Application of Contract Incentives

2. Application of Contract Incentives Breakout Session #305 Sharon King, CFCM Catherine Walsh July 19, 2010 Time: 4 – 5:15PM 1

3. Agenda Overview of types of contracts What’s changed Why it’s changed Implementation Samples Pitfalls Best Practices

4. Selecting Contract Type – FAR Part 16.104 Price Competition Price/Cost Analysis Type and Complexity of Requirement Urgency Period of Performance Contractor’s technical capability and financial responsibility Adequacy of the Contractor’s accounting system Concurrent Contracts Extent and nature of proposed subcontracting Acquisition History

5. Types of Incentives Award Fee Contracts Can not pre-determine cost, schedule and technical incentive targets Motivates exceptional performance while providing the Government with flexibility to evaluate performance as well as conditions under which performance was achieved Administrative costs are justified by benefits achieved Incentive Fee Contracts Objective/quantifiable criteria including a cost component Award Term – reward of continued business Stand-alone Incentives Hybrids

6. What’s changed? Adjectival Ratings – FAR 16.4 now includes standard adjectival ratings.

7. What’s changed? Determination & Findings (D&F) for AF Approved by HCA Must determine that cost, schedule and technical performance targets can not be pre-determined ACAT I D&Fs must be provided on a quarterly basis to OSD DPAP No Roll-over of award fee DoD Reporting requirements

8. Why the change? Accountability GAO Report 06-409T (April 2006), Defense Acquisitions - DOD Wastes Billions of Dollars through Poorly Structured Incentives and GAO Report 09-630 (May 2009), Federal Contracting – Guidance on Award Fees Has Led To Better Practices But Is Not Consistently Applied DOD paid out an estimated $8 billion in award fees on contracts in GAO’s study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD’s expectations (contracts studied from 1999-2003). DOD programs gave contractors on about half of the award-fee contracts in our study population at least a second opportunity to earn an estimated $669 million in initially unearned or deferred fees.

9. Why the change? DPAP memo of 24 Apr 07 Increased use of CPAF contracts, particularly for development and LRIP efforts Lack of objective criteria in measuring contract performance Requirement for D&F when using CPAF structure – for ACAT I programs requires providing DPAP copies of D&Fs executed on a quarterly basis Incorporated FAR changes for standard adjectival ratings and ranges DPAP memo of 25 Jun 08 Required reporting of award fee

10. Why the change? Motivation Agencies are seeking to increase link between performance and program outcomes for both major systems and professional services contracts Encourage Contractor to meet program’s acquisition outcomes Using incentives properly—in concert with good acquisition practices—is a key to minimizing waste, maximizing value, and getting our military personnel what they need, when and where they need it 9

11. Implementation – Selection Understanding the requirement Associated risk Incorporation of lessons learned from similar/historical efforts

12. Implementation - Criteria Mission performance Test Results SLAs/KPPs Cost EVM CPI & variance analysis supporting Schedule Incentive: EVM SPI; Adherence to IMS; % of deliverables delivered early, on-time or late Dis-incentive: Liquidated Damages SB Subcontracting Dis-incentive: Penalty for Failure to meet SB/SDB requirements resulting in 2.5% reduction in fee for the next option period Incentive: If SB and SDB subcontracting exceeds amount in the approved subcontracting plan, incentive awarded

13. Implementation - Governance Who determines whether criteria was met? How often does evaluation occur or is it event-driven? Need to incorporate award/incentive plan to document the process For AF/AT, contractors usually provided the opportunity to provide a self-assessment Decisions are unilateral and solely at the Government’s discretion Ability to change award fee criteria for future periods provided it’s done before the start of the next period Government will often re-invest un-earned fee/incentives for unfunded requirements

14. Samples When the schedule for an ACAT I program was shifted to the left, incentive CLINs were added to a FFP production contract to provide the contractor with compensation for achieving early delivery On a major IT acquisition – incentives and credits due back to the Government based on performance against Service Level Agreement On another ACAT I development program, incentives were tied to EVM; performance at test events

15. Award Fee Pitfalls Payment – Need to monitor contract costs to ensure obligated award fee pool funding is not expensed to cover contract cost overruns Appropriation lifecycle - If not obligated at beginning of period, it can be difficult to find funds in that FY to pay for performance Be mindful of how funding impacts including incremental funding and CRA can impact the contractor’s schedule (i.e., Government delay) Past Performance Evaluations (i.e., PPIRS) should be consistent with award fee/incentive determinations. Avoid evaluating based on feelings rather than specific, substantiated examples Be sure feedback is consistent with the given period evaluated Contractor often requests re-consideration if assessed 90 or below

16. Best Practices • When developing plan, think creatively. • Avoid rewarding the contractor for simply meeting the requirements • Make incentives challenging yet attainable • Consider tying on-time delivery to cost and/or quality performance criteria. • Use both positive and negative incentives and include limits • Consider including incentives for discounts based on early payments. • Ensure that performance incentives focus the Contractor’ efforts on your desired objectives. (e.g. tie to program milestones) • Keep communication open • Ensure that input is • objective and based solely on facts and performance, • timely and consistent, • examples are clear and specific, and • keep documentation that backs up your input 15

17. Reference Material FAR Part 16.4, Incentive Contracts GAO Report 09-630 dtd May 2009, Federal Contracting – Guidance on Award Fees Has Led To Better Practices But Is Not Consistently Applied GAO Report 06-409T dtd April 2006 OSD DPAP Memo dtd April 24, 2007, Proper Use of Award Fee Contracts and Award Fee Provisions