Army smart to push for contract results

The most important trend in contracting today is a growing recognition that the crucial benefit of procurement reform is giving the government more leeway to structure business arrangements with vendors in a way that increases the chances that contractors will deliver results to government customers successfully.

Two of the earliest reform concepts—improved communication between government and vendors, and best-value contracting, which recognizes that having failure delivered at bargain-basement prices is not a good deal—were aimed at improving results. The government's increased attention to past performance reflects an increased concern with results. And even procurement streamlining can indirectly promote attention to results by freeing program managers' time from managing useless bureaucracy.

This year, there has been a dramatic increase in attention to innovative incentive techniques as part of procurement reform. A good deal of this attention has been in the context of opportunities for share-in-savings contracting [FCW, Jan. 11]. Incentives also were a major theme raised at Office of Federal Procurement Policy administrator Deidre Lee's spring procurement summit, which dealt with transforming contracting professionals into government business advisors [FCW, May 10].

Recently, Ken Oscar, the Army's soft-spoken but determined senior procurement executive, brought together about 25 senior Defense Department and industry folks for the first of several private, one-day sessions to get their advice on improving how the Army provides incentives in its relationships with contractors.

Incentives are not new in DOD contracts, especially for weapons systems. Cost-plus-incentive-fee contracts try to give contractors inducements to keep costs down in a cost-reimbursement environment. Cost-plus-award-fee contracts provide bonuses for other elements of performance. But Oscar rightly thinks these traditional methods aren't enough. Award fees generally are quite small, are often tied to subjective measures and not strongly enough to results, and don't include disincentives for failure to perform well. Oscar also has been troubled for the past few years that, over and above specific incentives tacked onto a contract, the basic terms of underlying business arrangements encourage inappropriate contractor behavior.

Oscar's meeting started with a general discussion. Elliot Branch, head of contracting policy for the Navy, illustrated Oscar's worry about business arrangements not being structured correctly by giving examples of the military buying spare parts rather than service levels for equipment. This creates an incentive for the sale of more inputs (parts) rather than better results (uptime)—like buying copiers and not copies.

Mark Lumer, the head of contracting at the Army Space and Missile Defense Command in Huntsville, Ala., suggested that the government provide incentives by granting a vendor commercial marketing rights for software developed for the government in exchange for the vendor developing the software without charging the government.

The meeting employed interactive decision-support technology to gauge participants' interest in various incentives. Attendees used a computer at their seats to vote for how much impact, on a scale of one to 10, an incentive would have if it was implemented successfully, along with how difficult the incentive would be to implement.

About 25 incentives were nominated. Generally, incentives that participants thought had the highest impact also were voted the most difficult to implement. These included developing incentives for government personnel and lowering life-cycle costs rather than just initial acquisition costs. However, a few proposed incentives stood out as having high impact and relative ease of implementation.

The clear winner was award-term contracting—the idea that contract length can be shortened or extended based on attaining or surpassing specified results metrics. It tied for the second-highest score in terms of impact and was considerably above average in ease of implementation. A second incentive that scored high on impact and ease of implementation was writing contracts around outputs (for example, copies rather than copiers, service-level agreements rather than millions of instructions per second). Both these approaches are very applicable to information technology contracting.

The group is planning to meet again with Oscar this month to take this process the next step forward. Stay tuned.

-- Kelman is Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.

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