Breakout Session # 408 Alan S. Gilbreth, Professor, DAUMW Wednesday, April 16 9:40am-10-40am

2. Incentive Contracting That Works Breakout Session # 408 Alan S. Gilbreth, Professor, DAUMW Wednesday, April 16 9:40am-10-40am

3. Overview • December 05 GAO Report • Incentive & Award Fee Background • DAU Research Study • Findings of Research Study • Industry Comments/Concerns • Realistic Incentive Strategies • DoD’s Policy with Regard to Award Fee and Award Fee Provisions • Food for Thought

4. GAO Report GAO-06-66 Dec 2005Use of Incentives in DoD • Selected a Probability Sample of 93 contracts from a study of 597 DoD award-fee and incentive contracts FY 1999-2003 • 52 contracts award-fee • 27 contracts incentive-fee • 14 contracts included both award and incentive fee provisions • Seven GAO Recommendations Made • Overall conclusion “DoD has paid billions in award and incentive fees regardless of the acquisition outcome”

5. Incentive Arrangements • Incentives to effect desired contractor behavior within the terms and conditions of the contract (e.g. liquidated damages, past performance, QA requirements, payment terms, etc.) • Incentives embedded within the contract type itself (FPIF, FPAF, CPIF, and CPAF)

6. Compensation Arrangements Low Technical Complexity High Technical Complexity FP FFP FPIF FPAF CPIF CPAF CPFF CR FPIDIQ/BOA/BPA FP w/EPA Base Ops A/C Production Major System Development R&D Mature A/C (F-16) Cost Risk Contractor Government Performance Risk Contractor Government (Mandatory Compliance/Delivery) (Best Effort)

7. Incentive Arrangements • Two types: objective and subjective • Subjective: award fee • Objective: incentive fee (pre-determined formula or bonus/lump sum • Multiple Incentive: contains both incentive and award fee criteria • What are you trying to achieve? • Cost, schedule, performance

8. DAU Research Study • To better understand where award and incentive fees had a favorable impact on performance outcomes and why • Surveys were developed based on Mr. Krieg’s guidance • Program offices were suggested by major commands • Senior level industry representatives came to an industry day at Ft. Belvoir and spoke candidly about their DoD experience with incentives

9. Research Findings Say • Regulatory guidance relating to incentive contracting is sufficient • Incentive contracts as described in this subpart are appropriate when a firm-fixed price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contractor’s performance (FAR 16.401(a)) • Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively (FAR 16.404(a)) • Do not issue a solicitation contemplating a fixed-price contract with award fee unless the administrative costs of conducting award-fee evaluations are not expected to exceed the expected benefits (FAR 16.404(b)(1)) • The cost-plus-award-fee contract is suitable for use when the work to be preformed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule (FAR 16.405-2(b)(1)(i))

10. Research Findings Say (Cont) • Multiple incentive type contracts “build to need” • The combination of objective and subjective measures indicated the strongest correlation to expected outcomes • Subjective measures only used when objective measures would not achieve the desired outcome to the same level • Use relevant, achievable and sustainable measures within an evaluation period • “Hard wire” measures to achievable outcomes • When possible, base your award fee periods on events or outcomes rather than time

11. Research Finds Say (Cont) • Use base fee in cost-plus-award-fee (CPAF) contracts • Provides necessary leverage for proper use of the award portion of CPAF • Factor in the view of senior defense industry people-they welcomed the use of base fee to better delineate the difference between “best efforts” (e.g. base fee) and “excellence” (e.g. award fee) • Examine the limit on base fee (currently 3% in DFARS 216.405-2 (c)(iii))

12. Research Findings Say (Cont) • In a cost reimbursement environment, consider your organization’s philosophy for rewarding “satisfactory” or “meeting contract requirements” as well as “excellence” • Most or all for excellence • Consider available funding, complexity of effort, return on investment and the amount of base fee • When possible, base your award fee periods on events or outcomes rather than time • Management of highly complex efforts in a risky environment • Comparison to fixed fee and fee limitations

13. Research Findings Say (Cont) • Strong Communication and Continuous Feedback Stressed • Several programs found it necessary to establish a glossary of terms • Close monitoring on a monthly basis by a joint government and contractor team justified the additional effort in this research review • Many programs emphasized very open communication with the contractors-the contractor is never surprised by what they get • Some programs used “emphasis letters” or “barometer reports” during award periods to stress the importance of certain “outcomes” or “events-others used monthly reviews • Several program offices found that strong preparation and a focused evaluation board were very important elements along with upper management support

14. Research Findings Say (Cont) • Institute training and leverage experienced personnel to the maximum extent • Many PM offices capitalized the incentive/award fee experience of people already embedded in their organization • Others used formalized instruction while continuing to coach personnel on the use of incentives • A large number of PM offices stated just-in-time training involving the entire incentive team was the most effective • Some program offices suggested that performance monitors observe other assessments to help them appreciate the depth of evaluations

15. Industry Findings Say • Industry welcomes the use of base fee to better delineate the difference between “best efforts” and “excellence” in award fee • Government personnel are not always adequately trained in managing award fee contracts • There are sometimes inconsistencies in the timing of the award fee in line with the evaluation criteria • Government and contractors sometimes have different perceptions of the purpose of award fee • Requirements are sometimes too subjective and do not measure outcomes that are sought by DoD

16. Realistic Incentive Strategies • Air Mobility Command (AMC) Contracted Commercial Gateway Services at Baltimore-Washington Int’l Airport • Fixed-price with award fee services contract for passenger handling at $1 million per year for five years • The contract spells out the requirements that are needed; however, there is much more the contractor can do to ease the stress of their travelers • There are two award fee periods a year-but performance monitors submit monthly reports and customer complaints and surveys. • The contractor is evaluated on customer service, passenger service, baggage and management • Contractor is only paid award fee for exceeding satisfactory • The results of surveys and monitor reports support that award fee has driven favorable outcomes on this contract

17. Realistic Incentive Strategies (Cont) • TACOM Life Cycle Mgt Cmd, Future Combat Systems • This Systems Development and Demonstration (SDD) contract is an innovative cost-plus-fixed fee with incentive • The key objectives of the SDD program are to prove out technologies and systems integration • The purpose of the incentive fee is to incentivize the contractor to place the program in an appropriate risk position • The Incentive categories selected for the SDD contract were designed to insure that the program office could afford to produce items developed in SDD.

18. Realistic Incentive Strategies (Con’t) • TACOM Life Cycle Mgt Cmd, Total Integrated Engine Revitalization (TIGER) Program • The $1.3 B sole source contract is fixed-price with a highly leveraged incentive fee with a base and three options • It is unique in that the incentive metrics are objective, as one would expect, but there are also attributes similar to award fee • The ktr’s performance is measured by four metrics: engine availability, durability, cost and small business • Metrics are key to overall performance goal-improve the mean time between depot return (MTBDR) from 700 to 1,400 hours • Each year ktr is challenged to exceed Govt threshold-board meets annually to evaluate and validate ktr’s performance • Performance goals for each year-final performance goal is 1,400 hours MTBDR within specific cost objectives

19. Realistic Incentive Strategies (Cont) • Aeronautical Systems Center (ASC), F-15 Aircraft Suite 6 Software Upgrade A-E Models • The contract is cost-plus-award-fee (CPAF)-while a CPAF contract typically uses only subjective criteria they used both objective and subjective as they felt appropriate • Integrated process team sessions with the Govt functional areas and the ktr were used to establish criteria used in the award fee periods • The program office created a strong link to favorable outcomes and reduced program risk by developing the award fee objectives and linking the award fee periods to deliverables • Ktr initially wanted an award fee with only subjective criteria-accepted objective criteria when the program office came up with 3% base fee

20. DoD’s Policy with Regard to Award Fee and Award Fee Provisions • It is the policy of the Department that objective will be utilized, whenever possible, to measure contract performance • Where objective criteria exist, and the CO and PM wish to also evaluate and incentivize subjective elements of performance, the most appropriate type of contract would be a multiple incentive type contract containing incentive and award fee criteria • If it is determined that objective criteria do not exists and that it is appropriate to use a cost-plus-award fee (CPAF) contract, then the Head of the Contracting Activity (HCA) must sign a D&F that “the work to be performed is such that it is neither feasible noe effective to devise predetermined cost objective incentive targets applicable to cost, technical performance or schedule” • Specific ratings with definitions and award fee ranges

21. Food for Thought • As stated earlier in the brief, many of the industry day participants supported the use of base fee. Is the DFARS maximum for award fee base of 3% the right number? • If the base fee in award fee is properly used, could this negate the need to use provisional award fee? • Some of our research has shown that when companies share their award fee with the employees doing the work, a marked increase in performance is seen. Could the Government encourage or require the contractor to share the award fee with their employees? • Some of our research indicates that award fee does not constrain contractors, but shifts resources. What are the potential ramifications when this occurs? • Does the incentive “award fee” still have a place in government contracting?