Just Rewards

Eliminating second chances for contractor incentives could save millions, auditors say.

A single federal agency could save hundreds of millions of dollars simply by withholding incentive awards from contractors that were previously denied, according to a March report from the Government Accountability Office. Companies that fail to meet initial performance standards have been getting a second chance to earn award fees, which auditors say amounted to about $300 billion from fiscal 2004 to 2008.

Transferring unearned award fees to the next performance evaluation period on a contract, a practice known as rollover, gives suppliers another opportunity to collect the money. After discovering in 2005 that it was wasting billions of dollars on award fees, the Defense Department established rules that limit rollovers. GAO estimates the move saved the Pentagon more than $450 million from 2006 to 2010.

Now rollovers are banned under Federal Acquisition Regulation amendments issued last fall. Yet a Defense inspector general recently reported that Pentagon officials are still employing the tactic. "The key to improving the use of award fees and achieving savings will depend on whether agencies change their practices to conform to recent changes to federal acquisition regulations," says John P. Hutton, GAO director for acquisition and sourcing management.

Rollover points to a larger predicament: It's hard for the government to spell out and stick to tough terms for incentives. "There can be quantitative measures, but traditionally it's a qualitative assessment of contractor performance," says Ray Bjorklund, senior vice president and chief knowledge officer at research firm FedSources. "Therein lies the problem . . . It has made it easy for the program manager to be sloppy or lackadaisical in how they administer award fees."

GAO officials say the failure to establish clear justifications for award fee contracts has led agencies to use the incentives improperly. As far back as 2007, the George W. Bush administration was warning agencies to be more careful when doling out premiums, the March report notes. That year, the White House issued rules forbidding agencies from using award fee contracts unless they had conducted cost-benefit analyses to determine whether the time and energy devoted to establishing performance measurements and monitoring progress would pay off in fewer cost overruns and schedule slippages.

The Bush guidelines also discouraged agencies from banking bonuses. "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," Paul A. Denett, then-administrator at the Office of Federal Procurement Policy, wrote at the time. But even critics of the award fee process say getting rid of performance incentives entirely isn't the answer. While GAO's Hutton says rollovers should be stopped, he notes, "award fees, if used properly, can incentivize exceptional contractor performance."

Bjorklund adds, "If you take away cost reimbursement, award fees, etc., it takes away all incentive-there's no incentive to keep costs under control."

Some industry groups say complaints about award fees are overblown. "I think they are getting a bad rap," says Trey Hodgkins, senior vice president for national security and procurement policy at Tech-America. "There is a perception-and certainly the [GAO] report feeds that perception-that the awards are handed out willy-nilly and there's no relationship between the award fees and performance."

In general, Hodgkins says, the requirements for extra cash are demanding. Sometimes a vendor must come in under a specific budget figure or finish system parts ahead of deadline, he notes. And sometimes, he adds, just hitting the cost and timetable benchmarks deserves a reward if the project is particularly complex.

Program managers tend to be careful about distributing incentives because they know Congress and inspectors are paying close attention to waste, fraud and abuse in this economic climate, Hodgkins says. "Usually there's not an incentive for the program manager to simply pay an award fee, if for no other reason than someone is going to be looking over your shoulder from oversight," he says.

Under certain circumstances, rollover fees could push the contractor to do even better, Hodgkins notes. If the vendor doesn't earn the fees, for instance, the company could slack off in the belief that no amount of catch-up work will ever get that money back. "If you tell me there is a way for me to make it up by closing the gap then that's going to further incentivize me to keep the project on target," he explains.

Contractor organizations say it's hard to know whether the government is being too loose or too strict in distributing bonuses because agencies aren't transparent about their methodology. "While there may well be a number of cases [in which fees should not have been awarded], there are plenty of cases where award fees have been inconsistently awarded-where the company could have argued for more money," says Stan Soloway, president of the Professional Services Council.

Soloway is of the opinion that both sides need to collaborate to develop criteria for incentives. "We all agree at the end of the day award fees need to be tied to outcomes," he says. "Those outcomes have to be measured against criteria that are in the contractors' control."