Clinton cries foul over award fees

When Sen. Hillary Clinton (D-N.Y.)
called for an investigation of federal contractor
award fees last month, she brought
renewed attention to longstanding concerns
about government acquisition practices.
However, Clinton's drive to make such
fees more effective is likely to run into
familiar obstacles, according to industry
executives and policy experts.

Clinton asked the Homeland Security
Department's inspector general to evaluate
incentive bonuses and award fees DHS paid
to contractors to determine whether those
payments are being properly managed. She
would also like to tie award fees more closely
to contractor performance governmentwide
and recently helped insert an amendment
into the fiscal 2008 Defense
Appropriations bill that seeks to achieve
that goal.

"The issue will probably get greater attention
because of who Hillary Clinton is," said
Alan Chvotkin, senior vice president and
counsel at the Professional Services
Council, a trade association for government
contractors. "She is asking the right questions,
and it is fair game."

The DHS investigation is likely to focus
initially on award fees the Customs and
Border Protection (CBP) agency paid to
Chenega Technology Services Corp., of
Alexandria, Va., under a 2003 contract,
which was the subject of Clinton's request.
Chenega's parent company, Chenega Corp.,
is an Alaska Native Corporation (ANC). In her request to the IG, Clinton also asked for an investigation of award fees paid to the Boeing Co. under a Transportation Security Administration contract for explosives detection systems and fees paid to Lockheed Martin Corp. and Northrop Grumman Corp. under their Coast Guard Deepwater contract.

With Clinton leading the charge, other
federal contractors are bracing for
increased scrutiny and possible legislative
action to curb abuses of such fees.

"There is huge grade inflation," said Scott
Amey, general counsel at the Project on
Government Oversight, a watchdog group.
"The government takes these tasks lightly."

New equation

At the same time, some observers have
expressed concern that unless there are
broader acquisition reforms, turning up the
heat on award-fee practices could increase
risk and reduce profits for contractors.

"As you narrow the eligibility for fees, it
changes the risk-and-reward equation for
contractors," Chvotkin said.

He added that for several years, government
agencies have sought to pare contractor
profits to a minimum while using incentive
fees to offset some of those reductions. If award fees are shrunk, it will add to contractors' financial risks, he said.

An inquiry into award-fee practices is
also likely to encounter the same obstacles
that other investigations have faced, including
a lack of objective criteria to measure
contractor performance and limited acquisition
employees to conduct the reviews.

It is often difficult for agencies to measure
contractors' performance objectively
while also accounting for events beyond
contractors' control, such as ill-defined
requirements, mission creep, changed economic
circumstances, and an ineffective or
outdated initial concept and plan for a program.
With lead systems integrator contracts,
those problems are compounded
because the integrators are in charge of a
portion of the conceptualization and planning
for the program, Chvotkin and other
government contracting experts said.

"You can have excellent contractor performance
and still have a failed program,"
Chvotkin said.

Backlash predicted

Although it is too soon to tell if the latest
investigation will find a way around those
obstacles, Clinton might encounter some
resentment because of her pledge six
months ago to save billions of dollars by
cutting tens of thousands of federal contracting
jobs.

"Because of her profile and her national
presence, it will bring momentum to this,"
Amey said. "But in the long run, how outraged
is she?"

Under the Federal Acquisition
Regulation, agencies may pay award and
incentive fees to contractors to reward performance.
The fees are supposed to motivate
contractors to perform at their highest level, but for several years experts have
debated the fees' effectiveness.

The Government Accountability Office
reported in 2005 that the Defense
Department paid $8 billion in award fees
from 1999 to 2003 but did not always take
performance into account. Rep. Henry
Waxman (D-Calif.), chairman of the House
Oversight and Government Reform
Committee, has also investigated award
fees, and several senators have promoted
legislation aimed at reforming the practice.

Despite the activity, award-fee reforms
have not gained momentum, and new
information about the practice has trickled
to a halt. "I am embarrassed to say that
there has been no new investigation in a
year," Amey said.

In the case of Chenega, DHS IG Richard
Skinner said CBP improperly awarded the
company a sole-source contract in 2003 to
maintain high-tech screening equipment.
Agency officials used an incorrect industry
code that allowed for exemptions from various
revenue restrictions, Skinner said.

Because the department did not comply
with federal contracting regulations, the
government did not receive the best value
for the contract, he added.

CBP officials did not respond to a request
for comment.

Clinton asked Skinner to renew the
investigation to evaluate whether Chenega
also received questionable award fees as
part of the contract and whether DHS is
paying other inappropriate award fees.

"Taken together with your conclusion
that the department improperly awarded
the underlying contract to Chenega, it is
disturbing to hear that DHS has provided
an award fee to this corporation," Clinton
wrote Skinner.

A matter of value

However, policy analysts say that ensuring
the government received good value
with the contract is primarily DHS' responsibility
and does not necessarily indicate
anything about Chenega's performance.

"Good value does not always equal good
performance," Chvotkin said. "In my view,
they are different issues."

Clinton's staff did not respond to requests
for comment.

It is not the first time Chenega has been
under scrutiny. In a June 2006 review,
Waxman examined award fees paid to the
company and another ANC under a $2.2 billion
information technology services contract
with the National Imagery and
Mapping Agency, now the National
Geospatial-Intelligence Agency. In that case,
the Chenega partnership received 77 percent
to 87 percent of the allowable award fees
from 2003 to 2005 despite receiving poor
and marginal ratings for computer security.
The company scored excellent and good in
other categories, which had a combined
weight of 90 percent, while security was
given a 10 percent weight.

In releasing documents about the fees,
Waxman said they indicated performance
problems, but he did not say the fees were
improper. An official of Chenega declined
comment, citing client confidentiality.
However, Chvotkin and others noted that
the Chenega partnership's award fee was
significantly reduced because of the poor
performance in security.

However, even if agencies had clear metrics
available to evaluate contractor performance,
they have little time and few
employees available to conduct the necessary
reviews, said Claude Goddard, an
attorney at the law firm Wickwire Gavin PC
in Vienna, Va.

"Making these judgments is time-consuming
and difficult to do," Goddard said. "The
agency workforces are overstretched as it is."

"These are situations that require followup
and monitoring to see if goals are met,"
he added. "If insufficient attention is paid,
there is an inclination to give the contractors
a pass and not shut everything down."

Staff writer Alice Lipowicz can be reached at
alipowicz@1105govinfo.com.