Contract Incentives for 21 st Century Warfighting

1. National Contract Management Association Contract Incentives for 21st Century Warfighting Alan J. Boykin 7 February 2007

2. Session Overview • Definition of the Incentive Contract (IC) • IC and DoD Leadership Focus • Advising the warfighter • Key objectives of IC in acquisition planning • Contract execution from concept evolution • Key examples of effective ICs • Gaining “Leverage” through IC vehicles • Summary of IC discussion

3. Incentive Contract - Defined IC arrangements are described as 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 contract to the contractor’s performance.

4. Leadership focus: Contract Incentives Over last three years… key messages to reshape • Dual leadership focus from SECDEF & SECAF: a more efficient force (quality, capability, structure) • Promulgates more effective and efficient acquisition strategies to support warfighter • GAO (2005)… DoD has issues with use of incentives • DAPA (2006)… Top to bottom review of acquisition process • Finley memo (2006)… Effective and efficient business decisions

5. Pricing Imperatives for theSMART Business Advisor • Lead: Customer-focused planning & execution • Forging key stakeholder relationships • Understanding risk-based environment • Understanding leveraging as an opportunity • Conduit to key end-state objectives

6. Key Objectives of IC • Establish reasonable and attainable targets that are clearly communicated to contractor • Include appropriate IC arrangements designed to • Motivate contractor efforts • Discourage contractor inefficiency and waste • Create incentives large enough to influence behavior • Cost • Performance • Delivery • Multiples

7. CONTRACT TYPE Concept evolution . . . HIGH R I S K LOW

8. Used for cost control & performance Shared cost risk Final profit determined share ratio Costs compared to targets Profit adjusted for under/overrun Ceiling price = Max Govt liability Examples of IC Application Fee earned on performance • Motivates: Quality / Schedule / Technical innovation / Cost control • Measured against established criteria • Unilateral FDO determination GPS FPIF CPAF

9. Gaining Leverage through IC Vehicles • Identify measurable parameters to motivate performance • Apply mechanics to increased compensation • Use innovative strategies to empower performance • Use to impact performance through direct & indirect means The Contract Warfighter Needs Leverage Contracting Workforce

10. Summary • IC defined: Use to improve overall performance • DoD leadership paves the way ahead • Business Advisor: Lead the warfighter to success • IC objectives: Cost / Performance / Schedule • Real-time IC examples: GPS (FPIF) / JASSM (CPAF) • Leverage to success using IC vehicles • Appropriate IC strategies produce “Win/Win” outcomes

12. QUESTIONS?