DOD misses mark on performance pacts

Defense Department Inspector General's report

The Defense Department may have paid more than $4 billion on performance-based contracts without first determining if the work was performed as required, according to DOD's Inspector General.

In 43 out of the 67 cases reviewed, contract offices failed to provide adequate oversight of payments, which account for $4.1 billion out of $5.5 billion in contract work, according to the June 25 IG report.

The Bush administration has promoted performance-based contracts as a way to improve contractor performance, because they tie payments to specific criteria.

But many DOD organizations failed to enforce contract terms and made payments in advance or without documenting whether vendors had met the necessary requirements for payment, according to the report. The IG reviewed both supplies and services contracts, including ammunition and missile systems as well as computer and software systems.

As part of DOD's contracting guidelines issued in November 2000, the agency set a goal of basing 25 percent of fixed-price contracts on performance by 2002. By fiscal 2005, performance-based contracting should be prevalent, according to the guidelines.

Deidre Lee, director of Defense procurement and acquisition policy, noted that many of the contracts cited in the IG report were negotiated before DOD issued the guidance. Since then, DOD has created a user's guide and an online training course to teach contracting officers how to handle performance-based payments.

This fall, DOD officials will review how the guidance is working, Lee said in a written response to the IG report.

Chip Mather, senior vice president of Acquisition Solutions Inc. and a former senior Air Force procurement executive, said the government needs to stop focusing on compliance and devote its efforts to making performance-based contracts work.

"The only thing harder to do than a performance-based payment contract is not to do one," he said. "The government is still in a half-in/half-out methodology on this because this is a cultural change with a capital 'C.' Once we've gotten this far, there is no going back."

Service-level agreements (SLAs) and performance-based payments are still relatively new concepts in the federal sector, and work still needs to be done to fine-tune the interface between the government and the contractor, said Warren Suss, president of the Pennsylvania-based information technology firm Suss Consulting Inc.

"SLAs are really a double-edged sword," he said. "It gets the government out of the business of micromanaging vendor performance and allows the government to focus on the bottom line." On the other hand, they create a significant burden because the government has to establish effective measurements, monitoring processes and techniques for following up on the agreements.

"It should be incumbent on the contractors to monitor themselves in a way that is transparent enough for the government to have oversight without all of the extra effort," Suss said.

Incorporating performance levels into contracts is becoming more prevalent in the federal sector because acquisition executives are realizing the benefits of establishing exactly what is expected of contractors. In recent years, the Transportation Security Administration, Environmental Protection Agency and Education Department have awarded large, performance-based contracts to various vendors.

Mike Wassenberg, director of enterprise solutions for Computer Sciences Corp., said agencies need to create a process to ensure vendors are performing as expected. That must be developed from the start, not added later, he said. "We have award reviews every six months to determine how well we've met SLAs," he said. "We get a score card, and if we don't perform well, we don't get paid."

CSC has a large performance-based contract with the EPA to manage its information technology and telecommunications operations. That contract is moving from a performance-based to a managed services contract structure, so more SLAs will apply in the future, he said. That could add to the complexity of overseeing the contract, he said, but the way SLAs are measured can alleviate that problem.

"We try to stay away from getting too complex in how SLAs are measured," Wassenberg said. "If the measurement is more complicated than the task itself, then you've missed the point of having SLAs in the contract."

Education's Federal Student Aid program uses performance-based contracts for its debt-collection services. Under strict payment measures, vendors collect money for the department and are paid based on how much they collect.

"Frankly, the vendor doesn't get work unless he's succeeding in collecting money for us," said Patrick Bradfield, FSA's acting director of acquisition and contracts performance.

The department's performance-based contracts have proven successful, but they're not for everyone, Bradfield said. Some services aren't appropriate for that procurement method, and strict guidelines are necessary.

"We have a very ideal situation for performance-based contracts," he said. "It comes down to [whether] you can see the results of the vendor's efforts."

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Questionable performance

In a recent audit, the Defense Department Inspector General found that in nearly two-thirds of the performance-based programs reviewed, defense organizations paid contractors even when they did not meet the terms of their contracts.

Here's the breakdown, by organization:

Army — 11 contracts reviewed, 8 with inadequate administration

Navy — 34 contracts reviewed, 24 with inadequate administration

Air Force — 18 contracts reviewed, 7 with inadequate administration

Defense Logistics Agency — 4 contracts reviewed, 4 with inadequate administration

Total — 67 contracts reviewed, 43 with inadequate administration