Reader Forum: Acquisition

The case for award-fee contracts

An FCW reader argues that award fees lead to better work from contractors

In a recent Federal Computer Week blog entry ["Acquisitive Mind: Do award fees produce better work from contractors?"], a reader impugned the value of award-fee contracts, complaining that “contractors don’t produce as required anyway.” But contractors in fact do provide better work with an award fee.

That’s because they are in business to make money, and they are correctly incentivized by the better profit potential of an award-fee contract.

As a contractor myself, I know we put our best effort and best people into the work to earn that award fee. We want the profit, and we don’t want to fail or perform at any level less than excellent in a performance-based contract. In the end, we earn that award, and the government achieves its important mission-performance goals. Everybody wins.

That win-win characteristic is the reason why the government is committed to more performance-based contracting in our capitalist economy.

As the Office of Management and Budget asserts, financial incentives, such as cost-plus-award-fee contracts, should be used in performance-based contracting when they will induce better quality or lower costs in the agency’s mission performance. In its guide, OMB provides many examples of demonstrably good work by contractors as a result of performance-based contracting. For example, NASA reduced program costs for the space station by $350 million since 1990 through the use of special contract incentives — pretty good work, I’d say.

Perhaps the best example of successful performance-based contracting is the Interstate 10 freeway repair that occurred in California after the Northridge earthquake in January 1994. The heavily damaged freeway was reopened on April 11, 1994, just 84 days after the earthquake and 66 days ahead of schedule. That earned the contractor a bonus — i.e., an award fee — of $14.8 million from the California Department of Transportation.

Does it qualify as an “obscene profit”? I don’t think so, especially when you consider how many billions of dollars of lost economic value were saved that would otherwise have occurred in California during those 66 days.

Performance-based contracting provides another incentive beyond that initial profit. Every contractor knows that his good performance on a performance-based contract is the key to winning future contracts. If he performs poorly, he will damage his reputation and lose the chance for future business. Therefore, he will do everything to please the customer and avoid failing.

There is only one caveat for performance-based contracting and award fees, the same caveat that OMB notes. The contract must carefully and quantitatively define what constitutes good performance and have a quality assurance plan that monitors, measures and rewards good performance correctly and objectively. It’s when those elements are missing that contractors don’t produce as required, as the FCW reader pointed out.

If you are interested in contributing an opinion piece, please contact John Monroe.

About the Author

Fenton works for a defense contractor.

FCW in Print

In the latest issue: Looking back on three decades of big stories in federal IT.

Featured

  • FCW @ 30 GPS

    FCW @ 30

    Since 1987, FCW has covered it all -- the major contracts, the disruptive technologies, the picayune scandals and the many, many people who make federal IT function. Here's a look back at six of the most significant stories.

  • Shutterstock image.

    A 'minibus' appropriations package could be in the cards

    A short-term funding bill is expected by Sept. 30 to keep the federal government operating through early December, but after that the options get more complicated.

  • Defense Secretary Ash Carter speaks at the TechCrunch Disrupt conference in San Francisco

    DOD launches new tech hub in Austin

    The DOD is opening a new Defense Innovation Unit Experimental office in Austin, Texas, while Congress debates legislation that could defund DIUx.

  • Shutterstock image.

    Merged IT modernization bill punts on funding

    A House panel approved a new IT modernization bill that appears poised to pass, but key funding questions are left for appropriators.

  • General Frost

    Army wants cyber capability everywhere

    The Army's cyber director said cyber, electronic warfare and information operations must be integrated into warfighters' doctrine and training.

  • Rising Star 2013

    Meet the 2016 Rising Stars

    FCW honors 30 early-career leaders in federal IT.

Reader comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

More from 1105 Public Sector Media Group