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Incentive Contracts FAR Subpart 16.4

Incentive Contracts FAR Subpart 16.4 . Level II PIP Presentation Ashley McQueen. December 6, 2010. Why I Chose This Topic?. Overview of Presentation. Definition of Incentive Contracts Purpose of Incentive Contracts Types of Incentives When Should We Use Incentive Contracts?

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Incentive Contracts FAR Subpart 16.4

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  1. Incentive Contracts FAR Subpart 16.4 Level II PIP Presentation Ashley McQueen December 6, 2010

  2. Why I Chose This Topic?

  3. Overview of Presentation • Definition of Incentive Contracts • Purpose of Incentive Contracts • Types of Incentives • When Should We Use Incentive Contracts? • Advantages and Disadvantages of Incentive Contracts • Words from US Government Accountability Office (GAO) • Recommendations • Conclusion • Questions?

  4. Reference: FAR Part 16.401(a) What are Incentive Contracts? • A fixed price or cost reimbursement type contract that makes the Contractor responsible for their performance (i.e. delivery, cost, and technical performance). • The profit or fee amount is tied to the Contractor’s performance. • Incentives can be positive or negative

  5. Reference: FAR Part 16.401(a)(1), FAR Part 16.401(b) Purpose of Incentive Contracts • Establishes Targets for the Contractor • Technical • Cost • Schedule • Motivates the Contractor • Discourages Inefficiency • Improves Performance

  6. Reference: FAR Part 16.402 Types of Incentives • Cost Incentives • FAR Part 16.402-1 • Profit • Adjusted Fee • Actual Cost Adjustment • Performance Incentives • FAR Part 16.402-2 • Product Characteristics • Performance Tests • Assessment of Work

  7. Types of Incentives Cont’d • Delivery Incentives • 16.402-3 • Reward-Penalty Structure • Multiple Incentives • 16.402-4 • Motivation for Outstanding performance in all areas • Compel Trade-off Decisions

  8. Reference: FAR Part 16.4 Types of IncentivesCont’d • Fixed-Price Incentives • FAR Part 16.403 • Establishes Final Contract Price • Price Ceiling • Firm Target • Specifies Target Cost, Target Profit, Includes a Price Ceiling, and Adjusted Formula • Successive Target • Specifies an Initial Target Cost and an Initial Target Profit • Includes Profit Ceiling or Floor

  9. Types of Incentives Cont’d • Award Fee Incentives • FAR Part 16.401(e)(1) • Are supported by an award-fee plan that establishes the procedures for evaluating award fee • Includes an Award-Fee Board or Performance Evaluation Board (PEB) for conducting the award-fee evaluation • Incentive Fee Incentives • FAR Part 16.405-1 • Fee Payable to Contractor is Determined by Adjusted Formula

  10. Reference: FAR Part 16.401(b) When Should We Use Incentive Contracts? • Firm-Fixed Price is NOT Appropriate • Requirement can be Acquired at a Lower Cost • After Determination and Finding (D&F) is Approved by Head of Contracting Activity • Negotiations can be Accomplished to Establish an Initial Target and Delegate a Fair Share of the Risk

  11. Advantages Disadvantages • Used to Encourage More Effective Work From Contractors • When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance • Good Business Practice • Time Consuming to Administer • Incentive Criteria may not be Related to Cost, Schedule, or Performance Goals • Opportunities are Given to Contractors to Receive Unearned Fees

  12. Reference: Memorandum for Chief Acquisition Officers Words From The GAO • Identified practices that reduce Contractor’s effectiveness on performance • Evaluating Contractors on areas that are not directly related to goals (i.e. cost, schedule, performance) • Paying Contractors a large portion of available fee for acceptable or satisfactory performance • Giving Contractors additional opportunities to obtain unearned fees

  13. Words From The GAO cont’d • Incentive Fees should be linked to acquisition outcomes • Cost • Performance • Schedule • Incentive Fees are not earned if Contractor’s performance is judged • Below satisfactory • Does not meet the basic requirements of contract

  14. Recommendations • Training • Workshops • Courses • Forums • Consistent Fair Ratings • Directly Related to Performance • Remain Unbiased with Contractors • Avoid Conflict of Interest • Do Not “Over-Communicate” with Contractors

  15. ConclusionTop Things To Remember • What are Incentive Contracts? • What is the Purpose for Using Incentive Contracts? • Types of Incentive Contracts • Pros and Cons with Administering these Contracts • Appropriately Evaluate the Contractor Based Only On Goals that are Directly Related the Contract • Participate in Additional Training on Incentive Contracts

  16. Questions?

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