GAO-11-318SP: General government: Adherence to new guidance on award fee contracts could improve agencies' use of award fees and produce savings

General government

Adherence to new guidance on award fee contracts could improve agencies' use of award fees and produce savings

Why Area Is Important

GAO has reported that several major agencies spent over $300 billion from fiscal year 2004 through fiscal year 2008 on contracts that included monetary incentives known as award fees. The purpose of these incentives is to motivate enhanced contractor performance. In 2005, however, GAO found that the Department of Defense (DOD) paid billions of dollars in award fees regardless of acquisition outcomes. In 2007, GAO found significant disconnects between program results and fees paid at the National Aeronautics and Space Administration. In 2009, GAO reported that five agencies had paid more than $6 billion in award fees, but were not consistently following award fee guidance and did not have methods for evaluating the effectiveness of an award fee as a tool for improving contractor performance.

What GAO Found

GAO has identified three primary issues related to the use of award fees that, if addressed, could improve the use of these incentives and produce savings. Specifically, (1) award fees are not always linked to acquisition outcomes, (2) award fee payments are made despite unsatisfactory contract performance, and (3) contractors have been permitted to earn previously unearned award fees in subsequent evaluation periods, a practice known as "rollover," where unearned award fees are transferred from one evaluation period to a subsequent period, thus allowing contractors additional opportunities to earn previously unearned fees. GAO has made recommendations to address these issues, several of which have been reflected in revised Office of Management and Budget (OMB) guidance and in amendments to the Federal Acquisition Regulation, effective October 2010. The key to improving the use of these fees, however, will be whether agencies change their practices to conform to the revised policies.

Although required by OMB guidance since 2007, GAO reported in 2009 that award fees were not always linked to acquisition outcomes. But when efforts are made to do so, savings can be achieved. For example, the Joint Strike Fighter program created metrics for areas such as software performance, warfighter capability, and cost control that were previously assessed using less-defined criteria. By using metrics to assess performance, the Joint Strike Fighter program paid an estimated $29 million less in fees in the 2 years since the policy changed than it might have when applying the former criteria.

As GAO previously reported, OMB guidance directed agencies to ensure that no award fee should be paid for performance that does not meet contract requirements or is judged to be unsatisfactory. GAO found in practice the guidance was not always followed. Specifically, GAO reported in 2009 that programs across the agencies reviewed used evaluation tools that could allow contractors to earn award fees without performing at a level that is acceptable to the government under the terms of the contract. For example, a Department of Energy research contract allowed the contractor to earn up to 84 percent of the award fee for performance that was defined as not meeting expectations. In addition, GAO found two Department of Health and Human Services contracts, including a contract for Medicare claims processing, in which it was possible for the contractor to receive at least 49 percent of the award fee for unsatisfactory performance. Some programs within DOD, by contrast, have prohibited award fee payments for unsatisfactory performance. For example, GAO found that the Air Force saved $10 million on a contract for a satellite program by not paying an award fee to a contractor with unsatisfactory performance.

DOD guidance on award fees since 2006 has been that the practice of rollover should be limited to exceptional circumstances to avoid compromising the integrity of the award fee process. GAO found that based on contracts reviewed in 2005, DOD rolled over an average of 51 percent of the total unearned fees. For example, the contractor for the F-22 Raptor received over 90 percent of the award fee, including fee paid in subsequent evaluation periods, even though the program's cost and schedule targets had to be revised 14 times. By later limiting rollover, GAO estimated in 2009 that DOD would saveover $450 million on 8 programs from April 2006 through October 2010. A DOD Inspector General report in 2010, however, indicates that rollover is still being used. The recent amendments to the Federal Acquisition Regulation now prohibit rollover of unearned award fees.

Actions Needed

Recent changes to the Federal Acquisition Regulation and practices on award fees are encouraging:

  • Amendments to the Federal Acquisition Regulation in 2010 have prohibited the practices of rollover of unearned award fees and awarding fees to contractors that have performed unsatisfactorily. Some agencies are updating and disseminating guidance that could increase the pace and success rate of implementing these new regulations.
  • Further, agencies such as DOD are increasing the likelihood that award fees would be better linked to acquisition outcomes by implementing key practices. For example, DOD is implementing a peer review process for contracts over a certain dollar threshold that includes examining the plan for administering award fees.
  • However, sustained progress in the use of award fees will require that contracting agencies adhere to the recent changes to the Federal Acquisition Regulation. Enhanced oversight by OMB and Congress may be useful as well.

Framework for Analysis

The information contained in this analysis is based on the related GAO products listed under the "Related GAO Products" tab.

Area Contact

For additional information about this area, contact John Hutton at (202) 512-4841 or

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