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.

The House Armed Services Committee (HASC) Panel on Defense Acquisition Reform published its final report recently.  The final report was not much different from the interim report we told you about.  As it concerned DCAA, the HASC Panel recommended that “The Department [of Defense] should consider shifting the responsibility for certification of contractor business systems to independent teams within or outside of DCAA and DCAA should allocate its audit resources on the basis of risk.”

It should not be a surprise that recently introduced legislation puts forward some of the HASC Panel’s recommendations.  It should not be a surprise, but it is—mostly because there have been so many panels and commissions throughout the years, with so many recommendations, that have not made it into legislation.  Yet H.R. 5013 – the proposed “Implementing Management for Performance and Related Reforms to Obtain Value in Every Acquisition Act of 2010,” does in fact address many (if not all) of the Panel’s recommendations.

More to our interests, H.R. 5013 proposes to amend Title 10 of the United States Code at §  131 as follows—

Sec. 2222a. Criteria for business system reviews

(a)  Criteria for Business System Reviews- The Secretary of Defense shall ensure that any contractor business system review carried out by a military department, a Defense Agency, or a Department of Defense Field Activity--

(1)  complies with generally accepted government auditing standards issued by the Comptroller General;

(2)  is performed by an audit team that does not engage in any other official activity (audit-related or otherwise) involving the contractor concerned;

(3)  is performed in a time and manner consistent with a documented assessment of the risk to the Federal Government; and

(4)  involves testing on a representative sample of transactions sufficient to fully examine the integrity of the contractor business system concerned.

(b)  Contractor Business System Review Defined- In this section, the term `contractor business system review' means an audit of policies, procedures, and internal controls relating to accounting and management systems of a contractor.'.

(c)  Contract Audit Guidance- Not later than 180 days after the date of the enactment of this Act, the Secretary of Defense shall issue guidance relating to contract audits carried out by a military department, a defense agency, or a Department of Defense field activity that are not contractor business system reviews, as described under section 2222a of title 10, United States Code, that--

(1)  requires that such audits comply with generally accepted government auditing standards issued by the Comptroller General and are performed in a time and manner consistent with a documented assessment of risk to the Federal Government;

(2)  establishes guidelines for discussions of the scope of the audit with the contractor concerned that ensure that such scope is not improperly influenced by the contractor;

(3)  provides for withholding of contract payments when necessary to compel the submission of documentation from the contractor; and

(4)  requires that the results of contract audits performed on behalf of an agency of the Department of Defense be shared with other Federal agencies upon request, without reimbursement.

We have, in the past, occasionally complained (or whined?) about PWACs—Persons Without A Clue—who propose legislation or regulation without thinking through the consequences.  Looking over H.R. 5012, there is much to applaud.  However, with respect to the provision noted above, we are less sanguine.  Our objections to the proposed legislation are as follows—

• The DAR Council is already in the midst of the rulemaking process regarding audit and administration of contractor “business systems.”  We’ve weighed-in on the proposed rule, ourselves.  If this legislation goes forward as-is, then the FAR Councils will need to revise the rulemaking they’ve already done, and make substantive changes to the regulations.  This will create confusion in the contracting community, not to mention being wasteful of government resources.
• As we told Mr. Fitzgerald (Director, DCAA) back in January of 2010, not all DCAA audits need to be subject to generally accepted government auditing standards (GAGAS).  In particular, audits of contractor internal control systems seem like very good candidates for not being subject to such standards.  In general, we oppose Congress telling DCAA which audits should (or should not) be subject to GAGAS.  Back off, Legislators!
• Moreover, legislating a requirement that DCAA should perform sufficient transaction sample testing to support its opinion seems both asinine and redundant.  As if any of the Congress members could tell a sufficient sample size from an insufficient one!
• We do like making DCAA perform its audits timely, and we even support control system reviews being performed by trained, specialized staff.  (After all, the DCMA purchasing system reviewers are trained, specialized staff.)  However, we wonder whether DCAA actually can implement the legislative mandate, given its current lack of resources and management acumen.

It would seem to make sense to allow DCAA time to get its house in order, to keep well-intentioned outsiders from meddling in things of which they have little or any first-hand knowledge.  Unfortunately, it has been suggested that DCAA’s reform efforts are merely window-dressing, and that the audit agency is resistant to meaningful reform.  Perhaps Mr. Fitzgerald has had sufficient time to clean house, and it is now appropriate to “help” him along?

We are not sure this is the right time to “help”  DCAA fix itself.  We are not sure these are the right fixes.  We are not sure Congress is the right “home” for the fixes.  And we’re not sure that DCAA reform efforts should be undertaken without the input of the contractors who work hand-in-hand with DCAA auditors, and feel the effects of changes to DCAA audit guidance, every single day.

H.R. 5013 makes us nervous ….

UPDATE:  In a shocking display of bipartisanship, the House passed H.R. 5013 on April 28, 2010, 417 to 3.