Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes

On March 29, 2006, the Deputy Under Secretary of Defense (Acquisition and Technology) issued a new policy on award-fee contracts that addressed this recommendation. Specifically, the policy states that the ability to earn award fees needs to be directly linked to desired program outcomes. To do this, it mentions the need to tie award fees to identifiable interim outcomes or discrete events or milestones, such as timely completion of preliminary design reviews, critical design reviews, and successful system demonstrations. This policy is effective immediately.

On April 24, 2007, the Director of Defense Procurement and Acquisition Policy issued a memo on the proper use of award fee contracts and award fee provisions. Among other actions, this memo requires the head of the contracting activity to sign a written justification stating that it is neither feasible nor effective to devise predetermined objective incentive targets related to cost, schedule, or technical performance before a cost-plus-award fee contract is used. Copies of these justifications will be provided to the Director of Defense Procurement and Acquisition Policy for all acquisition category one program. In our report, we recommended that DOD require appropriate approving officials to review new contracts to make sure that the military services are moving towards more outcomes-based award-fee criteria. The April 2007 memo addresses the intent of that recommendation by encouraging the use of incentive fees based on objective criteria and requiring that the head of the contracting activity justify and approve the use of award-fee contracts in writing. Providing a copy of these justifications to the Director of Defense Procurement and Acquisition Policy for major defense programs also increases the level of oversight and accountability over how award-fee contracts are being used.

On March 29, 2006, the Deputy Under Secretary of Defense (Acquisition and Technology) issued a new policy on award-fee contracts that addressed this recommendation. The policy provides guidance and sets limits on the use of rollover, which involves moving unearned fee money from one evaluation to another. Specifically, the policy states that rolling-over fee should be the exception rather than the rule on DOD programs and contractors should only be eligible to earn a portion of the unearned fee that was rolled-over. This policy is effective immediately.

In our report, we recommended that DOD develop a mechanism for capturing award- and incentive-fee data. On April 24, 2007, the Director of Defense Procurement and Acquisition Policy issued a memo on collecting this type data. Specifically, the memo requires each military department and defense agency to collect data on the award and incentive fees that were available and paid for each contract with an estimated value of over $50 million. The data must be reported to the Director of Defense Procurement and Acquisition Policy on a semi-annual basis starting September 30, 2007.

In response to a congressional inquiry, DOD collected data on contract actions for which fee or incentive determinations were made during calendar year 2007. DOD submitted a report that included an analysis of the data to Congress in October 2008. While the analysis was able to compare cost and schedule data to award fees paid, DOD has begun to establish metrics to evaluate the effectiveness of award fees in terms of performance. Moreover, they have built a process through which this information will be collected and analyzed over many years. Officials with the Defense Procurement and Policy group stated that analyzing the impact of award and incentive fees will be more feasible once they have collected about 5 years worth of data. Lastly, in October 2008, the National Defense Authorization Act for 2009 spurred the amendment of Federal Acquisition Regulation (FAR) to ensure that each executive agency collect relevant data on award and incentive fees and have a mechanism in place to evaluate the effectiveness of award and incentive fees as a tool for improving contractor performance and achieving desired program outcomes. It is too soon to determine the success of such effort, but we are closing the recommendation because of the implementation of the FAR rule and the evidence that DOD is working to measure the effectiveness of award fees and is discussing their results with other agencies.

On March 29, 2006, the Deputy Under Secretary of Defense (Acquisition and Technology) issued a new policy on award-fee contracts that addressed this recommendation. Specifically, in order to facilitate discussion and to share proven incentive strategies across the entire acquisition workforce, the policy established the "Award and Incentive Fees" Community of Practice under the leadership of the Defense Acquisition University. This online tool is supposed to serve as a repository for all related materials including policy information, related training courses, examples of good award fee arrangements, and other supporting resources related to this policy memorandum. This policy is effective immediately.