OFPP: Stop giving incentive awards for average contractor work

Concerned about negative reports on incentive fees, the Office of Federal Procurement Policy told agencies in a new memo to make sure the incentives actually improve contractors’ performance. Paul Denett, OFPP administrator, wrote in a Dec. 4 memo that agencies sometimes don’t tie the incentive award to meeting contract objectives. Agencies should clearly lay out those objectives in the contract before awarding it. Instead, agencies tied the award to a contractor’s effort. Agencies use incentive-fee — or cost-plus — contracts to encourage contractors to perform better by tying their profits to specific performance measures. The Government Accountability Office, however, has found instances in which agencies paid a contractor the award even though the company failed to meet the contract's objectives. In a January report, GAO said some cases had “a significant disconnect between program results and fees paid.” For example, GAO said NASA paid 97 percent of the award fee to the contractor for the Earth Observing System Data and Information System Core System despite more than two years in delays and a cost increase of more than 50 percent. Although NASA’s contractor evaluations show generally good performance, GAO said the contractors didn’t always reach the contract's benchmarks. GAO said the disconnect raises questions about how the incentive is bringing NASA the program results it sought in awarding a contract with incentives. That becomes significant because incentivized contracts accounted for nearly half of the agency’s obligated contract dollars for fiscal 2002 to 2004, GAO said. “Using incentives appropriately and applying strong project and acquisition management practices are vital to accomplishing mission needs, minimizing waste and maximizing value,” Denett wrote in his memo. When determining whether to use an incentive-fee contract, contracting officers should analyze the risks and cost benefits, Denett recommended in the memo. Agencies can determine the type of contract to use based on the risk to both the government and the contractor. When considering incentive-fee contracts, Denett also told agencies to think about how much planning would be required for monitoring and determining awards. In addition, an incentive-fee contract must have clear standards for evaluating the contractor’s performance and appropriate incentive fees, the memo states. Evaluation factors should be measurable and directly linked to cost, schedule and performance. Contracting officers should also write those evaluation factors so there are clear distinctions between satisfactory and excellent performance, Denett wrote.