Use rewards to extend vendors' pacts

Bob Woods, the longtime government information technology manager now working in industry, was talking with me recently about the need to have provisions written into government IT contracts that give better incentives for vendors to deliver results. "I have a great idea," he told me. "It's like airline frequent flyer points. Give the vendor a bunch of points based on different aspects of their performance. Then, depending on how many points it accrues, reward it by extending the length of its contract."

"Great minds think alike," I responded to Bob. "Guess what? The Air Force has already started doing this. They call it 'award-term contracting.' "

In the Air Force, the idea for award-term contracting originated with Col. Darryl Scott, previously director of contracting at Kelly Air Force Base, Texas, and recently named director of contracting at Wright-Patterson Air Force Base, Ohio, which is the Air Force's most prestigious field contracting job.

Scott's new position is richly deserved; he is one of the most innovative and creative contracting professionals in government. The award-term contracting technique is being used on contracts already signed for outsourcing aircraft repair and sustainment from bases in San Antonio and Sacramento, Calif., which are being shut down. The request for proposals for a jet engine repair contract out of Kelly Air Force Base has an "award-term clause" providing that "the initial seven-year ordering period [for the contract] may be extended or reduced on the basis of contractor performance, resulting in an ordering period lasting a minimum of five years to a maximum of 15 years."

The RFP provides for four performance measures to judge the contractor: on-time repair, affordability, product quality and attainment of small-business goals. Each measure is judged objectively. For a satisfactory rating for on-time repair, the contractor must, among other things, meet contractually required turnaround times for 95 percent of end items 95 percent of the time. For a satisfactory rating on affordability, the final price must be zero percent to 3 percent below the total aggregate proposed price. For quality and small business, the contractor must meet repair defect standards and minority-owned and small-business subcontracting goals. In each case, contractors may also be rated excellent, for example, regarding affordability, if the final price is more than 3 percent below the price that had been bid.

During each year of the contract, the contractor will be assigned points based on unsatisfactory, satisfactory and excellent performance of each of the four measures. Decisions about extending or shortening the contract will be made year-by-year, based on a moving multiyear average of the contractor's overall point total.

This is a great incentive arrangement. Like all good arrangements, it aligns the interests of the government and the contractor, providing a reality to what otherwise might merely be the rhetoric of partnership. It encourages something every government agency would love to have: a long-term relationship with a well-performing contractor. It provides the vendor with a very powerful reward: access to ongoing business, with future years of business generally more profitable because the contractor is well down the learning curve.

The appearance of award-term contracting is part of a renewed interest in innovative methods to create incentives for vendors to deliver results.

The new interest in incentives is not surprising in an era when we are—at long last—starting to focus on the results we get from government and not just the processes or procedures government uses.I have only one criticism of the approach used in the award-term contracts the Air Force has put out so far. These contracts allow extension of contractor performance for up to 15 years, requiring only an overall performance level (on each performance dimension) of satisfactory rather than excellent. To me, that sets the bar too low. Contractors should be expected to perform satisfactorily without receiving unusual incentives, beyond being paid. For contract extension, a higher standard should be required.

According to Scott, the decision to build that reward incentive into the contract resulted from an internal debate in the Air Force two years ago, when the concept was just being developed and the comfort level was lower. "Today, I'd probably do it differently," he told me. The Air Force's engine example also illustrates that award-term contracting is most appropriate when there are objective measures of performance.

I've heard that one of the Air Force's most innovative program managers, Terry Little, who brought us some fantastic acquisition reform success stories [FCW, Sept. 7, 1998, and Nov. 16, 1998], as well as some of the senior procurement leadership at NASA, is intrigued by this idea. So keep a lookout.

--Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.