The case for award-fee contracts

In a recent Federal Computer Week blog entry ["Acquisitive Mind: Do award fees produce better work from contractors?"], a reader impugned the value of award-fee contracts, complaining that “contractors don’t produce as required anyway.” But contractors in fact do provide better work with an award fee.

That’s because they are in business to make money, and they are correctly incentivized by the better profit potential of an award-fee contract.

As a contractor myself, I know we put our best effort and best people into the work to earn that award fee. We want the profit, and we don’t want to fail or perform at any level less than excellent in a performance-based contract. In the end, we earn that award, and the government achieves its important mission-performance goals. Everybody wins.

That win-win characteristic is the reason why the government is committed to more performance-based contracting in our capitalist economy.

As the Office of Management and Budget asserts, financial incentives, such as cost-plus-award-fee contracts, should be used in performance-based contracting when they will induce better quality or lower costs in the agency’s mission performance. In its guide, OMB provides many examples of demonstrably good work by contractors as a result of performance-based contracting. For example, NASA reduced program costs for the space station by $350 million since 1990 through the use of special contract incentives — pretty good work, I’d say.

Perhaps the best example of successful performance-based contracting is the Interstate 10 freeway repair that occurred in California after the Northridge earthquake in January 1994. The heavily damaged freeway was reopened on April 11, 1994, just 84 days after the earthquake and 66 days ahead of schedule. That earned the contractor a bonus — i.e., an award fee — of $14.8 million from the California Department of Transportation.

Does it qualify as an “obscene profit”? I don’t think so, especially when you consider how many billions of dollars of lost economic value were saved that would otherwise have occurred in California during those 66 days.

Performance-based contracting provides another incentive beyond that initial profit. Every contractor knows that his good performance on a performance-based contract is the key to winning future contracts. If he performs poorly, he will damage his reputation and lose the chance for future business. Therefore, he will do everything to please the customer and avoid failing.

There is only one caveat for performance-based contracting and award fees, the same caveat that OMB notes. The contract must carefully and quantitatively define what constitutes good performance and have a quality assurance plan that monitors, measures and rewards good performance correctly and objectively. It’s when those elements are missing that contractors don’t produce as required, as the FCW reader pointed out.

If you are interested in contributing an opinion piece, please contact John Monroe.