Agencies lose money on award fees, GAO says

Agencies may be losing money because they inconsistently apply governmentwide guidance on giving award fees to contractors, according to a new report.

The guidance that the Office of Federal Procurement Policy (OFPP) issued in 2007 on award fees for contractors saves millions of dollars, according to a Government Accountability Office report released June 29. GAO estimates the Defense Department (DOD) alone will have saved $450 million through fiscal 2010 by simply limiting contractors from attempting to get unearned award fees, or rollover fees, in eight different programs.

In the guidance, OFPP told agencies how to use incentives appropriately to get what’s expected from contractors. The policy lays out money-saving principles such as putting unearned fees out of a contractor’s reach, linking award fees to acquisition outcomes, designing evaluation criteria to motivate excellent performance, and not paying for performance that is unsatisfactory.

“Using incentives appropriately and applying strong project and acquisition management practices are vital to accomplishing mission needs, minimizing waste, and maximizing value,” then-OFPP Administrator Paul Denett wrote.

GAO said DOD and NASA updated their award fee policies, aligning with OFPP’s principles. For example, DOD now prohibits paying award fees for poor performance, and NASA requires a documented cost-benefit analysis to support the use of a contract with award fees.

However, other agencies have failed to instill the OFPP's principles. Agencies inside the Energy, Health and Human Services (HHS) and Homeland Security (DHS) departments — departments that spent 95 percent of the government’s award fees in fiscal 2008 — have various approaches to award fees, GAO said. For example, at Energy, paying a contractor the award fee shows that officials are satisfied with the results of the work, but its Office of Science uses a scoring system that could allow for payment of up to 84 percent of an award for performance that does not meet expectations.

“Rolling over fees is not the preferred method for incentivizing the contractor to perform above satisfactorily,” the OFPP guidance states.

GAO also said agencies generally don't have methods to evaluate whether award fees are helpful. Agency officials told GAO that coming up with metrics to compare performance across programs would be difficult, although individual programs and some offices have taken steps to evaluate award fee criteria. GAO found some programs with good ways to track such data, but there’s no governmentwide or agencywide— except for DOD —forum to share those techniques.

“These [successful programs are] to remain isolated examples of potential best practices,” GAO said.

GAO recommends that Energy, HHS and DHS develop stronger guidance on handing out award fees, and that all agencies work together to find ways to evaluate whether award fees are useful.