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Defense Contracting: DOD Needs Better Information on Incentive Outcomes

GAO-17-291 Published: Jul 11, 2017. Publicly Released: Jul 11, 2017.
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Fast Facts

In fiscal year 2015, DOD spent $274 billion on contracts for products and services. Some of this money was used on incentive contracts to achieve specific outcomes, such as lower costs or tighter time frames.

For these contracts, we found that DOD has increased its use of incentive fees (which objectively measure contractor performance toward set goals) and decreased its use of award fees (which are more subjective).

However, DOD does not consistently collect data on the outcomes of these incentive contracts—so DOD can't determine if they are improving contractor performance. We recommended that DOD collect and analyze relevant contract data.

DOD Obligations on Incentive Contracts, Fiscal Years 2005 through 2015

Line graph of the amounts that DOD spent on award fee and incentive fee contracts.

Line graph of the amounts that DOD spent on award fee and incentive fee contracts.

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What GAO Found

Since 2010, the Department of Defense (DOD) has made changes to its regulations, policies, and guidance and taken other steps to improve its use of incentive contracts. DOD has promoted greater use of objective incentives—which measure contractor performance toward predetermined targets using a formula—through incentive fee contracts, partly to better motivate cost control. These changes are reflected in DOD's increased use of incentive fee contracts and decreased use of award fee contracts, which involve fees paid based on a more subjective evaluation of contractor performance and have not always been linked to acquisition outcomes (see figure).

Department of Defense Obligations for Incentive Contracts, Fiscal Years 2005 through 2015

Department of Defense Obligations for Incentive Contracts, Fiscal Years 2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.

DOD expects to achieve cost objectives on 15 of the 21 incentive fee contract actions that GAO reviewed and for which costs could be assessed. GAO could not assess cost performance on five additional selected incentive fee contracts because comparable cost estimates were not available. Across the 21 incentive fee contract actions, estimated costs for the incentivized portions were about 5 percent below target costs. Schedule and technical performance incentives mostly resulted in good outcomes. In two cases, however, although the contractor met specific schedule and technical performance goals, overall outcomes were either unsatisfactory or not yet determined. In the nine award fee contracts GAO reviewed, consistent with prior GAO recommendations, DOD did not allow unearned fees to be earned in a subsequent period, and GAO did not find evidence of award fees paid for unsatisfactory performance. Federal regulations require DOD to collect and evaluate information on incentives. In 2015, DOD stopped its previous effort to manually collect data twice a year on incentives valued at more than $50 million, which was burdensome and collected information that DOD did not use, according to DOD officials. GAO's review of current DOD systems found that they provide some useful data but do not allow DOD to determine how well incentives are achieving desired cost, schedule, and performance outcomes. Without such information, DOD may be disadvantaged in establishing incentive arrangements that achieve intended results.

Why GAO Did This Study

In fiscal year 2015, DOD obligated $274 billion on contracts for products and services, a portion of which was for contracts that used incentive and award fee provisions—or incentive contracts—intended to improve cost, schedule, and technical performance outcomes. Work by GAO and others has shown that such contracts, when not well managed, can lead to unnecessary costs shouldered by the American taxpayer. Beginning in 2010, DOD made regulatory and policy changes related to incentives.

GAO was asked to review DOD's use of incentives. This report (1) identifies steps DOD has taken to improve its use of incentive contracts since 2010, and (2) assesses the extent to which selected DOD incentive contracts achieved desired acquisition outcomes.

To conduct this work, GAO reviewed relevant federal and DOD guidance; analyzed DOD obligations and new contract award data for fiscal years 2005 through 2015, before and after regulatory and policy changes; and analyzed a nongeneralizable sample of 26 contracts and task orders that contained incentives and 9 contract actions providing for award fees that were awarded between fiscal years 2011 and 2015 and reported as completed by the end of fiscal year 2015 to assess contract outcomes.


DOD should identify the type of information on incentives needed and collect and analyze relevant data to assess outcomes. DOD agreed to do so and stated it will take actions in fiscal year 2018 to address GAO's recommendation.

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics The Under Secretary of Defense for Acquisition, Technology and Logistics should identify the specific types of information that would best meet the department's needs and, based on that determination, collect and analyze relevant data after contract performance is sufficiently complete to determine the extent to which contracts with incentives achieved their desired outcomes.
Closed – Implemented
DOD concurred with our recommendation. In April 2018, DOD developed a template for the military departments to use to identify specific types of information. Each of the military departments subsequently initiated or planned to initiate efforts to collect and analyze information about outcomes of incentive contracts. In the meantime, in February 2021, GAO made a related recommendation in a report about DOD's use of fixed-price type contracts that the Secretary of Defense conduct an assessment of DOD's use of fixed-price incentive contracts for major DOD systems, including the extent to which share lines and other contract elements contributed to achieving desired cost and schedule performance outcomes. In August 2022, DOD provided an updated template that includes the information about major DOD systems, is populated with information on incentive contracts, and includes a column for assessing the overall outcome of the contract. Use of this template will help DOD better understand the extent to which its incentive contracts achieved their desired outcomes.

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Allowable costsContract administrationContract performanceContractor paymentsContractsCost analysisFixed price incentive contractsDefense acquisition programsDefense procurementActual costsContractor performanceCost and schedule performanceDefense contracting