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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

May 2009: 

Federal Contracting: 

Guidance on Award Fees Has Led to Better Practices but Is Not 
Consistently Applied: 

GAO-09-630: 

GAO Highlights: 

Highlights of GAO-09-630, a report to Congressional Requesters. 

Why GAO Did This Study: 

In prior work, GAO found that contractors were paid billions of dollars 
in award fees regardless of acquisition outcomes. In December 2007, the 
Office of Management and Budget (OMB) issued guidance aimed at 
improving the use of award fee contracts. 

GAO was asked to (1) identify agencies’ actions to revise or develop 
award fee policies and guidance to reflect OMB guidance, (2) assess the 
consistency of current practices with the new guidance, and (3) 
determine the extent agencies are collecting, analyzing, and sharing 
information on award fees. 

GAO reviewed the Departments of defense (DOD), Energy (DOE), Health and 
Human Services (HHS), and Homeland Security (DHS) and the National 
Aeronautics and Space Administration (NASA)—agencies that constituted 
over 95 percent of the dollars spent on award fee contracts in fiscal 
year 2008. 

What GAO Found: 

From fiscal year 2004 through fiscal year 2008, agencies have spent 
over $300 billion on contracts that include monetary incentives, or 
award fees, for performance that is evaluated against subjective 
criteria. OMB’s guidance on using award fees includes principles such 
as limiting the opportunities for earning unearned fees in subsequent 
periods, linking award fees to acquisition outcomes, designing 
evaluation criteria to motivate excellent performance, and not paying 
for performance that is unsatisfactory. These principles are largely 
reflected in DOD’s and NASA’s updated guidance on the use of award 
fees. For example, DOD now prohibits payment of award fees for 
unsatisfactory performance, and NASA requires a documented cost-benefit 
analysis to support the use of an award fee contract. However, DOE, 
DHS, and HHS vary in the extent to which their agency-wide guidance 
reflects the OMB guidance. These departments generally rely on 
operational divisions to develop award fee guidance; however, many 
acquisition professionals at these agencies were unaware of the 
contents of the OMB guidance. 

Current practices for using award fee contracts at agencies GAO 
reviewed often are inconsistent with the new guidance. However, where 
the revised policies have been applied, the results have been hundreds 
of millions of dollars in cost savings and better use of government 
funds. For example, by limiting second chances at unearned fees in 
eight programs, GAO estimates that DOD will save over $450 million 
through fiscal year 2010. These practices, however, are not being 
implemented across DOD. NASA programs now document cost benefit 
analyses to justify using award fee contracts. Without clear guidance, 
agencies within DOE, HHS, and DHS have developed various approaches to 
using award fees. For example, while DOE’s median award fee paid 
indicates satisfaction with the results of its contracts, its Office of 
Science uses a scoring system that could allow for payment of up to 84 
percent of an award for performance that does not meet expectations. 
Most of the agencies we reviewed continue to allow contractors second 
chances at unearned fees. For example, at DHS, a contractor was able to 
earn 100 percent of its unearned fee in a subsequent period. Agencies 
do not always use criteria that are based on measuring results. For 
example, one HHS contract for a call center included criteria that 
focused more on efforts, such as maintaining proper staffing levels 
during hours of operation, rather than on measuring results. 

Only DOD collects data on the use of award fees. However, the data are 
largely used to respond to legislative requirements for award fee 
information. Agencies generally do not have methods to evaluate the 
effectiveness of award fees. While individual programs and some offices 
have taken steps to evaluate award fee criteria, officials stated that 
identifying metrics to compare performance across programs would be 
difficult. Further, while GAO found effective practices within some 
agencies, the lack of a governmentwide or, with the exception of DOD, 
agencywide forum to share information allows these to remain isolated 
examples of potential best practices. 

What GAO Recommends: 

GAO recommends that DOE, HHS, and DHS develop or update implementing 
guidance on award fees, that DOD promote application of its current 
guidance, and that all agencies reviewed work together to develop 
methods to use in evaluating the effectiveness of award fees and 
sharing successful strategies. 

The agencies concurred with each of our recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-09-630] or key 
components. For more information, contact John Hutton at (202) 512-4841 
or huttonj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

OMB's Guidance Is Not Addressed Consistently at All of the Agencies We 
Reviewed: 

Agency Practices Are Not Always Consistent with OMB Guidance: 

Agencies Are Not Collecting, Analyzing, and Sharing Information on 
Award Fees to Evaluate the Effectiveness of Their Use. 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Contracting Definitions: 

Appendix III: OMB Guidance on the Use of Award and Incentive Fee 
Contracts: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: Comments from the Department of Energy: 

Appendix VI: Comments from the Department of Homeland Security: 

Appendix VII: Comments from the National Aeronautics and Space 
Administration: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Timeline of Award Fee Policy and Guidance Changes: 

Table 2: Department of Defense Award Fee Ratings and Applicable Fees: 

Table 3: NASA's Award Fee Evaluation Scale: 

Table 4: Available Fee Awarded during Fiscal Years 2005 through 2008: 

Figures: 

Figure 1 Prevalence of DOD Award Fee Contracts among Cost Type 
Contracts in Fiscal Year 2005 and Fiscal Year 2008: 

Figure 2: Dollars Obligated to Cost-Plus and Award Fee Contracts at 
DOE, NASA, HHS, and DHS in Fiscal Year 2008: 

Figure 3: Cost Risk and Acquisition Phases Related to Contract Type: 

Figure 4: Agencies' Options for Treatment of Award Fee Pools: 

Abbreviations: 

CPAF: cost-plus-award-fee: 

DAU: Defense Acquisition University: 

DHS: Department of Homeland Security: 

DOD: Department of Defense: 

DOE: Department of Energy: 

FAR: Federal Acquisition Regulation: 

FDO: Fee Determining Official: 

FPDS: Federal Procurement Data System: 

HHS: Department of Health and Human Services: 

MDA: Missile Defense Agency: 

NASA: National Aeronautics and Space Administration: 

NNSA: National Nuclear Security Administration: 

OMB: Office of Management and Budget: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 29, 2009: 

Congressional Requesters: 

To encourage innovative, efficient, and effective performance, federal 
agencies give contractors the opportunity to earn monetary incentives 
known as award fees. Award fees are an amount of money added to a 
contract, which a contractor may earn in whole or in part by meeting or 
exceeding subjective criteria stated in an award fee plan typically 
related to areas within quality, technical ingenuity, cost-effective 
management, program management, and other unquantifiable areas. From 
fiscal year 2004 to fiscal year 2008, the government has spent over 
$300 billion on contracts that have included award fees representing 14 
percent of total procurement dollars. In fiscal year 2008, five 
agencies accounted for over 95 percent of the dollars spent on these 
contracts.[Footnote 1] Previously, we had identified billions of 
dollars in fees at the Department of Defense (DOD) that were paid 
regardless of acquisition outcomes and contractor performance.[Footnote 
2] At the National Aeronautics and Space Administration (NASA) we found 
that the agency did not consistently implement existing guidance on 
award fees.[Footnote 3] Further, these agencies had not compiled data, 
conducted analyses, or developed performance measures to evaluate their 
effectiveness in using award fees. In response to those reports, both 
agencies initiated policy changes that support increased accountability 
and effectiveness in the use of award fees and Congress required 
further guidance from DOD.[Footnote 4] In December 2007, the Office of 
Management and Budget's (OMB) Office of Federal Procurement Policy 
issued guidance to chief acquisition officers and procurement 
executives across the government that echoed several of the 
recommendations in our reports and emphasized positive practices to be 
implemented by all agencies in using award fees. 

You expressed interest in whether the new emphasis on award fees has 
improved DOD's and NASA's use of these fees and whether other agencies 
were implementing OMB's guidance. Specifically, you requested that we 
(1) identify the actions agencies have taken to revise or develop 
policies and guidance to reflect OMB guidance on using award fees, (2) 
determine whether current practices for using award fee contracts are 
consistent with the new guidance, and (3) determine the extent that 
agencies are collecting and analyzing information on award fees to 
evaluate their use and sharing that information within their agencies. 

To identify the actions agencies have taken to revise or develop 
policies or guidance on the use of award fees, we assessed procurement 
policies at DOD, NASA, and the Departments of Energy (DOE), Health and 
Human Services (HHS), and Homeland Security (DHS) and interviewed 
procurement officials at each agency to discuss planned and implemented 
policy changes. To determine whether current practices for using award 
fee contracts are consistent with OMB guidance, we reviewed data from 
645 evaluation periods in 100 contracts at the five agencies. For DOD 
and NASA, our scope included contracts examined in prior GAO work and 
the 10 additional DOD contracts over $10 million awarded after policies 
were changed that had held at least one award fee period. Where 
applicable, we identified the programmatic and monetary effect of 
implementing policy changes. For DOE, HHS, and DHS, we selected all 
award fee contracts with over $50 million obligated against them from 
fiscal year 2004 through fiscal year 2008 as identified in the Federal 
Procurement Data System (FPDS). We collected data on the amount of 
award fee available compared to the amount awarded as well as the 
criteria used to evaluate contractor performance. We reviewed contract 
documents including award fee plans to determine the extent to which 
the contracts reflected positive award fee practices identified in our 
prior work and OMB guidance. We also interviewed procurement officials 
at each agency on efforts to collect data on award fees, evaluate their 
effectiveness, and share information on successful strategies. 

We conducted this performance audit from August 2008 through May 2009 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient and appropriate evidence to provide a reasonable basis for 
our findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our findings 
and conclusions based on our audit objectives. For more on our scope 
and methodology, see appendix I. 

Results in Brief: 

In response to the increased attention on the effective use of award 
fee contracts, DOD and NASA have revised or reemphasized their policies 
to clarify practices that allow for better use of award fees in 
contracts and are generally consistent with OMB guidance. For example, 
DOD's guidance now states that award fees must be linked to desired 
outcomes, defines the level of performance used to evaluate 
contractors, and prohibits payment of award fees to contractors for 
unsatisfactory performance. NASA's guidance now requires a documented 
cost-benefit analysis to support the use of an award fee contract. 
While DOD and NASA have improved their policies on the use of award 
fees, the extent to which DOE, HHS, and DHS have done so at a 
departmentwide level varies, despite the fact that acquisition 
professionals at each agency told us they need additional guidance on 
using award fees. Further, many acquisition professionals at these 
agencies told us that they were unaware of the contents of the 
governmentwide OMB guidance, and the application of this guidance was 
inconsistent among and within these agencies. 

Current agency practices for using award fee contracts often are not 
consistent with the new OMB guidance. However, where the revised 
policies have been applied, the results have been hundreds of millions 
of dollars in cost savings and better use of government funds through 
linking fees to acquisition outcomes, limiting rollover,[Footnote 5] 
emphasizing excellent performance, and prohibiting payments for 
unsatisfactory performance. 

* At DOD, savings have been achieved through limiting the use of 
rollover and through tying award fee criteria to acquisition outcomes. 
For the 50 DOD contracts we reviewed, we estimated that from April 2006 
through October 2010, DOD will save in excess of $450 million by not 
routinely offering contractors a second chance at unearned fees and 
more than $68 million by using more clearly defined criteria. For 
example, on an Air Force contract, the program ceased rolling over 
unearned fees to subsequent award fee periods to conform to the new 
policy and saved $20 million. Additionally, the Joint Strike Fighter 
program, while not required to follow DOD's new guidance, changed its 
award fee plan to tie payments more directly to acquisition outcomes, 
allowing the program to more accurately evaluate the contractor's 
performance. However, these practices are not being implemented 
consistently at DOD as some programs continue to roll over unearned 
fees and award up to 84 percent of available award fees for 
satisfactory performance. Allowing contractors a second chance at 100 
percent of their unearned fees has also occurred at some other 
agencies. 

* At NASA, the Deputy Director instructed staff in August 2008 to use 
award fee contracts only in limited circumstances. The reemphasis on 
following NASA's guidance and the addition of a requirement for a 
documented cost-benefit analysis is too recent for us to judge its 
effect. However, NASA has added the management of award fee contracts 
to the issues it will review during its annual space center reviews and 
discusses specific programs' use of award fees in its monthly baseline 
performance reviews. 

* At DOE, HHS, and DHS and among components within these agencies, 
practices for using award fee contracts varied greatly. For example, at 
DOE, the National Nuclear Security Administration (NNSA) has created a 
structure that does not allow payments for unsatisfactory performance 
while the Office of Science has developed a scoring system that does 
not define its terms and use, resulting in inconsistent application by 
contracting personnel that could allow for payment of up to 84 percent 
of an award fee for not meeting expectations. At DHS, a contractor 
received the minimum score that would allow for an award fee while the 
evaluation described the contractor's communication as egregious, 
stating that eliminating the fee entirely for poor communication would 
ignore its performance in other areas. In subsequent periods, the 
contractor was not awarded fee when it did not respond to identified 
areas for improvement. 

Agencies do not always follow OMB's guidance on linking fees to 
demonstrated results. For example, an HHS contract for call-center 
services awarded fee based on 19 performance categories which included 
results based criteria, such as timeliness of deliverables and 
adherence to requirements, but also included criteria based more on 
efforts such as requiring the contractor to ensure that staffing levels 
were appropriate for forecasted volumes during hours of operation 
rather than measuring results. 

Of the five agencies we reviewed, only DOD collects data on the use of 
award fees. Data collected are currently used to respond to legislative 
requirements for information on award fees and are shared with the 
Senior Procurement Executives of the military services and other 
Defense agencies. Agencies generally do not have an effective mechanism 
with which to evaluate the effectiveness of award fees as a tool for 
improving contractor performance and achieving desired program 
outcomes. While individual programs and some offices have taken steps 
to evaluate award fee criteria, agencies stated that identifying 
methods to evaluate award fees across programs would be difficult. 
Further, while we found effective use of award fees within some 
agencies, other than at DOD, no formal method to share information 
among contracting professionals was in place. While some agencies use 
informal networks to share award fee information, successful strategies 
may remain isolated without a governmentwide or agencywide forum. 

We are recommending that the Secretaries of Energy, Health and Human 
Services, and Homeland Security update or develop implementing guidance 
on using award fees. This guidance should provide instructions and 
definitions on developing criteria to link award fees to acquisition 
outcomes, using an award fee in combination with incentive fees, 
rolling over unearned fees, establishing evaluation factors to motivate 
contractors toward excellent performance, and prohibiting payments of 
award fees for unsatisfactory performance. In addition, we are 
recommending that the Secretary of Defense promote the application of 
existing guidance, review contracts not covered by the guidance for 
opportunities to apply it, and provide guidance on using an award fee 
in combination with incentive fees to maximize the effectiveness of 
subjective and objective criteria. We are also recommending that the 
Secretaries of Defense, Energy, Health and Human Services, and Homeland 
Security and the Administrator of NASA establish an interagency working 
group to (1) identify how best to evaluate the effectiveness of award 
fees as a tool for improving contractor performance and achieving 
desired program outcomes and (2) develop methods for sharing 
information on successful strategies. 

In comments on a draft of this report the five agencies concurred with 
our recommendations. Agencies noted their participation on a Federal 
Acquisition Regulation (FAR) working group and an interagency incentive 
contracting working group and proposed that these groups be leveraged 
to facilitate implementing our recommendations. Several agencies also 
provided technical comments which we incorporated as appropriate. 

Background: 

Agencies can use a variety of contract types to acquire products and 
services. Cost-reimbursement contracts are suitable only when 
uncertainties in the scope of work or cost of services prevent the use 
of contract types in which prices are fixed, known as fixed-price 
contracts.[Footnote 6] A contractor may receive a fixed or base fee on 
a contract regardless of performance,[Footnote 7] and also may earn an 
incentive, which may be used separately or jointly. Such incentive-type 
contracts, of which award fee contracts are an example, reward 
contractors with fees based on performance. Award fee contract types 
are to be used when it is not feasible to devise predetermined 
objective incentive targets based on cost, technical performance, or 
schedule, with the focus instead being on subjective criteria, such as 
project management. In fiscal year 2008, cost-reimbursement contracts 
made up 94 percent of contracts using award fees. 

As shown in figure 1, since we issued our report on DOD's use of award 
fees,[Footnote 8] DOD's use of cost-plus-award-fee (CPAF) contracts has 
decreased while its use of other cost-type contracts has increased or 
stayed the same. 

Figure 1: Prevalence of DOD Award Fee Contracts among Cost Type 
Contracts in Fiscal Year 2005 and Fiscal Year 2008: 

[Refer to PDF for image: vertical bar graph] 

Cost-plus-award-fee: 
As percentage of total cost-plus contracts, fiscal year 2005: 40%; 
As percentage of total cost-plus contracts, fiscal year 2008: 33%. 

Cost-plus-fixed-fee: 
As percentage of total cost-plus contracts, fiscal year 2005: 36%; 
As percentage of total cost-plus contracts, fiscal year 2008: 40%. 

Cost-plus-incentive-fee: 
As percentage of total cost-plus contracts, fiscal year 2005: 15%; 
As percentage of total cost-plus contracts, fiscal year 2008: 19%. 

Cost no fee: 
As percentage of total cost-plus contracts, fiscal year 2005: 9%; 
As percentage of total cost-plus contracts, fiscal year 2008: 9%. 

Source: GAO analysis and presentation of FPDS data. 

[End of figure] 

Figure 2 shows that use of CPAF contracts as a proportion of overall 
cost-plus contracts varies greatly at the other agencies we reviewed. 

Figure 2: Dollars Obligated to Cost-Plus and Award Fee Contracts at 
DOE, NASA, HHS, and DHS in Fiscal Year 2008: 

[Refer to PDF for image: stacked vertical bar graph] 

Cost-plus dollars obligate (in millions): 

Agency: DOE; 
CPAF: $9,856; 
Other cost-type contracts: $9,930; 
Total: $19,970. 

Agency: NASA	
CPAF: $9,960; 
Other cost-type contracts: $1,796; 
Total: $11,756. 

Agency: HHS; 
CPAF: $2,130; 
Other cost-type contracts: $3,868; 
Total: $5,998. 

Agency: DHS; 
CPAF: $1,132;
Other cost-type contracts: $1,229; 
Total: $2,361. 

Source: GAO analysis and presentation of FPDS data. 

[End of figure] 

Contract type is based on a risk assessment by the contractor and the 
government. The objective is to negotiate a contract type and price (or 
estimated cost and fee) that will result in reasonable contractor risk 
and provide the contractor with the greatest incentive for efficient 
and economical performance. In advance of contract award, outcomes can 
be identifiable and measurable, identifiable but not measurable, or 
unable to be identified. The FAR states that an award fee should be 
used when the work to be performed is such that it is neither feasible 
nor effective to devise predetermined objective incentive targets 
applicable to cost, technical performance, or schedule.[Footnote 9] 
Alternatively, an incentive fee contract should be used when cost and 
performance targets are objective and can be predetermined, allowing a 
formula to adjust the negotiated fee based on variations relative to 
the targets. These incentive types also can be combined into a multiple-
incentive fee contract, which combines objectively and subjectively 
measured criteria to reward contractor performance while maximizing the 
government's ability to use performance metrics that are predetermined, 
measurable, and targeted to desired contract outcomes. Agencies, when 
using multiple-incentive contracts, generally split the available award 
money into categories that evaluate the contractor's cost and 
performance using a combination of objective formulas and subjective 
judgments to evaluate performance of tasks stated in the contract. 
Appendix II provides definitions of these contract types as well as 
terms associated with award fees. 

One of the purposes of using fees is to reduce the government's 
ownership of risk, especially cost risk, in a cost-reimbursement 
contract. Incentive and award fee contracts are to offset a portion of 
the risk that would have been owned by the government if a simple cost-
reimbursement arrangement was used. For example, in a cost-plus-fixed-
fee (CPFF) arrangement, the contractor has no incentive to control cost 
other than a ceiling in the price that the government is willing to pay 
as the contractor receives the same amount of profit regardless. 
Incentive and award fees offset the government's risk by enabling the 
reduction of profit in the event that the contractor's performance does 
not meet or exceed the requirements of the contract. Thus, if done 
properly, the contractor has a profit motive to keep costs low, deliver 
a product on time, and make decisions that improve the quality of the 
product. Figure 3 displays the types of contracts available to the 
government as they relate to risk of paying for cost overruns in 
applicable acquisition phases. 

Figure 3: Cost Risk and Acquisition Phases Related to Contract Type: 

[Refer to PDF for image: illustration] 

This illustration depicts contract types and how risk relates to each 
type. The following three contract types are indicated as being 
involved in research and development, where there is higher risk and 
less defined requirements: 

CPFF; 
CPFF/CPAF; 
CPAF/CPIF. 

With these contract types, the government assumes more cost risk. 

The following two contract types move from development to production 
and sustainment, with lower risk and well-defined requirements: 

FPAF/FPIF; 
FFP. 

With these contract types, the contractor assumes more cost risk. 

Source: GAO analysis of Defense Acquisition University graphic. 

Note: Contract types described include cost-plus-fixed-fee (CPFF); cost-
plus-award-fee (CPAF); cost-plus-incentive-fee (CPIF); fixed-price-
award-fee (FPAF); fixed-price-incentive-fee (FPIF); and firm-fixed-
price (FFP). 

[End of figure] 

The portion of the award fee that may be paid depending on the 
evaluation of contractor performance is generally tied to a period of 
time. As shown in figure 4, award fee that is not awarded is referred 
to as unearned fee and can either be returned to the program for use 
within the scope of the contract, returned to the Treasury to be 
appropriated elsewhere, rolled over to be used as award fee in a 
subsequent period, or used by the agency if it is still available for 
obligation. Before an award fee period, fees can be reallocated or 
moved from one evaluation period to another for reasons such as 
government-caused delays. The key difference between reallocation and 
rollover is that the contractor has not had a chance at earning 
reallocated dollars while the contractor has a second chance to earn 
rollover dollars after having failed to perform well enough to earn 
them initially. 

Figure 4: Agencies' Options for Treatment of Award Fee Pools: 

[Refer to PDF for image: illustration] 

Base fee pool: 
* Goes directly to Award Fee. 

Award fee pool: 
* A portion goes to unearned fee; 
* A portion goes to Awarded fee. 

Unearned fee: 
* A portion goes to rollover, which goes to Awarded fee; 
* A portion goes to Treasury; 
* A portion goes to Programs. 

Source: GAO analysis of award fees as practiced by agencies; Art 
Explosion (illustration). 

[End of figure] 

The use of rollover as well as a number of other practices related to 
award fee contracts likely will be addressed in pending amendments to 
the FAR. The 2009 National Defense Authorization Act,[Footnote 10] 
directed that the FAR be amended by the middle of October 2009 to 
provide executive agencies other than DOD[Footnote 11] with additional 
guidance on the use of award fees. Elements of the guidance to be 
provided include linking award fees to acquisition outcomes (in terms 
of cost, schedule, and performance), defining standards of performance 
and award fee available at each rating standard, ensuring no award fee 
is paid for unsatisfactory performance, and providing specific 
direction on the circumstances, if any, in which rollover may be used. 

GAO's Prior Work Identified Ineffective Uses of Award Fee Contracts: 

Our previous work reviewing the use of award and incentive fees at DOD 
found that programs often paid fees without holding contractors 
accountable for achieving desired acquisition outcomes, such as meeting 
cost and schedule goals and delivering desired capabilities.[Footnote 
12] Over 50 percent of DOD programs reviewed provided contractors 
multiple opportunities to earn an estimated $669 million in fees not 
awarded in previous periods. We also reported that DOD programs 
regularly paid contractors a significant portion of the available fee 
for what award fee plans describe as "acceptable, average, expected, 
good, or satisfactory" performance when federal acquisition regulations 
and military service guidance state that the purpose of these fees is 
to motivate excellent performance. To improve the use of award fee 
contracts we made several recommendations including suggesting that DOD 
move toward more outcome-based award fee criteria, ensure that award 
fees are paid only for above satisfactory performance, and define when 
rollover is appropriate. We also recommended that DOD develop a 
mechanism for capturing award fee data for use in evaluating the 
effectiveness of award fee contracts. 

At NASA, we reported that guidance on the use of CPAF contracts 
provides criteria for improving the effectiveness of award fees. 
[Footnote 13] For example, the guidance emphasizes outcome factors that 
are good indicators of success in achieving desired results, cautions 
against using numerous evaluation factors, prohibits rollover of 
unearned fee, and encourages evaluating the costs and benefits of such 
contracts before using this contract type. However, we found that NASA 
did not always follow the preferred approach laid out in its guidance. 
For example, some evaluation criteria contained input or process 
factors, such as program planning and organizational management rather 
than focusing on outcomes or results. Moreover, some contracts included 
numerous supporting subfactors that may dilute emphasis on any specific 
criteria. Although the FAR and NASA guidance require considering the 
costs and benefits of choosing a CPAF contract, NASA did not perform 
such analyses. In some cases, we found a significant disconnect between 
program results and fees paid. 

OMB's Guidance Is Not Addressed Consistently at All of the Agencies We 
Reviewed: 

In 2007, OMB issued governmentwide guidance highlighting preferred 
practices and directing agencies to review and update their acquisition 
policies. That guidance included four fundamental practices: (1) 
linking award fees to acquisition outcomes, (2) limiting the use of 
rollover, (3) emphasizing excellent performance, and (4) prohibiting 
payments for unsatisfactory performance.[Footnote 14] DOD issued new 
policies on the proper use of award fees, while NASA reemphasized its 
existing guidance. The policies at both agencies reflect these four 
elements in the OMB guidance. DOE, DHS, and HHS vary in the extent to 
which they have agencywide guidance, generally allowing operational 
divisions to supplement award fee guidance. However, existing guidance 
is not always consistent within agencies or consistent with practices 
outlined by OMB. 

OMB Has Provided Governmentwide Guidance on Using Award Fees: 

In December 2007, the OMB Office of Federal Procurement Policy issued 
guidance to chief acquisition officers and senior procurement 
executives to review and update their acquisition policies on the 
appropriate use of incentive fee contracts, which include award fee 
contracts. Specifically, the guidance directed them to ensure that 
award fees are linked to acquisition outcomes such as cost, schedule, 
and performance results and are not earned if the contractor's 
performance is judged to be below satisfactory or does not meet the 
basic requirements of the contract. OMB provided additional guidance 
that instructed agencies to design evaluation factors that motivate 
excellent contractor performance by making clear distinctions in 
possible award earnings between satisfactory and excellent performance. 
The guidance also expressed that rollover of fees should be allowed 
only in limited circumstances in accordance with agency policy. 
Further, OMB asked agencies to obtain and share practices in using 
award fees through an existing Web-based resource. The guidance as it 
was sent to agencies is included in appendix III. The OMB guidance was 
developed based on award fee problems that had been identified by GAO 
and which DOD and NASA had begun to address. Table 1 provides a 
timeline of actions that influenced the guidance and that have followed 
its issuance. 

Table 1: Timeline of Award Fee Policy and Guidance Changes: 

Date: December 2005; 
Action: GAO finds that DOD has paid billions in award fees regardless 
of acquisition outcomes; (GAO-06-66). 

Date: March 2006; 
Action: DOD issues guidance responding to GAO recommendations. Action 
items include limiting rollover and ensuring that award fees are 
commensurate with contractor performance; (DOD, Award Fee Contracts, 
March 29, 2006). 

Date: October 2006; 
Action: The National Defense Authorization Act for Fiscal Year 2007 
directs DOD to develop guidance to ensure that award fees are linked 
with acquisition outcomes and no fee is paid for unsatisfactory 
performance; Pub. L. No. 109-364, § 814. 

Date: January 2007; 
Action: GAO finds that NASA does not always follow its award fee 
guidance and in some cases there appears to be a disconnect between 
contractor performance and award fees paid; (GAO-07-58). 

Date: April 2007; 
Action: DOD issues guidance on award fees establishing that no award 
fee will be paid for unsatisfactory performance and that no more than 
50 percent of the fee will be paid for satisfactory performance; (DOD, 
Proper Use of Award Fee Contracts and Award Fee Provisions, April 24, 
2007). 

Date: June 2007; 
Action: NASA revises its policy to require a documented cost-benefit 
analysis to support use of an award fee contract; and reemphasize the 
importance of tying award fee criteria to desired outcomes and limiting 
the number of criteria; (NASA, Procurement Notice 04-27, June 29, 
2007). 

Date: December 2007; 
Action: OMB directs chief acquisition officers to review and update 
policies to ensure that award fees are linked to acquisition outcomes 
and that no fee is paid for unsatisfactory performance. The memo also 
suggests limiting the use of rollover to exceptional circumstances; 
(OMB, Appropriate Use of Incentive Contracts, December 4, 2007). 

Date: December 2007; 
Action: The Fiscal Year 2008 Appropriations Act requires DHS to link 
award fees to acquisition outcomes; Pub. L. No. 110-161, § 556. 

Date: October 2008; 
Action: The National Defense Authorization Act for Fiscal Year 2009 
directs that the FAR be amended to address issues previously aimed at 
DOD and apply these amendments to all other agencies; Pub. L. No. 110-
417, § 867. 

Source: GAO summary and presentation of DOD, NASA, and OMB guidance, 
GAO reports, and Public Laws as noted. 

[End of table] 

DOD's Guidance Is Consistent with OMB's Award Fee Guidance: 

In March 2006, DOD issued guidance on using award fees that was in 
direct response to our recommendations.[Footnote 15] This guidance 
stated that it is imperative that award fees are linked to desired 
outcomes such as discrete events or milestones. Such milestones include 
design reviews and system demonstrations for weapons systems. The 
guidance also stated that while award fee contracts should be 
structured to motivate excellent contractor performance, award fees 
must be commensurate with contractor performance over a range from 
satisfactory to excellent performance. The guidance recognized that 
performance that is less than satisfactory is not entitled to any award 
fee and that satisfactory performance should earn considerably less 
than excellent performance, otherwise the motivation to achieve 
excellence is negated. Further, the guidance established that the 
practice of rolling over unearned award fees from one period to another 
should be limited to exceptional circumstances. The guidance also 
established the Award and Incentive Fee Community of Practice to 
facilitate discussion of strategies across the acquisition workforce 
and serve as a repository for policy information, related training 
courses, and examples of good award fee arrangements. 

In October 2006, Congress required DOD to develop specific guidance on 
linking award and incentive fees to acquisition outcomes.[Footnote 16] 
The requirement specified that among other elements, the guidance 
should define acquisition outcomes in terms of program cost, schedule, 
and performance and provide guidance on determining "excellent" or 
"superior" performance. Additionally, the guidance was to prohibit the 
payment of award fees for performance that is judged to be below 
satisfactory or does not meet the basic requirements of the contract. 
The guidance was also to establish standards for determining the 
percentage of the available award fee, if any, for various levels of 
performance ranging from satisfactory to excellent. Further, DOD was to 
provide specific guidance on the circumstances, if any, in which it may 
be appropriate to roll over award fees that are not earned in one award 
fee period to a subsequent award fee period or periods and include 
performance measures to evaluate the effectiveness of award and 
incentive fees as a tool for improving contractor performance and 
achieving desired program outcomes. Finally, DOD's guidance was to 
provide mechanisms for sharing proven incentive strategies for the 
acquisition of different types of products and services.[Footnote 17] 

In April 2007, DOD responded by providing additional guidance that 
reemphasized that cost-plus award fee contracts are suitable for use 
when it is neither feasible nor effective to devise objective targets 
applicable to cost, technical performance, or schedule. Recognizing 
that most DOD contracts contain objective criteria, the guidance 
clarified that in instances where objective criteria exist and the 
Contracting Officer and Program Manager wish to also evaluate and 
incentivize subjective elements of performance, the most appropriate 
contract type would be a multiple incentive type contract containing 
both incentive and award fee criteria. Additionally, the guidance 
defined the levels of performance used to evaluate contractors and the 
corresponding percentage of fee that could be earned. Table 2 
illustrates the scale as recommended by DOD. 

Table 2: Department of Defense Award Fee Ratings and Applicable Fees: 

Rating: Outstanding; 
Definition: Contractor has met the basic (minimum essential) 
requirements of the contract and has met at least 90 percent of the 
criteria established in the award fee plan; 
Award fee earned (percentage): 90 to100. 

Rating: Excellent; 
Definition: Contractor has met the basic (minimum essential) 
requirements of the contract and has met at least 75 percent of the 
criteria established in the award fee plan; 
Award fee earned (percentage): 75 to 90. 

Rating: Good; 
Definition: Contractor has met the basic (minimum essential) 
requirements of the contract and has met at least 50 percent of the 
criteria established in the award fee plan; 
Award fee earned (percentage): 50 to 75. 

Rating: Satisfactory; 
Definition: Contractor has met the basic (minimum essential) 
requirements of the contract; 
Award fee earned (percentage): No greater than 50. 

Rating: Unsatisfactory; 
Definition: Contractor has failed to meet basic (minimum essential) 
requirements of the contract; 
Award fee earned (percentage): 0. 

Source: DOD. 

[End of table] 

DOD also instructed its services to collect data on award fee contracts 
and develop a process to evaluate the data to ensure that the award fee 
paid is commensurate with the contractor's performance. The request for 
data collection was issued at the same time as DOD's guidance; thus, 
the data collected was not intended to reflect application of the newly 
issued guidance. 

NASA Has Reemphasized Its Guidance on Award Fee Contracts and Is 
Generally Consistent with OMB Guidance: 

To address the use of award fees and specific weaknesses previously 
identified by its Inspector General in the early 1990s, NASA issued 
guidance in its FAR Supplement and Award Fee Contracting Guide. 
Previously identified weaknesses included the awarding of excessive 
fees with limited emphasis on acquisition outcomes (end results, 
product performance, and cost control), rollover of unearned fee, use 
of base fee, and the failure to use both positive and negative 
incentives. NASA updated its award fee guide in 1994, 1997, and 2001 to 
explain and elaborate on its award fee policy. The 2001 revision also 
reflects the FAR's additional emphasis on using performance-based 
contracts. 

NASA's Award Fee Contracting Guide provides a tool to contracting 
officers with guidance on when to use an award fee contract, the risk 
involved with various contract types, and how to combine award fees 
with other contract types. Additionally, NASA's guidance addresses 
award fee practices that are designed to produce positive results. For 
example, in describing evaluation factors to be used in award fee 
determinations, NASA established a preference to use outcome factors 
when feasible since they are better indicators of success relative to 
the desired result. Additionally, the guidance provides the scale 
displayed in table 3 with which to evaluate contractor performance and 
emphasizes that no award fee will be paid to contractors that perform 
unsatisfactorily. 

Table 3: NASA's Award Fee Evaluation Scale: 

Rating: Excellent; 
Definition: Of exceptional merit; exemplary performance in a timely, 
efficient and economical manner; very minor (if any) deficiencies with 
no adverse effect on overall performance; 
Award fee earned (percentage): 91 to 100. 

Rating: Very good; 
Definition: Very effective performance, fully responsive to contract 
requirements; contract requirements accomplished in a timely, efficient 
and economical manner for the most part; only minor deficiencies; 
Award fee earned (percentage): 81 to 90. 

Rating: Good; Definition: 
Effective performance; fully responsive to contract requirements; 
reportable deficiencies, but with little identifiable effect on overall 
performance; 
Award fee earned (percentage): 71 to 80. 

Rating: Satisfactory; 
Definition: Meets or slightly exceeds minimum acceptable standards; 
adequate results; reportable deficiencies with identifiable, but not 
substantial, effects on overall performance; 
Award fee earned (percentage): 61 to 70. 

Rating: Poor/unsatisfactory; 
Definition: Does not meet minimum acceptable standards in one or more 
areas; remedial action required in one or more areas; deficiencies in 
one or more areas which adversely affect overall performance; 
Award fee earned (percentage): 0. 

Source: NASA Award Fee Contracting Guide. 

[End of table] 

NASA's guidance is unclear on how to define and rate satisfactory 
performance. While the scale in table 3 describes meeting minimum 
acceptable standards as "Satisfactory" performance, the guidance also 
states that "as a general guideline, a contractor which satisfactorily 
meets its contractual commitment will fall into the "good" (71-80) 
range." NASA's guidance also explicitly prohibits the use of rollover 
or awarding previously unearned fee in subsequent award fee periods on 
service contracts. However, for contracts in which there is an end 
item, such as hardware, NASA's policy is to provide interim award fees 
at each period with the entire fee at risk at the delivery of the item. 
This policy allows NASA to adjust the final award fee based on the 
outcome. For example, in a contract for a satellite, award fee could be 
paid over several interim periods. However, if the satellite failed to 
launch, NASA could take back fee that had been previously paid. In 
2007, we found that NASA did not consistently implement key aspects of 
its guidance on major award fee contracts.[Footnote 18] In response to 
our findings, a June 2007 NASA policy update reemphasized these 
policies to contracting staff and added a requirement that contracting 
officers include documented cost-benefit analysis when using an award 
fee contract. 

Guidance at Other Agencies Does Not Consistently Reflect OMB Guidance: 

DOE, HHS, and DHS varied in the extent to which they had existing 
guidance specific to award fees and the extent to which that guidance 
was consistent with OMB guidance. While OMB's guidance was sent to 
chief acquisition officers and senior procurement executives in 
December 2007, many officials with whom we met across various levels at 
several agencies within these departments were unaware of the OMB 
guidance memo or its contents. 

DOE has supplemental guidance to the FAR that outlines how award fees 
should be considered in contracts for operations and management and 
separately for lab contracts. Recognizing the complexity of this 
guidance, DOE created implementing guidance specific to management and 
operations contracts in September 2008 that links performance fees to 
acquisition outcomes and limits the use of rollover. Specifically, the 
guidance states that fee must relate to clearly defined performance 
objectives and performance measures. Where feasible, the performance 
objectives and measures should be expressed as desired results or 
outcomes. It also states that following these principles will increase 
the probability that the contractor will only receive performance fee 
for government-negotiated acquisition outcomes. 

Additionally, the departmental guidance states that rollover should be 
used in limited circumstances where convincing evidence of the cost and 
benefit are considered by a senior procurement executive. The guidance 
acknowledges that allowing the contractor a second chance at earning 
the same fee could undermine the incentive in the original award fee 
period. In response to this concern, the guidance states that if 
rollover is used, the contractor can only earn a portion of the 
unearned fee based on how close the contractor came to delivering the 
originally negotiated performance (for example, a contractor failing to 
reach a milestone by a year must earn significantly less than a 
contractor that fails by a week) and how much DOE still desires the 
originally negotiated performance, some other performance, or both. 

While linking fee to acquisition outcomes and limiting the use of 
rollover are in line with OMB's guidance, several other elements of 
DOE's departmental guidance are not. For example, both DOE's 
supplemental acquisition policy and the implementing guidance establish 
CPAF contracts as generally the appropriate type of contract for 
management and operations. The OMB guidance states that in using an 
award fee contract, contracting officers should conduct and document 
risk and cost-benefit analyses that support use of the contract type. 
As part of this analysis, they are to conduct a risk assessment and 
ensure that incentive strategies are consistent with the level of risk 
assumed by the contractor and motivate the contractor by balancing 
awards with negative consequences. Also, according to both the OMB memo 
and the FAR, contracting officers should determine whether 
administrative costs associated with managing the incentive fee are 
outweighed by the expected benefits. Further, agencies should ensure 
sufficient staff are available to properly structure and monitor the 
contract. These factors require a case by case consideration before 
using an award fee contract which contradicts DOE guidance that 
suggests the general application of a certain type of contract for work 
of a particular type.[Footnote 19] 

Additionally, the DOE departmental guidance does not clearly define the 
standards of performance for each rating category (e.g., satisfactory, 
above satisfactory, excellent) or the percentage of fee the contractor 
should be paid for each of these rating categories as stated in OMB's 
guidance, as do DOD and NASA. Instead, some divisions of DOE (including 
the Office of Science and NNSA) have developed their own standards and 
methods of evaluation.[Footnote 20] These standards varied among 
contracts at the sites. For example, at a multimission site, some 
contracts prohibited payment of fee to contractors that did not perform 
satisfactorily while others allowed a reduced fee for that level of 
performance. DOE contracting officials at the division level told us 
that while they appreciate the flexibility allowed in coming up with 
their own evaluation criteria, they could benefit from additional 
departmental guidance on performing the evaluations and establishing 
standards. 

DHS provides guidance on award fees in its acquisition manual, but does 
not fully address the issues in the OMB guidance. The DHS guidance 
requires award fee plans to include criteria related (at a minimum) to 
cost, schedule, and performance. Further, it establishes that award 
fees are to be earned for successful outcomes and no award fee may be 
earned against cost, schedule or performance criteria that are ranked 
below "successful" or "satisfactory" during an award-fee evaluation of 
contractor performance. However, the manual does not describe standards 
or definitions for determining various levels of performance. 
Additionally, it does not include any limitation on the use of 
rollover. DHS procurement officials noted that there is a need for 
better guidance on the use of award fees. They also noted, however, 
that the extent of that need will largely be determined by the pending 
interim FAR rule on award fees. 

Officials at HHS stated that they did not have guidance specific to the 
use of award fees and were not aware of any such policies at their 
operational divisions. They stated that they relied on the FAR for 
guidance on using award fees. However, contracting officials at HHS 
operational divisions noted a need for better guidance and told us that 
the FAR did not provide the level of detail needed to execute an award 
fee contract.[Footnote 21] As a result, contracting officers at these 
operational divisions have developed various approaches for conducting 
award fee contracts with this limited guidance and these approaches 
vary in the degree to which they are consistent with OMB's guidance. 
For example, award fee plans within different operational divisions of 
HHS included evaluation scales that allowed payment of fee for 
satisfactory performance varying from 35 percent to 80 percent. 

Agency Practices Are Not Always Consistent with OMB Guidance: 

In response to revised guidance, some DOD components reduced costs and 
improved management of award fee contracts by limiting the use of 
rollovers and by tying fees more directly to acquisition outcomes. 
Potential changes at NASA--such as documented cost-benefit analyses and 
adding the management of award fee contracts as an area of review--are 
too recent for their full effects to be judged. At DOE, DHS, and HHS, 
individual contracting offices have developed their own approaches to 
implementing award fee contracts which are not always consistent with 
the principles in the OMB guidance or between offices within these 
departments. 

Limiting the Use of Rollover Has Led to Reduced Costs in Some Programs: 

Guidance from DOD, NASA, DOE, and OMB has stated that allowing 
contractors a second chance at unearned fees should be limited to 
exceptional circumstances and should require approval at a high level. 
Allowing contractors an opportunity to obtain previously unearned fee 
reduces the motivation of the incentive in the original award fee 
period. Three of the 5 agencies have established policies that either 
prohibit or limit the use of rollover. However, before changes in 
policies and guidance that established these limits, the use of 
rollover was prevalent in DOD contracts. In 2005, we reported that for 
DOD award-fee contracts active for fiscal years 1999 through 2003, an 
estimated $669 million was rolled over across all evaluation periods. 
[Footnote 22] In almost all of the 50 DOD contracts we reviewed, 
rollover is now the exception and not the rule. While in 2005, we 
identified that 52 percent of all DOD programs rolled over fee, only 4 
percent of the programs in our sample continue this practice. We 
reviewed active contracts from our 2005 sample and found that the 
limitation on the use of rollover will save DOD more than an estimated 
$450 million on 8 programs from April 2006 through October 2010. 

In some cases, entire DOD contracting commands have strictly limited 
the use of rollover. One Air Force contracting officer told us that 
even if he wanted to roll over a portion of the unearned fee, the fee 
determining official (FDO) would not allow it. This change in policy 
has required a change in culture on both the government's and 
contractor's part. In our review of an Air Force contract for a 
satellite program, we found that despite receiving 0 percent of the 
award fee for unsatisfactory performance, a contractor sent the program 
a written request to include the $10 million in unearned fee in the 
next period. The program denied this request and has not allowed any 
rollover. The program ceased rolling over unearned fees to subsequent 
award fee periods to conform to the new policy and will save an 
estimated $20 million. 

While our analysis of DOD contracts has demonstrated the savings that 
can be achieved by not rolling over unearned fee, we found contracts at 
DOD, DOE, HHS, and DHS that continue to allow contractors second 
chances at unearned fees. DOD award fee letters issued as recently as 
January 2009 indicate that rollover is still being used. For example, 
in the most recent evaluation of a DOD contract for mobile radios, the 
program continued to recommend that funds be rolled over to subsequent 
periods after over $2 million in rollover fees had already been earned 
by the contractor. Several contracts we reviewed at other agencies 
allowed for 100 percent of the unearned fee to be earned in later 
periods. For example, in a DHS Transportation Security Administration 
contract for personnel services we found that a contractor that scored 
above average and received 86 percent of the fee in a particular period 
was allowed a second chance at 100 percent of the remaining fee in the 
next period. Additionally, an HHS Centers for Medicare and Medicaid 
Services award fee plan that was used on several contracts we reviewed 
stated that the unearned fee is placed in a separate award fee pool to 
be used at the discretion of the FDO. The FDO can roll over up to 100 
percent of the unearned fee as long as the money is spent during the 
same contract year.[Footnote 23] 

Award Fees Are Not Always Linked to Acquisition Outcomes Such as Cost, 
Schedule, and Performance: 

To ensure that award fees are being used to motivate contractor 
performance, guidance, where available, from each of the agencies we 
reviewed states that award fees should be linked to acquisition 
outcomes such as cost, schedule, and performance. OMB's guidance states 
that incentive fee contracts, which include award fee contracts, should 
be used to achieve specific performance objectives established prior to 
contract award, such as delivering products and services on time, 
within cost goals, and with promised performance outcomes. OMB's 
guidance also states that awards must be tied to demonstrated results, 
as opposed to effort, in meeting or exceeding specified performance 
standards. 

Contracting officers and program managers across all five agencies we 
reviewed stated that a successful award fee contract should maintain a 
portion of fee based on a subjective evaluation of how the contractor 
identified and responded to issues and challenges and how it mitigated 
risks, but could benefit from objective targets that equate to a 
specific amount of fee. In August 2008, NASA's Deputy Director noted 
that requirements that do not support desired outcomes should not be 
included in contracts and that award fees should generally only be used 
in complex contracts. NASA now requires that award fee contracts are 
accompanied by a documented cost-benefit analysis, although the 
requirement is too new to judge its effect. Some contracts we reviewed 
ensure that award fee evaluations are accurately measuring contractor 
performance by incorporating objective criteria to serve as inputs for 
the evaluation. Other contracts combined the subjective criteria of an 
award fee contract with the objective targets of an incentive fee 
contract to ensure that specific metrics are evaluated on their actual 
outcomes. These subjective criteria are often described as program 
management, cost management, or communication and allow for a broader 
evaluation of contractor performance. Officials that supported the use 
of subjective criteria noted that they must be accompanied by 
definitions and measurements of their own. The combination of objective 
and subjective measurements describes a multiple incentive contract 
that incorporates elements of both award and incentive fee contracts. 
While officials at several agencies told us that this is the preferred 
structure for incentivizing contractor performance and the FAR states 
that it is allowed, there is no guidance on how to balance or combine 
these contract types. 

OMB's guidance states that award fees must be tied to demonstrated 
results, as opposed to effort, in meeting or exceeding specified 
performance standards. Agencies varied in the extent to which criteria 
used in contracts allowed them to evaluate results. For example, 
several DOD contracts we reviewed have included more clearly defined 
criteria, including the Joint Strike Fighter program that has, 
according to program officials, created formulas that measure software 
performance, warfighter capability, and cost control. The criteria, 
based on metrics, constitute about 30 percent of the total award fee 
pool. In comparing periods before and after the application of these 
criteria, the contractor has consistently scored lower in the 
performance areas than in previous periods where less defined criteria 
were applied. Because the program has been able to more accurately 
assess contractor performance, the program has saved almost $29 million 
in less than 2 years of the policy change. 

Similarly, our review of a contract for a missile defense system found 
that greater adherence to cost and schedule criteria prevented the 
program from paying $39 million for events that did not take place 
within specified time frames. In addition to the Joint Strike Fighter, 
other DOD programs that were active before the guidance was issued and 
not required to follow it have incorporated it voluntarily with program 
and contracting officials recognizing the benefits of applying the new 
practices. In some cases they were able to do this through unilateral 
changes to the award fee plan. In others, changes required negotiations 
with the contractor. However, in other contracts we reviewed we found 
criteria being used to evaluate contractor performance that had little 
to do with acquisition outcomes. For example, an HHS contract for call 
center services awarded fees based on 19 performance categories which 
included results based criteria, such as response times, but also 
included criteria based more on efforts, such as requiring the 
contractor to ensure that staffing levels were appropriate for 
forecasted volumes during hours of operation, rather than measuring 
results. 

Evaluation Factors Are Not Consistently Designed to Motivate Excellent 
Contractor Performance: 

The amount of fee established for satisfactory performance or meeting 
contract requirements generally awards the contractor for providing the 
minimum effort acceptable to the government. In our review of 
contracts, we found that programs used a broad range in setting the 
amount of fee available for satisfactory performance, but many set it 
at a level that left little fee to motivate excellent contractor 
performance. For example, DOE's Office of Science uses a model that 
sets the amount of fee able to be earned for meeting expectations at 91 
percent, thus leaving 9 percent to motivate performance that exceeds 
expectations. In contrast, in an HHS contract for management, 
operations, professional, technical and support services for National 
Institute of Allergy and Infectious Diseases animal care facilities, 
the contractor earns 35 percent of the award fee for satisfactory 
performance, leaving 65 percent of the fee to motivate excellent 
performance. In an effort to truly concentrate the award fee on 
excellent performance, one contract we reviewed for Medicare services 
provides no award fee for satisfactory performance. 

NASA's guidance establishes satisfactory at a level that leaves 30 
percent to motivate above satisfactory performance. DOD's guidance 
states that satisfactory performance should earn no more than 50 
percent of the available award fee. This allows the program to 
incentivize above satisfactory performance with the remaining 50 
percent of the award fee. However, not all DOD programs have followed 
its guidance. For example, a Missile Defense Agency (MDA) contract 
signed in December 2007, awards the contractor up to 84 percent of the 
award fee pool for satisfactory performance, which the agency defines 
as meeting most of the requirements of the contract. This leaves only 
16 percent of the award fee pool to motivate performance that fully 
meets contract requirements or is considered above satisfactory. 

While the scale on which the contractors are evaluated is important in 
determining how much fee is reserved for motivating excellent 
performance, the judgment of the evaluators and their interpretation of 
the scale also have an effect. Contracting officers we spoke with 
varied in their interpretation of how to use the evaluation scale. 
While DOD has provided guidance on defining adjectival ratings for 
contractor performance, some programs continue to define meeting 
contract requirements as excellent performance. For example, on an Air 
Force program contracting for support services for staff stationed 
overseas, a contracting official stated that the contractor "has to do 
a pretty bad job to receive a rating of "good"," a rating that pays in 
excess of 85 percent of the award fee. The median award fee for this 
particular Air Force program is 100 percent over the course of 8 award 
fee periods over 2 contracts. These evaluations provide little 
motivation for improved performance despite fee determination letters 
that consistently noted that the contractor had room to improve. 

The data we collected on over 645 award fee periods in 100 contracts 
provided a wide range of evaluation scores, including 6 periods in 
which the contractor earned no fee. However, our analysis of data 
collected from DOE and HHS, which included all contracts over $50 
million that were identified as award fee contracts from fiscal year 
2004 through 2008, showed that the median award fee paid at these 
agencies was over 90 percent of available award fees as shown in table 
4. Contractors were routinely rated at a level that reflected excellent 
performance. DOD's own analysis of its use of award fees in 2007 also 
showed that it pays a median of 93 percent of available award fees. 
While our review of NASA contracts was limited to three active 
contracts that were reviewed in our previous work, they too had a 
median of 90 percent of available fees paid. The median award fee paid 
at DHS, also shown in table 4, was 83 percent of available fees, 
indicating that its contractors are typically rated lower than those at 
the other agencies. 

Table 4: Available Fee Awarded during Fiscal Years 2005 through 2008: 

Agency: Department of Energy; 
Number of award fee periods: 115; 
Available fee: $978 million; 
Fee awarded: $830 million; 
Median award fee paid to contractors (percentage): 91. 

Agency: Department of Health and Human Services; 
Number of award fee periods: 41; 
Available fee: $23 million; 
Fee awarded: $20 million; 
Median award fee paid to contractors (percentage): 95. 

Agency: Department of Homeland Security; 
Number of award fee periods: 54; 
Available fee: $74 million; 
Fee awarded: $58 million; 
Median award fee paid to contractors (percentage): 83. 

Source: GAO Analysis of Data Provided by DOE, HHS, and DHS. 

Note: This table does not include data from the 425 DOD or 10 NASA 
award fee periods that we collected. 

[End of table] 

Programs Allow for Payment of Award Fees for Performance That Is Judged 
to be Unsatisfactory or Does Not Meet Contract Requirements: 

DOD, NASA, and OMB have promulgated guidance that no award fee should 
be paid for performance that does not meet contract requirements or is 
judged to be unsatisfactory. However, while the median award fee scores 
indicate satisfaction with the results of the contracts, programs 
across the agencies we reviewed continue to use evaluation tools that 
could allow for contractors to earn award fees without performing at a 
level that is acceptable to the government under the terms of the 
contract. For example, an HHS contract for maintaining a Medicare 
claims processing system rates contractor performance on a point scale, 
from 0 to 100, where the contractor can receive up to 49 percent of the 
fee for unsatisfactory performance, 50 to 69 percent for marginal 
performance, and 70 to 79 percent for satisfactory performance (defined 
as meeting contract requirements). Therefore, the contractor could 
receive up to 79 percent of the award fee for satisfactory performance, 
or $1.8 million over the course of the contract. Another contract for 
operations and technical support at the National Cancer Institute uses 
a scale that awards up to 59 percent of the award fee for performance 
that is described as failing to meet customer requirements. The same 
scale provides up to 79 percent of the award fee, while still not 
requiring the contractor to fully meet customer requirements. 

In the contracts we reviewed, DOE's median award fee paid was 91 
percent, indicating satisfaction with the results of the contracts. 
However, divisions use different approaches in evaluating contractor 
performance. While the evaluation tool used by NNSA does not allow for 
payment of award fees for unsatisfactory performance, the evaluation 
method used by the Office of Science allows a contractor to earn up to 
84 percent of the award fee for performance that is defined as not 
meeting expectations. Contracting officers we spoke with defined 
meeting expectations differently with some stating that a contractor 
who performed satisfactorily would meet expectations and others 
requiring exceptional performance to meet their expectations. In 2007, 
the Office of Science eliminated use of adjectival distinctions such as 
"satisfactory" and "excellent" in favor of letter grades and a 
numerical score system to communicate performance levels and determine 
award fee amounts. Current Office of Science guidance tasks each site 
office, with assistance from headquarters, with determining the 
requirements and milestones for each performance measure and target. 
While the office has favored the new system, it has not provided 
instructions on defining satisfactory performance or equating letter 
grades to adjectival language used in the OMB guidance. Further, 
current award fee plans for some programs using the Office of Science 
lab appraisal process allow for award fee to be earned at the C level, 
which guidance defines as performance in which "a number of 
expectations...are not met and/or a number of other deficiencies are 
identified" with potentially negative impacts to the lab and mission. 
As much as 38 percent of fee can be earned for objectives that fall in 
this category, according to Office of Science guidance, establishing a 
system that rewards below standard performance. 

While having an evaluation tool in place to prevent award fees from 
being paid for unsatisfactory performance is important, it is equally 
important to adhere to the tool that is used. In a Customs and Border 
Protection contract for maintenance of aircraft, the contractor 
switched to a more costly method of hazardous waste disposal to reduce 
its own perceived risks without communicating with the government. The 
evaluation described the lack of communication as questionable use of 
taxpayer funds for parochial interests without the coordination and 
consultation of government representatives. The evaluation noted that 
the contractor's approach was egregious and gave the contractor the 
minimum score of 70, stating that eliminating the fee entirely for poor 
communication would ignore its performance in other areas. However, in 
two subsequent periods when the contractor did not respond to 
identified areas for improvement, the program determined the 
contractor's performance to be marginal, resulting in no award fee 
being paid for those periods. 

Agencies Are Not Collecting, Analyzing, and Sharing Information on 
Award Fees to Evaluate the Effectiveness of Their Use. 

DOD is currently the only agency required to collect data, evaluate the 
effectiveness of award fees, and share proven strategies in using this 
contract type. While DOD has collected information on award fee 
contracts in 2007 and 2008 in accordance with legislative requirements, 
these data are not being used to evaluate the effectiveness of award 
fee contracts. While the 2009 National Defense Authorization Act 
directs that the FAR be amended to require executive agencies to 
collect data on award fees, other agencies do not collect these data 
outside of individual programs. However, within certain programs, 
automated tools are being used to evaluate the use of award fees. 
Further, while OMB directed agencies to broadly disseminate its 
guidance and suggested that agencies find and share information on 
these contracts using existing web based resources, contracting 
officials we spoke with stated that they rely on informal networks for 
sharing information on the use of award fees. 

Data on the Use of the Award Fees Is Generally Not Collected at the 
Agency Level: 

While programs have paid more than $6 billion in award fees over the 
course of the 100 contracts in our review, none of the five agencies 
has developed methods for evaluating the effectiveness of an award fee 
as a tool for improving contractor performance. Instead, program 
officials noted that the effectiveness of a contract is evident in the 
contractor's ability to meet the overall goals of the program and 
respond to the priorities established for a particular award fee 
period. However, officials were not able to identify the extent to 
which successful outcomes were attributable to incentives provided by 
award fees versus external factors, such as maintaining a good 
reputation. When asked how they would respond to a requirement to 
evaluate the effectiveness of an award fee, officials stated that they 
would have difficulty developing performance measures that would be 
comparable across programs. Additionally, officials at NASA noted that 
while cost and schedule are relatively easy to measure, the government 
may not fully realize the effectiveness of performance until the end of 
a program. For example, in a satellite program, a contractor's 
performance becomes meaningless without a successful launch. 

Of the five agencies we reviewed, DOD is the only agency that collects 
some type of data on award fee contracts. In 2006, legislation required 
DOD to develop guidance on the use of award fees that included ensuring 
that the department collects relevant data on award and incentive fees 
paid to contractors and that it has mechanisms in place to evaluate 
such data on a regular basis.[Footnote 24] In response to the new DOD 
guidance, data were collected on 576 contract actions placed under 350 
contracts for which fee or incentive determinations were made during 
calendar year 2007. This included $2.3 billion in award and incentive 
fees available during the period. DOD officials told us that they have 
shared the analysis of these data with the Senior Procurement 
Executives of the military services and other Defense agencies. 

Additionally, the legislation required guidance to include performance 
measures to evaluate the effectiveness of award and incentive fees as a 
tool for improving contractor performance and achieving desired program 
outcomes.[Footnote 25] However, DOD was not able to establish metrics 
to evaluate the effectiveness of award fees in terms of performance. 
DOD pointed out that the data collected on objective efficiencies do 
not reflect any consideration of the circumstances that affected 
performance, a critical element in determining award fees. DOD, which 
compared fees earned to cost and schedule measurements, stated in its 
analysis that the metrics used to evaluate the effectiveness of the 
incentives included 137 actions that measured cost and schedule 
efficiencies. While this was 24 percent of the actions it reviewed, it 
represented 67 percent of the award fees paid. DOD officials noted that 
the data indicated that lower fees were earned when cost or schedule 
efficiencies were less than 90 percent. 

While no agency has developed a tool to track and evaluate the use of 
award fees, some programs we reviewed have done so individually. Citing 
that automation can increase the effectiveness, efficiency, 
transparency, and integrity of the award fee process, one MDA program 
has developed an automated award fee tool that allows government 
employees to evaluate, comment on, and offer feedback on all 
performance criteria. The tool also captures performance inputs and 
descriptions of performance standards and allows administrators to 
analyze user ratings to normalize and remove rating bias. While the 
tool is still in the stages of final testing, MDA program officials 
stated that the tool has provided this particular MDA program with 
immediate and effective results in managing the award fee process. 
However, this automated system has not been implemented across the 
agency and not all MDA program officials believe that it is beneficial. 
Similarly, the National Cancer Institute uses a Web-based interface 
that collects performance information provided by the contractor's 
customers to facilitate performance assessments. Officials stated that 
this tool saves them numerous hours of collecting and sifting through 
performance data and ensures that all evaluators are making judgments 
based on the same materials. 

Information Sharing Relies on Informal Networks at Most Agencies: 

The guidance issued by OMB in December 2007 included instructions for 
broad dissemination to agency personnel who have responsibilities for 
the effective planning, execution, and management of acquisitions. In 
addition, according to an OMB official, many agencies served on an 
interagency working group that was created at the suggestion of the 
guidance. Participation on the working group was at the agency 
headquarters level and involved officials from each of the agencies we 
reviewed. The interagency working group initiated a separate working 
group to review and amend the FAR. However, contracting officials at 
offices within DOE, DOD, DHS, and HHS that develop and execute award 
fee guidance and practices were not specifically represented in either 
group, were generally not aware of either of these groups, and were not 
asked to provide opinions, perspectives, or experiences to either 
group. 

Recent legislation required DOD to develop guidance to provide 
mechanisms for sharing proven incentive strategies for the acquisition 
of different types of products and services among contracting and 
program management officials.[Footnote 26] The Defense Acquisition 
University (DAU) has established an online community of practice on 
award fees and is currently developing additional guidance for DOD on 
the use of award fee contracts. 

Within DOD, we found that information sharing on best practices and 
lessons learned is inconsistent between contracting commands. For 
example, contracting officers at one Air Force command showed us 
specific guidance and document templates that they received along with 
detailed training on using award and incentive fee contracts. However, 
at another Air Force command, contracting officers told us that they do 
not generally share strategies on using award fees and if they were to 
do so, it would be through informal networks. Contracting officers at 
DOE, DHS, and HHS also stated that they were unaware of any formal 
networks or resources for obtaining and sharing best practices, lessons 
learned, or other strategies for using award fee contracts. Instead, 
they rely on informal networks or existing guidance from other agencies 
such as DOD. Contracting officials noted that the specific nature of 
their missions makes it difficult to adopt the practices of other 
agencies. 

In some cases, contracting officials are taking steps to provide 
oversight for a number of contracts to achieve consistency and identify 
unsuccessful practices. For example, at MDA, NNSA, and one Air Force 
command, the determination of award fees is performed by a senior 
executive who compares the results of several contracts to ensure that 
a uniform evaluation process and common criteria are used when 
possible. Similarly, according to DOE procurement officials, at the 
Office of Environmental Management award fee plans are circulated among 
contracting officers and program managers who review them for criteria 
that have been successful or problematic in past contracts and at the 
Office of Science, award fee plans are reviewed and approved annually 
by headquarters. NASA has a similar process in which programs discuss 
their performance outcomes at a monthly meeting with the focus on one 
particular program. NASA officials stated that the use of award fees 
and the criteria being used to measure contractor performance are 
frequent topics in these meetings. 

Conclusions: 

Award fee contracts can motivate contractor performance when certain 
principles are applied. Linking fees to acquisition outcomes ensures 
that the fee being paid is directly related to the quality, timeliness, 
and cost of what the government is receiving. Limiting the opportunity 
for contractors to have a second chance at earning previously unearned 
fee maximizes the incentive during an award fee period. Additionally, 
the amount of fee earned should be commensurate with contractor 
performance based on evaluation factors designed to motivate excellent 
performance. Further, no fee should be paid for performance that is 
judged to be unsatisfactory or does not meet contract requirements. 
DOD, through revised guidance, has realized benefits from applying 
these practices in some of its contracts, including some that, because 
they were active prior to its issuance, are not required to follow the 
guidance. While these principles have been stated in OMB's guidance, 
they have not been established fully in guidance at all five agencies 
we reviewed, notably DOE, DHS, and HHS. Guidance, while an important 
first step, will not achieve the desired effect of motivating excellent 
contractor performance unless it is consistently implemented. Based on 
our work, this guidance is not being consistently implemented. Further, 
the lack of methods to evaluate effectiveness and information sharing 
among and within agencies has created an atmosphere in which agencies 
are unaware of whether these contracts are being used effectively and 
one in which poor practices go unnoticed and positive practices are 
isolated. 

Recommendations for Executive Action: 

To ensure broad implementation of OMB's guidance and positive practices 
in using award fees, we are making three recommendations to executive 
agencies. 

We recommend that the Secretaries of Energy, Health and Human Services, 
and Homeland Security update or develop implementing guidance on: 

* developing criteria to link award fees to acquisition outcomes such 
as cost, schedule, and performance; 

* using an award fee in combination with incentive fees to maximize the 
effectiveness of subjective and objective criteria; 

* determining when rolling over unearned fees to subsequent periods may 
be justified; 

* establishing evaluation factors, including definitions of 
performance, associated fees, and evaluation scales, that motivate 
contractors toward excellent performance; and: 

* prohibiting payments of award fees for performance that is judged to 
be unsatisfactory or does not meet contract requirements. 

To promote the application of existing guidance and expand upon 
improvements made in using award fees, we recommend that the Secretary 
of Defense: 

* in preparation for regulatory changes to the FAR , emphasize the 
importance of consistently adhering to current guidance for all 
contracts in the interim; 

* review active contracts issued before the effective date of the 2007 
guidance for opportunities to apply the guidance when efficiencies can 
be obtained through unilateral decisions at a minimal cost to the 
government; and: 

* provide guidance on using award fees in combination with incentive 
fees to maximize the effectiveness of subjective and objective 
criteria. 

To assist agency officials in evaluating the effectiveness of award 
fees, we recommend that the Secretaries of Defense, Energy, Health and 
Human Services, and Homeland Security, and the Administrator of the 
National Aeronautics and Space Administration establish an interagency 
working group to (1) determine how best to evaluate the effectiveness 
of award fees as a tool for improving contractor performance and 
achieving desired program outcomes and (2) develop methods for sharing 
information on successful strategies. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DOD, DOE, DHS, HHS, and NASA. In 
commenting, each agency concurred with our recommendations. DHS and HHS 
noted that they have been actively engaged in a FAR working group and 
indicated their intention of working with that group to address our 
recommendation for updated guidance. DOD's response to its specific 
recommendation stated that it will emphasize the importance of 
consistently adhering to current guidance and will advise that this 
guidance be applied before the effective date as opportunities allow. 
Additionally, each agency noted that it is a member of an interagency 
incentive contracting working group and proposed that this group be 
leveraged to facilitate implementing our recommendation on identifying 
methods to evaluate the effectiveness of award fees and sharing 
successful strategies. We agree that working through these existing 
groups would be an adequate approach in implementing our 
recommendations. 

DOD, DOE, DHS, and NASA provided written comments that are included as 
appendices IV, V, VI, and VII respectively. HHS provided oral comments 
on our draft. In addition, agencies provided technical comments, which 
we incorporated where appropriate. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution until 30 days from the date of 
this report. We then will provide copies to the Secretaries of Defense, 
Energy, Health and Human Services, and Homeland Security and the Acting 
Administrator of the National Aeronautics and Space Administration. In 
addition, this report will be made available at no charge on the GAO 
Web site at [hyperlink, http://www.gao.gov]. 

Please contact me at (202) 512-4841 or huttonj@gao.gov if you have any 
questions regarding this report. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are acknowledged 
in appendix VIII. 

Signed by: 

John P. Hutton: 
Director: 
Acquisition and Sourcing Management: 

List of Congressional Requesters: 

The Honorable Tom Carper:
Chairman:
The Honorable John McCain:
Acting Ranking Member:
Subcommittee on Federal Financial Management, Government Information, 
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs,
United States Senate: 

The Honorable Tom Coburn:
United States Senate: 

The Honorable Bernard Sanders:
United States Senate: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify the actions agencies have taken to revise or develop 
policies or guidance on the use of award fees, we assessed procurement 
policies at the departments of Defense (DOD), Energy (DOE), Health and 
Human Services (HHS), and Homeland Security (DHS) and the National 
Aeronautics and Space Administration (NASA). These five agencies 
provided over 95 percent of the total dollars obligated against 
contracts with an award fee in fiscal year 2008, according to the 
Federal Procurement Data System (FPDS). We reviewed our prior work on 
the use of award fees at DOD and NASA to identify policies and guidance 
in place and examined these agencies in regards to changes that were 
implemented based on our recommendations, legislative requirements, 
internal guidance, and governmentwide guidance from the Office of 
Management and Budget (OMB). For the other agencies, DOE, DHS, and HHS, 
we reviewed existing guidance on the use of award fees where available 
and compared it to OMB's guidance. We interviewed procurement officials 
at each agency to discuss planned and implemented policy changes as 
they related to the OMB guidance. 

To determine whether current practices for using award fee contracts 
are consistent with OMB guidance, we reviewed data from 645 evaluation 
periods in 100 contracts at the five agencies from fiscal year 2004 
through fiscal year 2008, allowing for a comparison of practices before 
and after OMB's guidance. At DOD, we collected data on 40 active and 
follow-on award fee and multiple incentive type contracts used in our 
prior review.[Footnote 27] We also examined the 10 award fee contracts 
for over $10 million that were signed after the DOD guidance's 
effective date of August 1, 2007 and had held at least one award fee 
evaluation.[Footnote 28] Where applicable, we identified the 
programmatic and monetary effect of implementing policy changes. 

We estimated cost savings at DOD achieved through the limitation of 
rollover of unearned fees and other changes in award fee practices 
consistent with 2007 DOD guidance by comparing the dollar amounts of 
rollover as a proportion of total available award fee pools before and 
after our recommendation to issue guidance on when rollover is 
appropriate. We also examined each program's savings from canceling 
their rollover policy by projecting a reasonable dollar amount based 
upon historical data that they would have paid in rollover had they 
continued using the original policy. For award fee periods that have 
taken place or will take place in fiscal years 2009 and 2010, we 
estimated the amount of unearned fee based on historical averages. At 
NASA, we reviewed 3 active contracts from our prior review of 10 CPAF 
contracts.[Footnote 29] In our prior review, we extracted information 
from FPDS on the top ten dollar value NASA contracts active between 
fiscal years 2002 and 2004 that were coded as CPAF. 

At DOE, DHS, and HHS, we collected data on 47 contracts that represent 
the universe of CPAF, fixed-price-award-fee, and multiple incentive 
type contracts with an award fee component that had obligations greater 
than $50 million from fiscal year 2004 through fiscal year 2008. To 
ensure the validity of the database from which we drew our contracts, 
we confirmed the contract type of each of the 47 contracts we selected 
through DOE, DHS, and HHS contracting officers and contract 
documentation. Contracts in our sample conducted at least one award fee 
period between fiscal years 2004 and 2008 and issued a letter of 
notification (fee determination letter) to the contractor regarding at 
least one award fee payment. 

For each of the 100 award fee contracts in our sample of the five 
agencies, we collected four primary data points for each evaluation 
period: (1) the award fee available, (2) the award fee paid,(3) the 
amount of unearned fee rolled over into subsequent evaluation periods, 
and (4) the end date of the award fee period. In most cases, 
contracting and program officials submitted the data from firsthand 
documentation such as award fee plans, contract modifications, and fee 
determining official letters. From these data, we calculated the 
percentage of the available fee that was awarded for individual 
evaluation periods, entire contracts to date, and the overall sample. 

We collected data from agencies within the five departments and met 
with selected procurement, contracting, and program officials to obtain 
the perspective of users of award fees. At these meetings we discussed 
experiences, policies, and guidance related to use of the award fees. 
Agencies from which we collected data include: 

U.S. Air Force:
* Air Force Space and Missile Systems Center:
* Air Force Materiel Command:
* Air Force Aeronautical Systems Center:
* Air Force Security Assistance Center:
* Air Force Logistics Command:
* Air Force Space Command: 

U.S. Army:
* Army Chemical Materials Agency:
* White Sands Missile Range:
* Fort Polk:
* Army Reserves:
* Army Space and Missile Defense Command: 

U.S. Missile Defense Agency: 

U.S. Navy:
* Naval Air Systems Command:
* Naval Sea Systems Command:
* Space and Naval Warfare Systems Center: 

Department of Energy:
* National Nuclear Security Administration:
* Office of Civilian Radioactive Waste Management:
* Office of Legacy Management:
* Office of Environmental Management:
* Office of Health, Safety and Security:
* Office of Science:
* Strategic Petroleum Reserve: 

Department of Health and Human Services:
* Agency for Healthcare Research and Quality:
* Centers for Disease Control and Prevention:
* Centers for Medicare and Medicaid Services:
* National Institutes of Health:
* Substance Abuse and Mental Health Services Administration: 

Department of Homeland Security:
* Customs and Border Protection:
* Federal Emergency Management Agency:
* Transportation Security Administration:
* U.S. Coast Guard: 

We conducted this performance audit from August 2008 through May 2009 
in accordance with generally accepted government auditing standards. 
These standards require that we plan and perform the audit to obtain 
sufficient and appropriate evidence to provide a reasonable basis for 
our findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our findings 
and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Contracting Definitions: 

[End of section] 

Award fee: An amount of money added to a contract, which a contractor 
may earn in whole or in part by meeting or exceeding the criteria 
stated in the award fee plan. These criteria typically relate to 
subjective areas within quality, critical processes, technical 
ingenuity, cost-effective management, program management, subcontract 
management, and other areas that may have unquantifiable behaviors. 

Award fee plan: A document that captures the award fee strategy. The 
plan details the procedures for implementing the award fee by 
structuring the methodology of evaluating the contractor's performance 
during each evaluation period. 

Award fee pool: The total of the available award fee for each 
evaluation period and base fee (if applicable) for the life of the 
contract. 

Award fee review board (AFRB): The AFRB evaluates the contractor's 
overall performance for the evaluation period in accordance with the 
Award Fee Plan. The board is comprised of Government personnel only 
whose experience in acquisition allows them to analyze and evaluate the 
contractor's overall performance. 

Base fee: An award-fee contract mechanism that is an amount of money 
over the estimated costs (typically in the range of 0 to 3 percent of 
the contract value), which is fixed at the inception of the contract 
and paid to the contractor regardless of performance in a cost-plus- 
award-fee contract. A base fee is similar to the fixed fee paid to a 
contractor under a cost-plus-fixed-fee contract that also does not vary 
for performance. 

Cost contract: A cost-reimbursement contract in which the contractor 
receives no fee. A cost contract may be appropriate for research and 
development work, particularly with nonprofit educational institutions 
or other nonprofit organizations, and for facilities contracts. 

Cost-plus-award-fee contract: A cost-reimbursement contract that 
provides for a fee consisting of a base amount (which may be zero) 
fixed at inception of the contract and an award amount, based upon a 
judgmental evaluation by the government, sufficient to provide 
motivation for excellence in contract performance. 

Cost-plus-incentive-fee contract: A cost-reimbursement contract that 
provides for an initially negotiated fee to be adjusted later by a 
formula that objectively measures the performance of the contractor. 

Cost-reimbursable contract: A contract that provides for payment of the 
contractor's allowable cost to the extent prescribed in the contract 
not to exceed a ceiling. 

Evaluation criteria: The criteria that are used to grade each category 
of performance. The criteria should emphasize the most important 
aspects of the program to facilitate the contractor doing its utmost to 
deliver outstanding performance. The criteria should be specific to the 
program and clearly stated in the contract. 

Evaluation period: The period of time upon which an award fee is based. 
This can be a specific increment of time (one year) or based upon the 
completion of an event (preliminary design review). An award fee amount 
is tied to each period of time or each event and the award fee board 
determines the appropriate fee for this period of time subject to 
approval by the fee determining official. 

Fee determining official (FDO): The FDO makes the final determination 
regarding the amount of award fee earned during the evaluation period 
by the contractor. 

Fixed-price contract: A contract that provides for a price that is 
either fixed or subject to adjustment obligating the contractor to 
complete work according to terms and for the government to pay the 
specified price regardless of the contractor's cost of performance: 

Fixed-price-award-fee contract: A variation of the fixed-price contract 
in which the contractor is paid the fixed price and may be paid a 
subjectively determined award fee based on periodic evaluation of the 
contractor's performance. 

Fixed-price incentive contract: A fixed-price contract that provides 
for adjusting profit and establishing the final contract price by 
application of a formula based on the relationship of total final 
negotiated cost to total target cost. 

Incentive contract: A contract used to motivate a contractor to provide 
supplies or services at lower costs and, in certain instances, with 
improved delivery or technical performance, by relating the amount of 
fee to contractor performance. 

Multiple incentive contract: A contract which contains both incentive 
and award fee criteria. This type of contract could be coded as a 
combination contract in the Federal Procurement Data System (FPDS). 

Provisional award fee payment: A payment made within an evaluation 
period prior to a final evaluation for that period. This payment is 
subject to restrictions and must be paid back to the government if the 
award fee board decides that this money was not earned. 

Reallocation: The process by which the Government moves a portion of 
the available award fee from one evaluation period to another for 
reasons such as Government-caused delays, special emphasis areas, and 
changes to the Performance Work Statement (PWS). 

Rollover: The process of transferring unearned available award fee from 
one evaluation period to a subsequent evaluation period, thus allowing 
the contractor an additional opportunity to earn that unearned award 
fee. 

[End of section] 

Appendix III: OMB Guidance on the Use of Award and Incentive Fee 
Contracts: 

Executive Office Of The President: 
Office Of Management And Budget: 
Office Of Federal Procurement Policy: 
Washington, D.C. 20503: 

December 4, 2007: 

Memorandum For Chief Acquisition Officers; 
Senior Procurement Executives 

From: [Signed by] Paul A. Denett: 
Administrator: 

Subject: Appropriate Use of Incentive Contracts: 

Incentive contracts are used throughout the Federal Government to 
encourage contractors to perform efficiently and effectively. Using 
incentives appropriately and applying strong project and acquisition 
management practices are vital to accomplishing mission needs, 
minimizing waste, and maximizing value. The purpose of this memorandum 
is to request your assistance and leadership to ensure incentive fee 
contracts are used to motivate excellent contractor performance. 
Specifically, please review your agency's acquisition policies to 
ensure that: 1) incentive fees are linked to acquisition outcomes such 
as cost, schedule, and performance results; and 2) incentive fees are 
not earned if the contractor's performance is judged to be below 
satisfactory or does not meet the basic requirements of the contract. 

The Federal Acquisition Regulation (FAR) states that incentive fee 
contracts, which include award fee contracts, should be used to achieve 
specific performance objectives established prior to contract award, 
such as delivering products and services on time, within cost goals, 
and with promised performance outcomes. Awards must be tied to 
demonstrated results, as opposed to effort, in meeting or exceeding 
specified performance standards. 

Recently, the Government Accountability Office (GAO) identified 
programs and supporting contracts in which incentive fee payment 
practices did not result in achievement of contract objectives. GAO 
identified the following practices that reduce the effectiveness of 
fees as a motivational tool: 1) evaluating contractors on incentive 
criteria that are not directly related to cost, schedule, and 
performance goals; 2) paying contractors a significant portion of the 
available fee for what is considered acceptable or satisfactory 
performance; and 3) giving contractors additional opportunities to 
obtain initially unearned fees, also known as rollover fees. 

As part of acquisition planning, when determining whether to use 
incentive fee contracts, the contracting officer should conduct risk 
and cost benefit analyses. Contract type is generally determined based 
on a consideration of risk to the government and the contractor. In 
addition to risk, cost benefit analyses related to use of incentive 
contracts should consider the amount of planning required to implement 
an incentive type contract and the amount of additional resources 
required for monitoring and determining awards. Risk and cost analyses 
related to the use of award and incentive contracts should be prepared 
in writing and approved at a level above the contracting officer or as 
determined by the agency. 

Incentive fees must be predetermined in writing and processes for 
awarding the fees must be included or cross-referenced in the 
acquisition plan (see FAR 7.105(b)(4)(i)). This incentive fee plan 
should include standards for evaluating contractor performance and 
appropriate incentive fee amounts. When considering the incentive fee 
arrangement, the plan should distinguish between earning potential for 
satisfactory versus excellent performance. Metrics should clearly 
describe what is required and at what point a contractor is considered 
successful. Additionally, agencies should develop guidance on when it 
is appropriate to award rollovers of unearned fee to a subsequent 
evaluation period. Rolling over fees is not the preferred method for 
incentivizing the contractor to perform above satisfactorily and should 
be permitted on a limited basis and require prior approval of the 
appropriate agency official. 

Using the attachment as a guide, Chief Acquisition Officers should 
review and update existing agency guidance on incentive fee contracting 
practices to ensure that fees are awarded in accordance with current 
regulations and that the guidance addresses the concerns of this 
memorandum. In addition, during an agency’s internal audit process, 
incentive fee contracts should be reviewed as part of the program 
management review process. Information on how well incentive fees are 
achieving their intended purpose and other related lessons learned can 
be found and shared on the Acquisition Community Connection on 
[hyperlink, 
https://acc.dau.mil/CommunityBrowser.aspx?id=105550&lang=en-US]. 

To help develop best practices, guidance, and templates, OFPP requests 
that agencies identify an incentive and award fee point of contact. 
These individuals may be asked to contribute examples and lessons 
learned to an interagency working group or to assist in communication 
and awareness efforts. Please submit the person’s name, title, 
telephone number, and e-mail address to Susan Truslow at OFPP by 
January 7, 2008. 

Please ensure broad dissemination of this memorandum among agency 
personnel who have responsibilities for the effective planning, 
execution, and management of your acquisitions. Questions may be 
referred to Susan Truslow at (202) 395-6810 or struslow@omb.eop.gov or 
Pat Corrigan at (202) 395-6805 or pcorrigan@omb.eop.gov. 

Thank you for your attention to this important matter. 

Attachment: 

cc: Chief Information Officers: 

[End of letter] 

Attachment: 

Incentive Contract Checklist: 

* Consult agency policy and guidance that supplement FAR 16.4, 
Incentive Contracts. 

* Ensure market research documentation and the acquisition plan 
sufficiently state desired outcomes, performance requirements, 
milestones, risks and cost benefits associated with choice of contract 
type (FAR 7.105). 

* Conduct and document risk and cost/benefit analyses that support use 
of an incentive type contract: 

- Conduct a risk assessment and ensure incentive strategies are 
consistent with the level of risk assumed by the contractor and 
motivate the contractor by balancing awards with negative consequences; 

- Determine whether administrative costs associated with managing the 
incentive fee are outweighed by the expected benefits; and; 

- Ensure sufficient human resources are available to properly structure 
and monitor the contract. 

* Ensure evaluation factors are: 

- Meaningful and measurable; 

- Directly linked to cost, schedule, and performance results; and; 

- Designed to motivate excellence in contractor performance by making 
clear distinctions in possible award earnings between satisfactory and 
excellent performance. 

* Ensure the incentive fee plan: 

- Defines clearly the standards of performance for each rating category 
(e.g., satisfactory, above satisfactory, excellent); 

- Defines clearly the percentage of fee the contractor should be paid 
for each of these rating categories; 

- Documents roles and responsibilities for those involved in monitoring 
contractor performance and determining award fees; 

- Provides detailed guidance on steps in the evaluation process for 
agency representatives and contractors; 

- Establishes a base fee. Good business practice allows the contractor 
more than 0% for base fee. This way, the award fee promotes above 
average performance; and; 

- Obtains appropriate approval in accordance with agency policy. 

* Ensure rollover fees are allowed only in limited circumstances in 
accordance with agency policy. 

[End of section] 

Appendix IV: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Acquisition Technology And Logistics: 
3000 Defense Pentagon: 
Washington, DC 20201-8000: 

May 28, 2009: 

Mr. John Hutton: 
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Hutton: 

This is the Department of Defense (DoD) response to the GAO draft 
report GAO09-630, "Federal Contracting: Guidance on Award Fees Has Led 
to Better Practices but Is Not Consistently Applied," dated May 8, 2009 
(GAO code 120768). 

I appreciate the opportunity to comment on the draft report. I 
generally concur with the recommendations. Detailed comments on the 
report recommendations are enclosed. 

If you have any questions or require additional information, please 
contact Mr. Al Saletta at 703-602-0293 or via email at Alfred. 
Saletta@osd.mil. 

Sincerely, 


Shay D. Assad: 
Director, Defense Procurement and Acquisition Policy: 

Enclosures: As stated: 

[End of letter] 

GAO Draft Report Dated May 8, 2009: 
GAO-09-630 (GAO Code 120768): 

"Federal Contracting: Guidance On Award Fees Has Led To Better 
Practices But Is Not Consistently Applied" 

Department Of Defense Comments To The GAO Recommendations: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
emphasize the importance of consistently adhering to current guidance 
for all contracts in the interim. (Page 30/GAO Draft Report) 

DOD Response: Concur. We will emphasize to the Military Services and 
Other Defense Agencies the importance of consistently adhering to 
current guidance for all effected contracts. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
review active contracts issued before the effective date of the 2007 
guidance for opportunities to apply the guidance when efficiencies can 
be obtained through unilateral decisions at a minimal cost to the 
government. (Page 31/GAO Draft Report) 

DOD Response: Concur. We will advise the Military Services and Other 
Defense Agencies to apply the guidance before the effective date as 
opportunities allow. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
provide guidance on using award fees in combination with incentive fees 
to maximize the effectiveness of subjective and objective criteria. 
(Page 31/GAO Draft Report) 

DOD Response: Concur 

Recommendation 4: The GAO recommends that the Secretary of Defense 
establish an interagency working group to determine how best to 
evaluate the effectiveness of award fees as a tool for improving 
contractor performance and achieving desired program outcomes. (Page 
31/GAO Draft Report) 

DOD Response: Concur. The Department will coordinate with the Incentive 
Contracting Working Group (ICWG) to work on these recommendations. The 
ICWG serves as an interagency advisory group to the Office of Federal 
Procurement Policy for promoting increased awareness of incentive 
contracting best practices and fostering the consistent implementation 
of applicable regulations, policies, processes and procedures 
Government-wide. 

Recommendation 5: The GAO recommends that the Secretary of Defense 
establish an interagency working group to develop methods for sharing 
information on successful strategies. (Page 31/GAO Draft Report) 

DOD Response: Concur. The Department will coordinate with the Incentive 
Contracting Working Group (ICWG) to work on these recommendations. 

[End of section] 

Appendix V: Comments from the Department of Energy: 

Department of Energy: 
Washington, DC 20585: 

May 26, 2009: 

Mr. John P. Hutton: 
Director, Acquisition and Sourcing Management: 
United States Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Mr. Hutton: 

This is the Department of Energy (DOE) response to the Government 
Accountability Office (GAO) Draft Report entitled "Federal Contracting: 
Guidance on Award Fees Has Led to Better Practices but Is Not 
Consistently Applied" dated May 2009 (GAO-09-630). We appreciate the 
opportunity to provide comments. 

DOE agrees with the recommendations. With respect to the findings, we 
have enclosed comments that we believe, if incorporated, will result in 
the final Report more accurately reflecting DOE's award fee policy and 
practices. 

DOE stands ready to participate actively on the interagency working 
group to evaluate the effectiveness of award fees and develop methods 
for sharing information on successful strategies. 

Should you have any questions, please contact Mr. Michael Righi of my 
staff at (202) 287-1337. 

Sincerely, 

[Illegible] for: 

Edward R. Simpson: 
Director: 
Office of Procurement and Assistance Management: 

Enclosure: 

[End of section] 

Appendix VI: Comments from the Department of Homeland Security: 

Note: GAO comment supplementing those in the report text appear at the 
end of this appendix. 

U.S. Department of Homeland Security: 
Washington, DC 20528: 
[hyperlink, http://www.dhs.gov] 

May 28, 2009: 

Mr. John Hutton: 
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Hutton: 

RE: Draft Report GAO-09-630, Federal Contracting: Guidance on Award 
Fees Has Led to Better Practices but Is Not Consistently Applied (GAO 
Job Code 120768): 

The Department of Homeland Security (DHS) appreciates the opportunity 
to review and comment on the U.S. Government Accountability Office's 
(GAO's) draft report referenced above. 

The GAO made two recommendations affecting the DHS. First, to ensure 
broad implementation of Office of Management and Budget guidance and 
positive practices in using award fees, the GAO recommends that the 
Secretaries of Energy, Health and Human Services, and Homeland Security 
update or develop implementing guidance in five areas: 

* developing criteria to link award fees to acquisition outcomes such 
as cost, schedule, and performance; 

* using an award fee in combination with incentive fees to maximize the 
effectiveness of subjective and objective criteria; 

* determining when rolling over unearned fees to subsequent periods may 
be justified; 

* establishing evaluation factors, including definitions of 
performance, associated fees, and evaluation scales, that motivate 
contractors toward excellent performance; and; 

* prohibiting payments of award fees for performance that is judged to 
be unsatisfactory or does not meet contract requirements. 

Department officials agree in principle with the recommendation. While 
DHS agrees with the need for this guidance, such guidance is already 
being developed on a government-wide basis as a revision to the Federal 
Acquisition Regulation (FAR). This FAR revision is statutorily 
required, and DHS has been and will continue to be a key player in the 
drafting of the revision. As such, DHS believes the most efficient 
method for implementing the recommendation is for DHS to work within 
the "FAR process" as part of the intergovernmental team. 

Second, to assist in evaluating the effectiveness of award fees, the 
GAO recommends that the Secretaries of Defense, Energy, Health and 
Human Services, and Homeland Security, and the Administrator of the 
National Aeronautics and Space Administration establish an interagency 
working group to (1) determine how best to evaluate the effectiveness 
of award fees as a tool for improving contractor performance and 
achieving desired program outcomes and (2) develop methods for sharing 
information on successful strategies. 

Department officials agree in principle with this recommendation. While 
DHS agrees that a working group would be beneficial, we note that there 
is already an Office of Federal Procurement Policy (OFPP) working group 
that is tasked with drafting guidance on award fees as needed to 
supplement the upcoming FAR revision. DHS believes this working group 
is the best vehicle for implementing the GAO recommendation. DHS has 
been and remains an active participant on this working group. 

Since the release of OFPP's guidance entitled, "Appropriate Use of 
Incentive Contracts," dated December 4, 2007, the Department has 
undertaken an important series of actions to ensure that the use of 
award fee contracts within its Components is consistent with this 
guidance and all existing acquisition regulations and policies. First, 
immediately upon the issuance of OFPP's guidance, the DHS Office of the 
Chief Procurement Officer (OCPO) distributed this document to its 
Component procurement policy directors for immediate distribution to 
all procurement operations staff. Second, the Department amended the 
Homeland Security Acquisition Manual's guidance regarding award fee 
contracts. Third, the DHS OCPO added a discussion of the OFPP guidance 
to its contract pricing training course, and this course has been 
taught to contracting personnel at all DHS Components. Finally, in 
addition to being an active participant on the working group on 
incentive fee contracts, the OCPO has served as an active contributor 
in the development of FAR Case 2008-008, which will amend the FAR as-
needed. In summary, DHS is and will continue to be an integral 
participant in the ongoing efforts to improve the regulatory and policy 
aspects of award fee contracting. [See comment] 

Technical comments have previously been provided. 

Sincerely, 

Signed by: 

Jerald E. Levine: 
Director: 
Departmental GAO/OIG Liaison Office: 

GAO Comment: 

The following is GAO's comment on the Department of Homeland Security's 
letter dated May 28, 2009. 

While we agree DHS has taken several steps to improve the use of award 
fee contracts since the issuance of OFPP's guidance, DHS's changes to 
the Homeland Security Acquisition Manual do not fully address the 
issues in the OFPP guidance. As we point out in our report, the manual 
does not describe standards or definitions for determining various 
levels of performance nor does it address issues related to rollover. 

[End of section] 

Appendix VII: Comments from the National Aeronautics and Space 
Administration: 

National Aeronautics and Space Administration: 
Office of the Administrator: 
Washington, DC 20546-0001: 

May 26, 2009: 

Mr. John Hutton: 
Director: 
Acquisition and Sourcing Management: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Hutton: 

NASA appreciates the opportunity to comment on the draft Government 
Accountability Office (GAO) report entitled, "Guidance on Award Fees 
Has Led to Better Practices but Is Not Consistently Applied," (GAO-09-
630). 

In the draft report, GAO makes three recommendations intended to ensure 
broad implementation of OMB's guidance and positive practices in using 
award fees. However, of the three recommendations made by GAO, only one 
(recommendation 3) is addressed to the NASA Administrator, 
specifically: 

Recommendation 3: To assist agency officials in evaluating the 
effectiveness of award fees, we recommend that the Secretaries of 
Defense, Energy, Health and Human Services, and Homeland Security, and 
the Administrator of NASA establish an interagency working group to (1) 
determine how best to evaluate the effectiveness of award fees as a 
tool for improving contractor performance and achieving desired program 
outcomes and (2) develop methods for sharing information on successful 
strategies. 

Response: NASA concurs with this recommendation, Furthermore, NASA 
proposes that the Office of Federal Procurement Policy (OFPP) Incentive 
Contracting Working Group (ICWG) be leveraged to facilitate the 
implementation of this recommendation. The OFPP ICWG serves as an 
interagency advisory group to the OFPP for promoting increased 
awareness of incentive contracting best practices and fostering the 
consistent implementation of applicable regulations, policies, 
processes, and procedures Government-wide. 

Thank you for the opportunity to comment on this draft report. If you 
have any questions or require additional information, please contact 
Sandra Morris at (202) 358-0532. 

Sincerely, 

Signed by: 

Charles H. Soules: 
Associate Deputy Administrator: 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

[End of section] 

John P. Hutton (202) 512-4841: 

Staff Acknowledgments: 

In addition to the individual named above, Thomas Denomme, Assistant 
Director; Ann Calvaresi Barr; Laurier Fish; Kevin Heinz; Julia Kennon; 
Farhanaz Kermalli; John Krump; Caryn E. Kuebler; Karen Sloan; and 
Monique Williams made key contributions to this report. 

[End of section] 

Footnotes: 

[1] The departments of Defense (DOD), Energy (DOE), Health and Human 
Services (HHS), and Homeland Security (DHS) and the National 
Aeronautics and Space Administration (NASA). 

[2] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, [hyperlink, 
http://www.gao.gov/products/GAO-06-66] (Washington, D.C., 2005). 

[3] GAO, NASA Procurement: Use of Award Fees for Achieving Program 
Outcomes Should Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-07-58] (Washington, D.C., 2007). 

[4] The John Warner National Defense Authorization for Fiscal Year 
2007, Pub. L. No. 109-364, § 814 (2006). 

[5] Rollover is a practice in which unearned award fee is moved from 
one evaluation period to a subsequent evaluation period or periods, 
thus providing the contractor an additional opportunity to earn 
previously unearned fee. 

[6] Federal Acquisition Regulation (FAR) Part 16.301-2. 

[7] Some programs have utilized base fee as additional incentive for 
the contractor by requiring return of the base fee in the case of poor 
or unsatisfactory performance. 

[8] [hyperlink, http://www.gao.gov/products/GAO-06-66]. 

[9] FAR 16.405-2(b). 

[10] The Duncan Hunter National Defense Authorization Act for Fiscal 
Year 2009, Pub. L. No. 110-417 § 867 (2008). 

[11] DOD previously received similar directives for more appropriate 
use of award fees through language contained in the John Warner 
National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 
109-364, § 814 (2006). 

[12] [hyperlink, http://www.gao.gov/products/GAO-06-66]. 

[13] [hyperlink, http://www.gao.gov/products/GAO-07-58]. 

[14] Other guidance in OMB's guidance memo included performing a cost 
benefit analysis before using incentive fees and ensuring that plans 
had clear definitions on how contractors would be evaluated, the levels 
of performance used to judge them, and specific criteria on how to 
achieve those levels. 

[15] [hyperlink, http://www.gao.gov/products/GAO-06-66]. 

[16] Pub. L. No. 109-364, § 814 (2006). 

[17] Other elements required for DOD's guidance included establishing 
standards for identifying the appropriate level of officials authorized 
to approve the use of award and incentive fees in new contracts and 
ensuring consistent use of guidelines and definitions relating to award 
and incentive fees across the military departments and defense 
agencies. The guidance was also to ensure that DOD collects relevant 
data on award and incentive fees paid to contractors and has mechanisms 
in place to evaluate such data on a regular basis. 

[18] [hyperlink, http://www.gao.gov/products/GAO-07-58]. 

[19] FAR 16.302 (b). As an exception, the FAR suggests that cost 
contracts may be appropriate for research and development work, 
particularly with nonprofit educational institutions or other nonprofit 
organizations. 

[20] NNSA is a separately organized agency within DOE. 

[21] A working group has been assembled to review and update the FAR on 
the use of award fees. The National Defense Authorization Act for 
Fiscal Year 2007 has provided direction in amending the regulation, but 
nothing had been produced at the time of our review. DOD officials 
informed us that they are in the process of developing supplemental 
guidance on the use of award fees, but are waiting for the outcome of 
the FAR working group before finalizing these documents. 

[22] [hyperlink, http://www.gao.gov/products/GAO-06-66]. 

[23] In the most recent award fee plans for these contracts, the 
provision allowing the use of rollover was removed. However, the option 
to roll over unearned fee remained and was exercised at least once 
prior to this change. 

[24] Pub. L. No. 109-364, § 814 (2006). 

[25] The DOD memo that required procurement executives to collect data 
on award and incentive fees did not specifically ask for performance 
measures to evaluate the effectiveness of award fees. 

[26] P.L. 109-364 § 814 (2006). 

[27] In [hyperlink, http://www.gao.gov/products/GAO-06-66] we selected 
a probability sample of 93 contracts from the study population of 597 
DOD award-fee and incentive-fee contracts that were active between 
fiscal years 1999 and 2003 and had at least one contract action coded 
as cost-plus-award-fee, cost-plus-incentive- fee, fixed-price-award-
fee, or fixed-price incentive valued at $10 million or more during that 
time. From this population, we selected a probability sample 93 
contracts which included 66 contracts with award fee provisions. 

[28] DOD issued a memo that laid out guidance for more effective use of 
award fee contracts. The guidance was to be implemented for all DOD 
contracts commencing August 1, 2007. 

[29] [hyperlink, http://www.gao.gov/products/GAO-07-58]. 

[End of section] 

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