Federal Contracting:

Guidance on Award Fees Has Led to Better Practices but Is Not Consistently Applied

GAO-09-630: Published: May 29, 2009. Publicly Released: Jun 29, 2009.

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In prior work, GAO found that contractors were paid billions of dollars in award fees regardless of acquisition outcomes. In December 2007, the Office of Management and Budget (OMB) issued guidance aimed at improving the use of award fee contracts. GAO was asked to (1) identify agencies' actions to revise or develop award fee policies and guidance to reflect OMB guidance, (2) assess the consistency of current practices with the new guidance, and (3) determine the extent agencies are collecting, analyzing, and sharing information on award fees. GAO reviewed the Departments of defense (DOD), Energy (DOE), Health and Human Services (HHS), and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA)--agencies that constituted over 95 percent of the dollars spent on award fee contracts in fiscal year 2008.

From fiscal year 2004 through fiscal year 2008, agencies have spent over $300 billion on contracts that include monetary incentives, or award fees, for performance that is evaluated against subjective criteria. OMB's guidance on using award fees includes principles such as limiting the opportunities for earning unearned fees in subsequent periods, linking award fees to acquisition outcomes, designing evaluation criteria to motivate excellent performance, and not paying for performance that is unsatisfactory. These principles are largely reflected in DOD's and NASA's updated guidance on the use of award fees. For example, DOD now prohibits payment of award fees for unsatisfactory performance, and NASA requires a documented cost-benefit analysis to support the use of an award fee contract. However, DOE, DHS, and HHS vary in the extent to which their agency-wide guidance reflects the OMB guidance. These departments generally rely on operational divisions to develop award fee guidance; however, many acquisition professionals at these agencies were unaware of the contents of the OMB guidance. Current practices for using award fee contracts at agencies GAO reviewed often are inconsistent with the new guidance. However, where the revised policies have been applied, the results have been hundreds of millions of dollars in cost savings and better use of government funds. For example, by limiting second chances at unearned fees in eight programs, GAO estimates that DOD will save over $450 million through fiscal year 2010. These practices, however, are not being implemented across DOD. NASA programs now document cost benefit analyses to justify using award fee contracts. Without clear guidance, agencies within DOE, HHS, and DHS have developed various approaches to using award fees. For example, while DOE's median award fee paid indicates satisfaction with the results of its contracts, its Office of Science uses a scoring system that could allow for payment of up to 84 percent of an award for performance that does not meet expectations. Most of the agencies we reviewed continue to allow contractors second chances at unearned fees. For example, at DHS, a contractor was able to earn 100 percent of its unearned fee in a subsequent period. Agencies do not always use criteria that are based on measuring results. For example, one HHS contract for a call center included criteria that focused more on efforts, such as maintaining proper staffing levels during hours of operation, rather than on measuring results. Only DOD collects data on the use of award fees. However, the data are largely used to respond to legislative requirements for award fee information. Agencies generally do not have methods to evaluate the effectiveness of award fees. While individual programs and some offices have taken steps to evaluate award fee criteria, officials stated that identifying metrics to compare performance across programs would be difficult. Further, while GAO found effective practices within some agencies, the lack of a governmentwide or, with the exception of DOD, agencywide forum to share information allows these to remain isolated examples of potential best practices.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, the Secretaries of Energy, Health and Human Services, and Homeland Security should update or develop implementing guidance on: (1) developing criteria to link award fees to acquisition outcomes such as cost, schedule, and performance; (2) using an award fee in combination with incentive fees to maximize the effectiveness of subjective and objective criteria; (3) determining when rolling over unearned fees to subsequent periods may be justified; (4) establishing evaluation factors, including definitions of performance, associated fees, and evaluation scales, that motivate contractors toward excellent performance; and (5) prohibiting payments of award fees for performance that is judged to be unsatisfactory or does not meet contract requirements.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: DOE, in October 2009, provided guidance consistent with Federal Acquisition Circular 2005-37 that was distributed to its contracting offices that satisfies our recommendation. As such, DOE enhanced its ability to more responsibly write and execute cost plus award fee contracts and award fee components of other contract types, which could lead to the improved use of taxpayer money.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to assist agency officials in evaluating the effectiveness of award fees, the Secretaries of Defense, Energy, Health and Human Services, and Homeland Security, and the Administrator of the National Aeronautics and Space Administration should establish an interagency working group to (1) determine how best to evaluate the effectiveness of award fees as a tool for improving contractor performance and achieving desired program outcomes and (2) develop methods for sharing information on successful strategies.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: In response to the recommendation, the five federal agencies established an interagency incentive contracting working group in conjunction with the Office of Management and Budget's Office of Federal Procurement Policy.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to promote the application of existing guidance and expand upon improvements made in using award fees, the Secretary of Defense should, (1) in preparation for regulatory changes to Federal Acquisition Regulation, emphasize the importance of consistently adhering to current guidance for all contracts in the interim; (2) review active contracts issued before the effective date of the 2007 guidance for opportunities to apply the guidance when efficiencies can be obtained through unilateral decisions at a minimal cost to the government; and (3) provide guidance on using award fees in combination with incentive fees to maximize the effectiveness of subjective and objective criteria.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: The Department of Defense, through the Federal Acquisition Regulation (FAR) process and the interagency working group, have amended the FAR to better link award fees to acquisition outcomes such as cost, schedule, and performance, allow for and promote the use of award fees in combination with incentive fees to maximize the effectiveness of subjective and objective criteria, prohibit rollover, establish evaluation factors, including definitions of performance, associated fees, and evaluation scales, and have prohibited payments of award fees for performance that is judged to be unsatisfactory or does not meet contract requirements. All of these improvements are now included in section 16.4 of the FAR that regulates incentive-type contracts.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, the Secretaries of Energy, Health and Human Services, and Homeland Security should update or develop implementing guidance on: (1) developing criteria to link award fees to acquisition outcomes such as cost, schedule, and performance; (2) using an award fee in combination with incentive fees to maximize the effectiveness of subjective and objective criteria; (3) determining when rolling over unearned fees to subsequent periods may be justified; (4) establishing evaluation factors, including definitions of performance, associated fees, and evaluation scales, that motivate contractors toward excellent performance; and (5) prohibiting payments of award fees for performance that is judged to be unsatisfactory or does not meet contract requirements.

    Agency Affected: Department of Homeland Security

    Status: Closed - Implemented

    Comments: In June 2010, DHS revised its Homeland Security Acquisition Manual to state the following: (1) that all award fee plans must include award fee criteria related at a minimum to cost, schedule, and performance, (2) that all award and incentive fee contracts and order must be accompanied by a determination and findings, (3) that award fee is earned for successful outcomes, and that (4) no award fee may be earned against cost, schedule, or performance criteria that are ranked below "successful" or "satisfactory" during an award fee evaluation of contractor performance. These policy changes could improve the use of award and incentive fees within the Department of Homeland Security. DHS was also a part of the interagency working group that approved the changes to Federal Acquisition Regulation that also address each of our recommendations.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, the Secretaries of Energy, Health and Human Services, and Homeland Security should update or develop implementing guidance on: (1) developing criteria to link award fees to acquisition outcomes such as cost, schedule, and performance; (2) using an award fee in combination with incentive fees to maximize the effectiveness of subjective and objective criteria; (3) determining when rolling over unearned fees to subsequent periods may be justified; (4) establishing evaluation factors, including definitions of performance, associated fees, and evaluation scales, that motivate contractors toward excellent performance; and (5) prohibiting payments of award fees for performance that is judged to be unsatisfactory or does not meet contract requirements.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: The Department concurred with this recommendation and worked through the interagency working group to develop agencywide guidance. As such, in August 2009, the Secretary of Health and Human Services provided guidance on award fees through Acquisition Policy Memorandum No. 2009-06. The policy memo (1) requires the Heads of Contracting Activity (HCA) to approve new award fee contracts, (2) standardizes a framework for award fee ratings and percentages in new contracts, (3) prohibits roll over of unearned fees in new contracts, and (4) requires SPE approval to roll over in existing contracts. In response to our recommendation to develop criteria to link award fees to acquisition outcomes and to use award fee contracts in combination with incentive fee contracts, the policy memo requires HCA approval of all new solicitations and contracts that include award fee provisions. As part of the approval process, Contracting Officers must prepare a Determination and Findings (D&F) document to include in the contract file. The D & F must address whether the contract type is in the best interest of the Government; include predetermined objective incentive targets applicable to cost, schedule, or technical performance, such as FPIF and CPIF, are neither feasible nor effective; show that the contract type enhances the likelihood of meeting acquisition objectives; and demonstrate that the expected benefits outweigh the administrative effort and cost of monitoring and evaluating performance. In response to our recommendation to determine when rolling over unearned fee is justified, the policy memo requires approval of roll over in existing contracts. The approval is subject to criteria that the request be in writing; that it provides the rationale for allowing the second opportunity to earn the award fee; and that it explains the criteria and measurements to be applied. In response to our recommendation to establish evaluation factors and prohibit payments of award fees for unsatisfactory performance, the policy memo provides a standardized award fee rating system that establishes evaluation factors, including definitions of performance, associated fees, and evaluation scales, and provides no fee for unsatisfactory performance. The guidance provided in HHS's Acquisition Policy Memorandum No. 2009-06 are responsive to ensuring implementation of OMB guidance and responsive to closing out this recommendation as implemented.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to assist agency officials in evaluating the effectiveness of award fees, the Secretaries of Defense, Energy, Health and Human Services, and Homeland Security, and the Administrator of the National Aeronautics and Space Administration should establish an interagency working group to (1) determine how best to evaluate the effectiveness of award fees as a tool for improving contractor performance and achieving desired program outcomes and (2) develop methods for sharing information on successful strategies.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to the recommendation, the five federal agencies established an interagency incentive contracting working group in conjunction with the Office of Management and Budget's Office of Federal Procurement Policy. The interagency working group is considering a scaled down version of the evaluation mechanism implemented by the Department of Defense after our report was issued in 2009. The Department of Defense has developed a list of performance indicators that will be used by the DOD Components to identify potential cases where the award or incentive fees paid are consistent with contractor performance. Likewise, these data elements will strengthen the Department's ability to identify cases where fees are inconsistent with contractor performance.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to assist agency officials in evaluating the effectiveness of award fees, the Secretaries of Defense, Energy, Health and Human Services, and Homeland Security, and the Administrator of the National Aeronautics and Space Administration should establish an interagency working group to (1) determine how best to evaluate the effectiveness of award fees as a tool for improving contractor performance and achieving desired program outcomes and (2) develop methods for sharing information on successful strategies.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In response to the recommendation, the five federal agencies established an interagency incentive contracting working group in conjunction with the Office of Management and Budget's Office of Federal Procurement Policy.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to assist agency officials in evaluating the effectiveness of award fees, the Secretaries of Defense, Energy, Health and Human Services, and Homeland Security, and the Administrator of the National Aeronautics and Space Administration should establish an interagency working group to (1) determine how best to evaluate the effectiveness of award fees as a tool for improving contractor performance and achieving desired program outcomes and (2) develop methods for sharing information on successful strategies.

    Agency Affected: Department of Homeland Security

    Status: Closed - Implemented

    Comments: In response to the recommendation, the five federal agencies established an interagency incentive contracting working group in conjunction with the Office of Management and Budget's Office of Federal Procurement Policy.

    Recommendation: To ensure broad implementation of OMB's guidance and positive practices in using award fees, and to assist agency officials in evaluating the effectiveness of award fees, the Secretaries of Defense, Energy, Health and Human Services, and Homeland Security, and the Administrator of the National Aeronautics and Space Administration should establish an interagency working group to (1) determine how best to evaluate the effectiveness of award fees as a tool for improving contractor performance and achieving desired program outcomes and (2) develop methods for sharing information on successful strategies.

    Agency Affected: National Aeronautics and Space Administration

    Status: Closed - Implemented

    Comments: In response to the recommendation, the five federal agencies established an interagency incentive contracting working group in conjunction with the Office of Management and Budget's Office of Federal Procurement Policy. NASA is a key contributer to this working group. The interagency working group is considering a scaled down version of the evaluation mechanism implemented by the Department of Defense after our report was issued in 2009.

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