Transcript Breakout Session #305

Application of Contract
Incentives
Breakout Session #305
Sharon King, CFCM
Catherine Walsh
July 19, 2010
Time: 4 – 5:15PM
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Agenda
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Overview of types of contracts
What’s changed
Why it’s changed
Implementation
Samples
Pitfalls
Best Practices
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Selecting Contract Type –
FAR Part 16.104
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Price Competition
Price/Cost Analysis
Type and Complexity of Requirement
Urgency
Period of Performance
Contractor’s technical capability and financial
responsibility
Adequacy of the Contractor’s accounting system
Concurrent Contracts
Extent and nature of proposed subcontracting
Acquisition History
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Types of Incentives
• Award Fee Contracts
– Can not pre-determine cost, schedule and technical
incentive targets
– Motivates exceptional performance while providing the
Government with flexibility to evaluate performance as well
as conditions under which performance was achieved
– Administrative costs are justified by benefits achieved
• Incentive Fee Contracts
– Objective/quantifiable criteria including a cost component
• Award Term – reward of continued business
• Stand-alone Incentives
• Hybrids
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What’s changed?
• Adjectival Ratings – FAR 16.4 now includes standard
adjectival ratings.
AF Adjectival
Rating
AF Pool
Available
Excellent
91% - 100%
Contractor has exceeded almost all of the significant award-fee criteria
and has met overall cost, schedule, and technical performance
requirements of the contract as defined and measured against the
criteria in the award-fee plan for the award-fee evaluation period
Very Good
76% – 90%
Contractor has exceeded many of the significant award-fee criteria and
has met overall cost, schedule, and technical performance
requirements of the contract as defined and measured against the
criteria in the award-fee plan for the award-fee evaluation period
Good
51% – 75%
Contractor has exceeded some of the significant award-fee criteria and
has met overall cost, schedule, and technical performance
requirements of the contract as defined and measured against the
criteria in the award-fee plan for the award-fee evaluation period.
Satisfactory
No Greater
Than 50%
Contractor has met overall cost, schedule, and technical performance
requirements of the contract as defined and measured against the
criteria in the award-fee plan for the award-fee evaluation period.
0%
Contractor has failed to meet overall cost, schedule, and technical
performance requirements of the contract as defined and measured
against the criteria in the award-fee plan for the award-fee evaluation
period.
Unsatisfactory
Description
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What’s changed?
• Determination & Findings (D&F) for AF
– Approved by HCA
– Must determine that cost, schedule and technical
performance targets can not be pre-determined
– ACAT I D&Fs must be provided on a quarterly
basis to OSD DPAP
• No Roll-over of award fee
• DoD Reporting requirements
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Why the change?
• Accountability
– GAO Report 06-409T (April 2006), Defense Acquisitions DOD Wastes Billions of Dollars through Poorly Structured
Incentives and GAO Report 09-630 (May 2009), Federal
Contracting – Guidance on Award Fees Has Led To Better
Practices But Is Not Consistently Applied
• DOD paid out an estimated $8 billion in award fees on
contracts in GAO’s study population, regardless of whether
acquisition outcomes fell short of, met, or exceeded DOD’s
expectations (contracts studied from 1999-2003).
• DOD programs gave contractors on about half of the awardfee contracts in our study population at least a second
opportunity to earn an estimated $669 million in initially
unearned or deferred fees.
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Why the change?
• DPAP memo of 24 Apr 07
– Increased use of CPAF contracts, particularly for
development and LRIP efforts
– Lack of objective criteria in measuring contract
performance
– Requirement for D&F when using CPAF structure – for
ACAT I programs requires providing DPAP copies of D&Fs
executed on a quarterly basis
– Incorporated FAR changes for standard adjectival ratings
and ranges
• DPAP memo of 25 Jun 08
– Required reporting of award fee
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Why the change?
• Motivation
• Agencies are seeking to increase link between
performance and program outcomes for both major
systems and professional services contracts
• Encourage Contractor to meet program’s acquisition
outcomes
Using incentives properly—in concert with good
acquisition practices—is a key to minimizing waste,
maximizing value, and getting our military personnel
what they need, when and where they need it
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Implementation – Selection
• Understanding the requirement
• Associated risk
• Incorporation of lessons learned from
similar/historical efforts
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Implementation - Criteria
• Mission performance
– Test Results
– SLAs/KPPs
• Cost
– EVM CPI & variance analysis supporting
• Schedule
– Incentive: EVM SPI; Adherence to IMS; % of deliverables
delivered early, on-time or late
– Dis-incentive: Liquidated Damages
• SB Subcontracting
– Dis-incentive: Penalty for Failure to meet SB/SDB
requirements resulting in 2.5% reduction in fee for the next
option period
– Incentive: If SB and SDB subcontracting exceeds amount
in the approved subcontracting
plan, incentive awarded
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Implementation - Governance
• Who determines whether criteria was met?
• How often does evaluation occur or is it event-driven?
• Need to incorporate award/incentive plan to document the
process
• For AF/AT, contractors usually provided the opportunity to
provide a self-assessment
• Decisions are unilateral and solely at the Government’s
discretion
• Ability to change award fee criteria for future periods provided
it’s done before the start of the next period
• Government will often re-invest un-earned fee/incentives for
unfunded requirements
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Samples
• When the schedule for an ACAT I program was shifted to the
left, incentive CLINs were added to a FFP production contract
to provide the contractor with compensation for achieving early
delivery
• On a major IT acquisition – incentives and credits due back to
the Government based on performance against Service Level
Agreement
• On another ACAT I development program, incentives were tied
to EVM; performance at test events
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Award Fee Pitfalls
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Payment – Need to monitor contract costs to ensure obligated award
fee pool funding is not expensed to cover contract cost overruns
Appropriation lifecycle - If not obligated at beginning of period, it can
be difficult to find funds in that FY to pay for performance
Be mindful of how funding impacts including incremental funding and
CRA can impact the contractor’s schedule (i.e., Government delay)
Past Performance Evaluations (i.e., PPIRS) should be consistent with
award fee/incentive determinations.
Avoid evaluating based on feelings rather than specific, substantiated
examples
Be sure feedback is consistent with the given period evaluated
Contractor often requests re-consideration if assessed 90 or below
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Best Practices
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When developing plan, think creatively.
Avoid rewarding the contractor for simply meeting the requirements
Make incentives challenging yet attainable
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Consider tying on-time delivery to cost and/or quality performance criteria.
Use both positive and negative incentives and include limits
Consider including incentives for discounts based on early payments.
Ensure that performance incentives focus the Contractor’ efforts on your
desired objectives. (e.g. tie to program milestones)
Keep communication open
Ensure that input is
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objective and based solely on facts and performance,
timely and consistent,
examples are clear and specific, and
keep documentation that backs up your input
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Reference Material
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FAR Part 16.4, Incentive Contracts
GAO Report 09-630 dtd May 2009, Federal Contracting – Guidance
on Award Fees Has Led To Better Practices But Is Not Consistently
Applied
GAO Report 06-409T dtd April 2006
OSD DPAP Memo dtd April 24, 2007, Proper Use of Award Fee
Contracts and Award Fee Provisions
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