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					Incentive Contracting That Works

        Breakout Session # 408

     Alan S. Gilbreth, Professor, DAUMW

             Wednesday, April 16
• December 05 GAO Report
• Incentive & Award Fee Background
• DAU Research Study
• Findings of Research Study
• Industry Comments/Concerns
• Realistic Incentive Strategies
• DoD’s Policy with Regard to Award Fee and Award
  Fee Provisions
• Food for Thought
  GAO Report GAO-06-66 Dec 2005
     Use of Incentives in DoD
• Selected a Probability Sample of 93 contracts from a
  study of 597 DoD award-fee and incentive contracts FY
   – 52 contracts award-fee
   – 27 contracts incentive-fee
   – 14 contracts included both award and incentive fee provisions
• Seven GAO Recommendations Made
• Overall conclusion “DoD has paid billions in award and
  incentive fees regardless of the acquisition outcome”
      Incentive Arrangements

• Incentives to effect desired contractor
  behavior within the terms and conditions of
  the contract (e.g. liquidated damages, past
  performance, QA requirements, payment
  terms, etc.)
• Incentives embedded within the contract type
  itself (FPIF, FPAF, CPIF, and CPAF)
      Compensation Arrangements
Low Technical Complexity                        High Technical Complexity

 FP      FFP       FPIF    FPAF       CPIF     CPAF      CPFF     CR
  Base Ops                  A/C Production Major            R&D
          Mature A/C (F-16)                System

 Cost Risk

 Contractor                                               Government

 Performance Risk

 Contractor                                               Government
 (Mandatory Compliance/Delivery)                          (Best Effort)
       Incentive Arrangements

• Two types: objective and subjective
  – Subjective: award fee
  – Objective: incentive fee (pre-determined formula
    or bonus/lump sum
  – Multiple Incentive: contains both incentive and
    award fee criteria
• What are you trying to achieve?
  – Cost, schedule, performance
           DAU Research Study

• To better understand where award and incentive fees
  had a favorable impact on performance outcomes
  and why
• Surveys were developed based on Mr. Krieg’s
• Program offices were suggested by major commands
• Senior level industry representatives came to an
  industry day at Ft. Belvoir and spoke candidly about
  their DoD experience with incentives
                   Research Findings Say
• Regulatory guidance relating to incentive contracting is sufficient
    – Incentive contracts as described in this subpart are appropriate when a firm-fixed
      price contract is not appropriate and the required supplies or services can be acquired
      at lower costs and, in certain instances, with improved delivery or technical
      performance, by relating the amount of profit or fee payable under the contractor’s
      performance (FAR 16.401(a))
    – Award-fee provisions may be used in fixed-price contracts when the Government
      wishes to motivate a contractor and other incentives cannot be used because
      contractor performance cannot be measured objectively (FAR 16.404(a))
    – Do not issue a solicitation contemplating a fixed-price contract with award fee unless
      the administrative costs of conducting award-fee evaluations are not expected to
      exceed the expected benefits (FAR 16.404(b)(1))
    – The cost-plus-award-fee contract is suitable for use when the work to be preformed is
      such that it is neither feasible nor effective to devise predetermined objective incentive
      targets applicable to cost, technical performance, or schedule (FAR 16.405-2(b)(1)(i))
    Research Findings Say (Cont)

• Multiple incentive type contracts “build to need”
   – The combination of objective and subjective measures
     indicated the strongest correlation to expected outcomes
   – Subjective measures only used when objective measures
     would not achieve the desired outcome to the same level
• Use relevant, achievable and sustainable measures
  within an evaluation period
   – “Hard wire” measures to achievable outcomes
   – When possible, base your award fee periods on events or
     outcomes rather than time
           Research Finds Say (Cont)

• Use base fee in cost-plus-award-fee (CPAF) contracts
   – Provides necessary leverage for proper use of the award portion of
   – Factor in the view of senior defense industry people-they welcomed
     the use of base fee to better delineate the difference between “best
     efforts” (e.g. base fee) and “excellence” (e.g. award fee)
   – Examine the limit on base fee (currently 3% in DFARS 216.405-2
 Research Findings Say (Cont)

• In a cost reimbursement environment, consider your
  organization’s philosophy for rewarding “satisfactory” or
  “meeting contract requirements” as well as “excellence”
   – Most or all for excellence
   – Consider available funding, complexity of effort, return on
     investment and the amount of base fee
   – When possible, base your award fee periods on events or
     outcomes rather than time
   – Management of highly complex efforts in a risky environment
   – Comparison to fixed fee and fee limitations
         Research Findings Say (Cont)

• Strong Communication and Continuous Feedback Stressed
   – Several programs found it necessary to establish a glossary of terms
   – Close monitoring on a monthly basis by a joint government and contractor
     team justified the additional effort in this research review
   – Many programs emphasized very open communication with the contractors-
     the contractor is never surprised by what they get
   – Some programs used “emphasis letters” or “barometer reports” during award
     periods to stress the importance of certain “outcomes” or “events-others used
     monthly reviews
   – Several program offices found that strong preparation and a focused
     evaluation board were very important elements along with upper management
      Research Findings Say (Cont)
• Institute training and leverage experienced
  personnel to the maximum extent
  – Many PM offices capitalized the incentive/award fee experience
    of people already embedded in their organization
  – Others used formalized instruction while continuing to coach
    personnel on the use of incentives
  – A large number of PM offices stated just-in-time training involving
    the entire incentive team was the most effective
  – Some program offices suggested that performance monitors
    observe other assessments to help them appreciate the depth of
           Industry Findings Say
• Industry welcomes the use of base fee to better delineate
  the difference between “best efforts” and “excellence” in
  award fee
• Government personnel are not always adequately
  trained in managing award fee contracts
• There are sometimes inconsistencies in the timing of the
  award fee in line with the evaluation criteria
• Government and contractors sometimes have different
  perceptions of the purpose of award fee
• Requirements are sometimes too subjective and do not
  measure outcomes that are sought by DoD
  Realistic Incentive Strategies
• Air Mobility Command (AMC) Contracted Commercial
  Gateway Services at Baltimore-Washington Int’l Airport
   – Fixed-price with award fee services contract for passenger handling at
     $1 million per year for five years
   – The contract spells out the requirements that are needed; however, there
     is much more the contractor can do to ease the stress of their travelers
   – There are two award fee periods a year-but performance monitors submit
     monthly reports and customer complaints and surveys.
   – The contractor is evaluated on customer service, passenger service,
     baggage and management
   – Contractor is only paid award fee for exceeding satisfactory
   – The results of surveys and monitor reports support that award fee has
     driven favorable outcomes on this contract
 Realistic Incentive Strategies (Cont)
• TACOM Life Cycle Mgt Cmd, Future Combat
  – This Systems Development and Demonstration (SDD) contract
    is an innovative cost-plus-fixed fee with incentive
  – The key objectives of the SDD program are to prove out
    technologies and systems integration
  – The purpose of the incentive fee is to incentivize the contractor
    to place the program in an appropriate risk position
  – The Incentive categories selected for the SDD contract were
    designed to insure that the program office could afford to
    produce items developed in SDD.
Realistic Incentive Strategies (Con’t)
• TACOM Life Cycle Mgt Cmd, Total Integrated Engine Revitalization
  (TIGER) Program
   – The $1.3 B sole source contract is fixed-price with a highly leveraged
     incentive fee with a base and three options
   – It is unique in that the incentive metrics are objective, as one would
     expect, but there are also attributes similar to award fee
   – The ktr’s performance is measured by four metrics: engine availability,
     durability, cost and small business
   – Metrics are key to overall performance goal-improve the mean time
     between depot return (MTBDR) from 700 to 1,400 hours
   – Each year ktr is challenged to exceed Govt threshold-board meets
     annually to evaluate and validate ktr’s performance
   – Performance goals for each year-final performance goal is 1,400 hours
     MTBDR within specific cost objectives
 Realistic Incentive Strategies (Cont)
• Aeronautical Systems Center (ASC), F-15 Aircraft Suite 6
  Software Upgrade A-E Models
   – The contract is cost-plus-award-fee (CPAF)-while a CPAF contract
     typically uses only subjective criteria they used both objective and
     subjective as they felt appropriate
   – Integrated process team sessions with the Govt functional areas and the
     ktr were used to establish criteria used in the award fee periods
   – The program office created a strong link to favorable outcomes and
     reduced program risk by developing the award fee objectives and linking
     the award fee periods to deliverables
   – Ktr initially wanted an award fee with only subjective criteria-accepted
     objective criteria when the program office came up with 3% base fee
   DoD’s Policy with Regard to Award Fee
         and Award Fee Provisions
• It is the policy of the Department that objective will be utilized,
  whenever possible, to measure contract performance
• Where objective criteria exist, and the CO and PM wish to also
  evaluate and incentivize subjective elements of performance, the
  most appropriate type of contract would be a multiple incentive type
  contract containing incentive and award fee criteria
• If it is determined that objective criteria do not exists and that it is
  appropriate to use a cost-plus-award fee (CPAF) contract, then the
  Head of the Contracting Activity (HCA) must sign a D&F that “the
  work to be performed is such that it is neither feasible noe effective
  to devise predetermined cost objective incentive targets applicable to
  cost, technical performance or schedule”
• Specific ratings with definitions and award fee ranges
                        Food for Thought
• As stated earlier in the brief, many of the industry day participants supported
  the use of base fee. Is the DFARS maximum for award fee base of 3% the
  right number?
• If the base fee in award fee is properly used, could this negate the need to use
  provisional award fee?
• Some of our research has shown that when companies share their award fee
  with the employees doing the work, a marked increase in performance is
  seen. Could the Government encourage or require the contractor to share the
  award fee with their employees?
• Some of our research indicates that award fee does not constrain contractors,
  but shifts resources. What are the potential ramifications when this occurs?
• Does the incentive “award fee” still have a place in government contracting?

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