1. Contracting Officer Podcast Slides
Knowledge & Insights From Contracting Officers

2. What are Incentive Contracts?
Episode 044
What are Incentive Contracts?
Original Air Date: September 14, 2015
Hosts: Kevin Jans & Paul Schauer

3. Formatting notes
Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the link
Red bold font indicates a point of emphasis
Green bold font indicates CO’s personal comment or perspective

4. Introduction
Purpose of this podcast: To explain the intricacies of incentive contracts
Incentive contracts are complex.
They can cost you a lot of time and money in the performance phase if you don’t understand them.

5. The ‘Contract-type’ Continuum
Fixed-price
Extreme is firm-fixed-price, where the contractor has full responsibility for performance costs and resulting profit (or loss)
Cost-reimbursement
Other extreme is cost-plus-fixed-fee, where the contractor has minimal responsibility for performance costs and negotiated fee (profit) is fixed.
Allow payment of “allowable costs” per the contract (and the FAR)
Establish an estimate of total cost and a ceiling

6. Incentive Contracts (In between the extremes)
Three types:
Cost incentives – may share in cost savings
Performance incentives to motivate “better” performance
Delivery incentives to motivate faster delivery

7. When do Incentive Contracts matter?
Acquisition Time Zones
(from Podcast Episode 003)
Requirements Zone
Market Research Zone
RFP Zone (proposal zone)
Source Selection Zone
Execution Time Zones
(from Podcast Episode 084)
Kick Off Zone
Performance Zone
Re-compete Zone
Wrap-up Zone

8. Incentive Contracts FAR 16.401 Appropriate when:
Fixed price is not appropriate, and
Required supplies or services can be acquired at lower cost or improved delivery or technical performance
By relating the amount of profit or fee payable under the contract to the contractor’s performance.
Incentive contracts are designed to obtain specific acquisition objectives by--
Establishing reasonable and attainable targets that are clearly communicated to the contractor; and

9. Incentive Contracts
Including appropriate incentive arrangements designed to --
Motivate contractor efforts that might not otherwise be emphasized, and
Discourage contractor inefficiency and waste
FAR (c)
Two basic categories of incentive contracts:
Fixed-price incentive contracts (see FAR and )
Cost-reimbursement incentive contracts (see FAR )

10. Incentive Contracts Fixed-price incentive contracts
Preferred when contract costs and performance requirements are reasonably certain
Usually to the Government’s advantage for the contractor to assume substantial cost responsibility and an appropriate share of the cost risk

11. Examples of Incentives
Options (not actually called an incentive in the FAR)
Awards
Fee (subjective, using award fee plan)
Term (objective or subjective, using award term plan)
Cost Sharing
Performance bonus (settle for minimum solution but bonus for best solution)
Delivery incentives (opposite of liquidated damages)

12. Incentive Contracts (‘in between’)
Need to be
Defined
Valuable
Trackable
Recognize this:
They require more administration!
Complexity drives confusion
Get buy in on administration effort! (this ain't always easy...)

13. Approval Required Because of ‘perceived abuse’ FAR 16.401(d):
“A determination and finding, signed by the head of the contracting activity, shall be completed for all incentive- and award-fee contracts justifying that the use of this type of contract is in the best interest of the Government.”

14. Why are Incentive Contracts important?
Creativity is built into the FAR – This is the thinking part.
The law of unintended consequences applies
For every action there is an equal and opposite reaction
Incentives compete with each other – and compete with rational behavior
Faster, better, cheaper… You can't have all 3
Cost, performance and schedule move together (like a triangle)

15. Why are Incentive Contracts important?
No incentive contract may provide for other incentives without also providing a cost incentive (or constraint) (see FAR (a) )
Makes sense in Cost-type contract, but seems out of place for FFP
In this case, the FFP is the constraint
Contractors assess how to maximize profit regardless of Government’s goals for the incentives
Will meet the contract requirements, but in the manner that maximizes profit

16. Why Should Government Care?
Focus: it forces the focus on what REALLY matters
Provides (or should provide) clarity on your goals
You may actually pay less for better service
You can get better performance and REWARD great performance
Or, you can spend a lot of time administering and end in the same place

17. Why Should Industry Care?
This is how you make more profit (or any, in some cases)
Make sure the incentives are aligned with delivering what the customer wants
Otherwise, your program will be a mess when the conflicts arrive
You know your customer’s priority (hopefully it matches the incentives)
You can focus on what REALLY matters to the customer
If they’ve properly incentivized it

18. Why Should Industry Care?
Incentives must match what industry can actually do!
Don’t expect a 6-month lead time item to be delivered in one day

19. Summary
Government can provide more clarity of goals and needs with incentives
Industry can be more successful (make more money) with incentives
Caution:
Know what you’re signing up for. They are NOT easy to administer
Incentive contracts are a powerful way to encourage contractor behavior.
Be sure that incentives align Government needs with contractor’s profitability

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