligate $1.1M for sustainment contracts. This triggers an ADA violation, which can lead to audits, penalties, and reputational damage.

Safeguards in Place

Government systems and oversight offices track appropriations to prevent misuse. But as an industry partner, knowing these rules makes you a trusted resource.

Key Takeaways

• Colors of money = Appropriations with specific rules.
• Common types: O&M, Procurement, RDT&E.
• Always follow Purpose, Time, Amount.
• Missteps can lead to serious compliance issues.

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