Patricia Olsen Vice President, Contracts, Pricing & Estimating

2. Incentive Fee Contracting Best Practices Patricia Olsen Vice President, Contracts, Pricing & Estimating The Boeing Company – Integrated Defense Systems August 4, 2008 3:00 PM

3. Agenda • The Current Playing Field – GAO Report on Award & Incentive Contracting Forces Change • Historical Perspective • GAO Report GAO-06-66 Summary • Government Response to GAO Report • Award Fee Observations & Best Practices • Establishment of Objective Criteria – Use Of CPIF, FPI and Multiple Incentive Contracts • Objective Criteria Observations & Best Practices • Summary

4. The Current Playing Field – GAO Report on Award & Incentive Contracting Forces Change • December 2005 GAO Report GAO-06-66 criticizes Award & Incentive Contracting • Paradigm shift for Government and Contractor: • Moving away from traditional CPAF arrangements with subjective Award Fee criteria • Award Fee as an element in FPI/AF, CPIF/AF frameworks • Award Fee Pool reflecting a “Bonus Concept” for superior performance • Increased use of CPIF, FPI & Multiple Incentive contracts • Cost/Technical/Schedule components tied to Objective criteria

5. Historical Perspective • 60’s – CPAF used by NASA as technique to ensure safety was not compromised by contractors pursuit of incentives related solely to cost i.e. used CPAF contract in lieu of Cost Incentive Contracts • 70’s - DOD/Service used traditional incentive structures. Award Fees used as an additional incentive pool beyond objective incentives F-15 FPIF/AF Bonus concept for superior performance • 80’s. - Fixed Price Development Contracts results in declined use of CPIF and CPAF contracts Unbalanced risk did great harm to industrial base • 90’s - Expanded use of CPAF. PEO’s/PM’s preferred CPAF due to direct leverage on contractor 80%+ earned award fee was custom • 00’s – Period of GAO report. 1999 to 2004

6. GAO Report GAO-06-66 “DoD has paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes” Observation – GAO Criticism of Award Fees largely focused on historical cost and schedule performance • Award Fee historically focused primarily on superior System Performance The Result: Media / Congress widely associate Award Fees as “Bonuses” to Contractors

7. GAO Report GAO-06-66 • Criticizes DoD’s lack of outcome oriented objective criteria • Recommended remedial actions: • Payment for above-satisfactory performance • Limited use of rollover • More supervisory review • Develop metrics on use/effectiveness of award fees • Share proven strategies

8. Responses to GAO Report • March 2006 –DUSD (A&T) Memo • Fiscal Year 2007 – National Defense Authorization Act, Sec 814 • December 2006 – DUSD (AT&L) Policy • April 2007 – OUSD (AT&L/DPAP) Memo

9. March 2006 DUSD (A&T) Memorandum • Endorsed most GAO recommendations, except limiting award fee payments to “above satisfactory” ratings • 3% base fee is insufficient for satisfactory work • Use of “rollover” an exceptional case • Defers addressing metrics and review recommendations

10. Fiscal Year 2007 National Defense Authorization Act, Sec 814 “Linking of Award and Incentive Fees to Acquisition Outcomes” • SECDEF to issue guidance: • Link award fees to acquisition outcomes (e.g. cost, schedule, and performance) • Provide guidance for judging performance and % fee to be earned • No award fee for below satisfactory (failure to meet minimum requirements) • Provide direction on use of “rollover • Assess and report on independent evaluation mechanisms (FFRDC)

11. December 2006 DUSD (AT&L) Policy • Discourages the use of traditional Award Fee Contracts • No more than 10% of the total available incentive/award fee should be based on subjective criteria • Checks and Balances for Award Fee Determinations – secondary review • Revise the DFARS and/or its PGI Supplement

12. April 2007 OUSD (AT&L/DPAP) Memorandum “It is the policy of the Department that objective criteria will be utilized, wherever possible, to measure contract performance” • Preference is multiple incentive type contracts • If objective criteria exist and desire is to also use subjective elements - use Award Fee in conjunction with multiple incentive type contracts (Bonus Concept) • Acknowledges most development and LRIP contracts contain numerous objective criteria • If objective criteria does not exist HCA must sign D&F to use CPAF • For CPAF, defines and sets % ranges of award fee pool to be earned for ratings of unsatisfactory, satisfactory, good, excellent, and outstanding in terms of: • Minimum essential contract requirements; and • Award fee criteria as established in award fee plan DFARS interim rule on hold (DFARS Case 2006-D021)

13. Award Fee Observations & Best Practices • Agree CPAF should no longer be default approach • When used: • Make part of multiple incentive structure • Be reflective of “Bonus Concept” for superior performance • Small Dollar Amounts • Award Fee Plan should be bilateral: • Agreement on evaluation criteria • Allocation of pool consistent with expenditure profile over contract period of performance • Prospective changes only

14. Establishing Objective Criteria: Use of CPIF, FPI & Multiple Incentive Contracts • Implement use of Objective Criteria via CPIF, FPI or Multiple Incentive Contracts arrangements • Cost, schedule and performance incentives to be encouraged • Contract Type/Incentives and Risk/Rewards should be commensurate with program phase • Include Partners and Subcontractors within overall fee arrangement • Avoid Overly complicated incentive structures • Will reduce Government flexibility during program execution Need to work with Customers Early

15. Objective Criteria Observations & Best Practices • For multiple incentive structures to be meaningful, higher total available fee should be considered • Successful performance to objective criteria require: • Adequate requirements definition • Realistic cost estimates (risk based source selection criteria) • Realistic schedule reserves • Funding cost at 80% confidence level • Stable funding • Incentive contracting will increase emphasis on Cost and Schedule performance • Target fees and share arrangements should be consistent with risk assessments and complexity of the contracted effort • Sharing arrangements should consider “dead bands”

16. Objective Criteria Observations & Best Practice (continued) • Must have robust management of “Constructive Changes” • Changes – Plan Ahead – Changes will impact incentive arrangements over the life of the contract • Performance Incentives – Criteria for “successful completion” is of utmost importance • Effective workforce training essential Balance Potential Risk and Rewards

17. Summary • If used, Award Fee must be in context of balanced incentive structure • Limit Award Fee to “Bonus Concept” • Incentive arrangements using Objective Criteria preferred contracting approach

18. Questions?