New rule targets award fees

A new rule on award-fee contracts has raised the level of risk for contractors, experts say

The Obama administration has devised a system designed to standardize how agencies assess companies’ eligibility for award fees. However, some experts say evaluating and rewarding contractor performance will still be far from simple.

The Federal Acquisition Regulation states that award-fee or cost-reimbursement contracts are suitable only when an agency can’t nail down a set price for the work. Under those contracts, agencies offer companies award fees, or bonus money, if they perform well. However, agencies have had trouble establishing a uniform way to measure that performance.

The administration’s new rule, issued in October, helps agencies assess how a contractor has performed based on whether the company has met preset objectives. Specifically, a contractor would receive an “excellent” rating for exceeding almost all of the objectives of a contract, including cost, schedule and technical requirements. In that case, the agency could award the company 91 to 100 percent of the available bonus money.

On the other hand, a contractor earns an average, or “satisfactory,” rating if it only meets the objectives. In those situations, contractors would be eligible for no more than 50 percent of the pool of award-fee money. And a contractor would receive no additional money if it earns an unsatisfactory rating for its performance.

“It’s like grades in school,” said Trey Hodgkins, vice president of national security and procurement policy at TechAmerica, a trade association for information technology contractors.

The rule stems from concerns that agencies were handing out award fees for work that didn’t warrant such rewards because officials didn't have criteria for assessing contractors’ work, said John Needham, director of acquisition and sourcing management at the Government Accountability Office.

According to a GAO report released in May, agencies spent more than $300 billion on such contracts from fiscal 2004 through 2008. Previous GAO audits found that the Defense Department paid more than $8 billion in award fees from fiscal 1999 to 2003, regardless of performance or outcome. GAO said DOD has improved its evaluations.

The new rule recommends that agencies conduct contractor reviews every three months and let contractors know how well they’ve been performing and where they need to improve.

In addition, the rule prohibits rolling over unearned award fees from one evaluation period to the next, a practice that has given contractors an opportunity to earn award fees in a subsequent evaluation period. According to the rulemaking notice, rollovers diminish “the effectiveness of the award-fee rating given for a specific evaluation period.”

However, experts say agencies rarely roll over fees, and that limited use has declined.

Nevertheless, the rule’s emphasis on tying performance to preset goals could spell trouble for some agencies.

Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, said performance is not always measurable, and although award-fee contracts encourage quantitative measures, they also permit many qualitative assessments.

“It’s a struggle for many government organizations to select meaningful metrics for their organizations, let alone translate those metrics to a contract,” he said.

Bjorklund said that when he worked for the government as a program manager and procurement official, he and his colleagues often couldn’t foresee all aspects of a contract and therefore were unsure how to set quantitative goals for a contractor’s performance.

“But we were able to adjust the award-fee criteria quarterly to give the contractor a ‘carrot’ goal to achieve in the next fee period as we learned more about how the program was evolving,” he said.

Contractors enter into award-fee contracts expecting to do well and earn all the extra money, and they structure their bids and profit projections with that in mind, Bjorklund added. By changing the rules, the government has raised the level of risk for contractors. “It’s become a much more treacherous exercise,” he said.

As a result, agencies might see fewer companies competing for award-fee contracts, he added. He also said companies might change the way they calculate their costs so they can ensure that they get the necessary revenue.

Other experts say some important aspects of contracts will always be subjective. But under the new system, companies might decide against an award-fee contract if they can’t be sure they will earn high marks from the agency.

However, the new grading system “is not bad. It’s not good. It’s just different,” Hodgkins said.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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