Incentive Contracts FAR Subpart 16.4 Level II PIP Presentation Ashley McQueen December 6, 2010

Why I Chose This Topic? ComplexChallenge Overlooked Teamwork Procurement

Overview of Presentation Definition of Incentive Contracts Purpose of Incentive Contracts Types of Incentives When Should We Use Incentive Contracts? Advantages and Disadvantages of Incentive Contracts Words from US Government Accountability Office (GAO) Recommendations Conclusion Questions?

What are Incentive Contracts? A fixed price or cost reimbursement type contract that makes the Contractor responsible for their performance (i.e. delivery, cost, and technical performance). The profit or fee amount is tied to the Contractor’s performance. Incentives can be positive or negative Reference: FAR Part (a)

Purpose of Incentive Contracts Establishes Targets for the Contractor ▫Technical ▫Cost ▫Schedule Motivates the Contractor Discourages Inefficiency Improves Performance Reference: FAR Part (a)(1), FAR Part (b)FAR Part (a)(1), FAR Part (b)

Types of Incentives Cost Incentives ▫FAR Part  Profit  Adjusted Fee  Actual Cost Adjustment Performance Incentives ▫FAR Part  Product Characteristics  Performance Tests  Assessment of Work Reference: FAR Part FAR Part

Types of Incentives Cont’d Delivery Incentives ▫  Reward-Penalty Structure Multiple Incentives ▫  Motivation for Outstanding performance in all areas  Compel Trade-off Decisions

Types of Incentives Cont’d Fixed-Price Incentives ▫FAR Part  Establishes Final Contract Price  Price Ceiling  Firm Target  Specifies Target Cost, Target Profit, Includes a Price Ceiling, and Adjusted Formula  Successive Target  Specifies an Initial Target Cost and an Initial Target Profit  Includes Profit Ceiling or Floor Reference: FAR Part 16.4FAR Part 16.4

Types of Incentives Cont’d Award Fee Incentives ▫FAR Part (e)(1) ▫Are supported by an award-fee plan that establishes the procedures for evaluating award fee  Includes an Award-Fee Board or Performance Evaluation Board (PEB) for conducting the award-fee evaluation Incentive Fee Incentives ▫FAR Part  Fee Payable to Contractor is Determined by Adjusted Formula

When Should We Use Incentive Contracts? Firm-Fixed Price is NOT Appropriate Requirement can be Acquired at a Lower Cost After Determination and Finding (D&F) is Approved by Head of Contracting Activity Negotiations can be Accomplished to Establish an Initial Target and Delegate a Fair Share of the Risk Reference: FAR Part (b)FAR Part (b)

AdvantagesDisadvantages Used to Encourage More Effective Work From Contractors When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance Good Business Practice Time Consuming to Administer Incentive Criteria may not be Related to Cost, Schedule, or Performance Goals Opportunities are Given to Contractors to Receive Unearned Fees

Words From The GAO Identified practices that reduce Contractor’s effectiveness on performance ▫Evaluating Contractors on areas that are not directly related to goals (i.e. cost, schedule, performance) ▫Paying Contractors a large portion of available fee for acceptable or satisfactory performance ▫Giving Contractors additional opportunities to obtain unearned fees Reference: Memorandum for Chief Acquisition OfficersMemorandum for Chief Acquisition Officers

Words From The GAO cont’d Incentive Fees should be linked to acquisition outcomes ▫Cost ▫Performance ▫Schedule Incentive Fees are not earned if Contractor’s performance is judged ▫Below satisfactory ▫Does not meet the basic requirements of contract

Recommendations Training ▫Workshops ▫Courses ▫Forums Consistent Fair Ratings ▫Directly Related to Performance Remain Unbiased with Contractors ▫Avoid Conflict of Interest ▫Do Not “Over-Communicate” with Contractors

Conclusion Top Things To Remember What are Incentive Contracts? What is the Purpose for Using Incentive Contracts? Types of Incentive Contracts Pros and Cons with Administering these Contracts Appropriately Evaluate the Contractor Based Only On Goals that are Directly Related the Contract Participate in Additional Training on Incentive Contracts

Questions?