Incentive Contracts FAR Subpart 16.4Level II PIP PresentationAshley McQueen

December 6, 2010

Why I Chose This Topic?

Overview of Presentation•Definition of Incentive Contracts•Purpose of Incentive Contracts•Types of Incentives•When Should We Use Incentive Contracts?•Advantages and Disadvantages of Incentive

Contracts•Words from US Government Accountability

Office (GAO)•Recommendations•Conclusion•Questions?

What are Incentive Contracts?•A fixed price or cost reimbursement type

contract that makes the Contractor responsible for their performance (i.e. delivery, cost, and technical performance).

•The profit or fee amount is tied to the Contractor’s performance.

•Incentives can be positive or negativeReference: FAR Part 16.401(a)

Purpose of Incentive Contracts•Establishes Targets for the Contractor

▫Technical ▫Cost▫Schedule

•Motivates the Contractor•Discourages Inefficiency•Improves Performance

Reference: FAR Part 16.401(a)(1), FAR Part 16.401(b)

Types of Incentives•Cost Incentives

▫FAR Part 16.402-1 Profit Adjusted Fee Actual Cost Adjustment

•Performance Incentives▫FAR Part 16.402-2

Product Characteristics Performance Tests Assessment of Work

Reference: FAR Part 16.402

Types of Incentives Cont’d•Delivery Incentives

▫16.402-3 Reward-Penalty Structure

•Multiple Incentives▫16.402-4

Motivation for Outstanding performance in all areas

Compel Trade-off Decisions

Types of IncentivesCont’d

•Fixed-Price Incentives▫FAR Part 16.403

Establishes Final Contract Price Price Ceiling

Firm Target Specifies Target Cost, Target Profit, Includes a

Price Ceiling, and Adjusted Formula Successive Target

Specifies an Initial Target Cost and an Initial Target Profit

Includes Profit Ceiling or Floor

Reference: FAR Part 16.4

Types of Incentives Cont’d•Award Fee Incentives

▫FAR Part 16.401(e)(1)▫Are supported by an award-fee plan that

establishes the procedures for evaluating award fee Includes an Award-Fee Board or Performance

Evaluation Board (PEB) for conducting the award-fee evaluation

•Incentive Fee Incentives▫FAR Part 16.405-1

Fee Payable to Contractor is Determined by Adjusted Formula

When Should We Use Incentive Contracts?

•Firm-Fixed Price is NOT Appropriate

•Requirement can be Acquired at a Lower Cost

•After Determination and Finding (D&F) is Approved by Head of Contracting Activity

•Negotiations can be Accomplished to Establish an Initial Target and Delegate a Fair Share of the Risk

Reference: FAR Part 16.401(b)

Advantages Disadvantages

• Used to Encourage More Effective Work From Contractors

• When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance

• Good Business Practice

• Time Consuming to Administer

• Incentive Criteria may not be Related to Cost, Schedule, or Performance Goals

• Opportunities are Given to Contractors to Receive Unearned Fees

Words From The GAO

•Identified practices that reduce Contractor’s effectiveness on performance▫Evaluating Contractors on areas that are not

directly related to goals (i.e. cost, schedule, performance)

▫Paying Contractors a large portion of available fee for acceptable or satisfactory performance

▫Giving Contractors additional opportunities to obtain unearned fees

Reference: Memorandum for Chief Acquisition Officers

Words From The GAO cont’d•Incentive Fees should be linked to

acquisition outcomes▫Cost▫Performance▫Schedule

•Incentive Fees are not earned if Contractor’s performance is judged▫Below satisfactory▫Does not meet the basic requirements of

contract

Recommendations •Training

▫Workshops▫Courses▫Forums

•Consistent Fair Ratings▫Directly Related to Performance

•Remain Unbiased with Contractors▫Avoid Conflict of Interest▫Do Not “Over-Communicate” with

Contractors

ConclusionTop Things To Remember

•What are Incentive Contracts?•What is the Purpose for Using Incentive

Contracts?•Types of Incentive Contracts•Pros and Cons with Administering these

Contracts•Appropriately Evaluate the Contractor Based

Only On Goals that are Directly Related the Contract

•Participate in Additional Training on Incentive Contracts

Questions?