FAR 16.305 says that a cost-plus-award-fee contract is “a cost-reimbursement contract that provides for a fee consisting of (a) a base amount (which may be zero) fixed at inception of the contract and (b) an award amount, based upon a judgmental evaluation by the Government, sufficient to provide motivation for excellence in contract performance.” (We suppose fixed-price-award-fee contracts are possible, but we’ve never seen one.)
As stated above, award fees are used to incentivize contractor performance. FAR 16.4 has an extensive discussion of the administration of award fees. According to 16.4(e)(1)—
An award-fee contract is suitable for use when—
(i) The work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, schedule, and technical performance;
(ii) The likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivates the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved; and
(iii) Any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits as documented by a risk and cost benefit analysis to be included in the Determination and Findings referenced in 16.401(e)(5)(iii).
Table 16-1 establishes the official linkage between performance and incentive award.
FAR 16.4 contains several administrative rules, including the prohibition on earning any award fee “when a contractor’s overall cost, schedule, and technical performance is below satisfactory,” and the prohibition on the practice of “rolling over” unearned award fee.
Not content with the administrative guidelines established in the FAR, the Defense Federal Acquisition Regulation Supplement (DFARS) recently issued a proposed rule that would, if implemented as drafted, tighten-up award-fee contract administrative rules for contracts administered by the Department of Defense. Among the proposed changes are the following –
- The contracting officer must perform an analysis of appropriate fee distribution to ensure at least 40% of the award fee is held for the final evaluation so that the award fee is appropriately distributed over all evaluation periods to incentivize the contractor throughout performance of the contract.
- Award-fee payments other than payments resulting from the evaluation at the end of an award-fee period are prohibited. (This prohibition does not apply to base-fee payments.) The fee-determining official's rating for award-fee evaluations will be provided to the contractor within 45 calendar days of the end of the period being evaluated. The final award-fee payment will be consistent with the contracting officer's final evaluation of the contractor's overall performance against the cost, schedule, and performance outcomes specified in the award-fee plan.
In addition to the foregoing, the proposed rule would add a new contract clause that essentially restates the FAR limitations. To wit—
AWARD FEE (DATE)
The Contractor may earn award fee from a minimum of zero dollars to the maximum amount stated in the award-fee plan in this contract.
In no event will award fee be paid to the Contractor for any evaluation period in which the Government rates the Contractor's overall cost, schedule, and technical performance below satisfactory. The Government may unilaterally revise the award-fee plan prior to the beginning of any rating period in order to redirect Contractor emphasis.
(End of clause)
In addition to the foregoing, on April 26, 2010 the Defense Department issued a Class Deviation that provided a new contract clause to be used for award-fee contracts administered by the DOD. The Class Deviation stated that the new clause was necessary to implement § 823 of the National Defense Authorization Act of Fiscal Year 2010 (Public Law 111-84). The new clause provides that any award fee may be “reduced or denied” if the prime contractor – or subcontractor – has been determined to be liable for serious bodily injury or death to any civilian or military personnel of the Government through gross negligence or with reckless disregard for their safety.
The need for such a clause likely stems from several news articles laying the deaths of Government personnel at the feet of contractors. For example, this article says that an Army report calls the electrocution death of a soldier “negligent homicide,” and says KBR is to blame. Here’s a quote from another article: “The waste of government money is unfortunate, but the death of a soldier due to possible managerial incompetence is both inexcusable and tragic.”
Clearly, the DOD needed to do something immediately to address the problem and safeguard personnel. But as others have noted, there is a rulemaking process in place, one that provides for public input. Issuing a Class Deviation bypasses that process and eliminates the ability of the public to participate in the rulemaking process.
To sum up, award fee contract types are difficult to administer. The proposed DFARS rule and the recently issued DOD Class Deviation make such contracts even more difficult for both DCMA Contracting Officer and contractors.
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