Contractor award fees paid inconsistently, GAO says

Five agencies and departments that paid billions in contractor award fees are not being consistent in how they apply those rewards, a Government Accountability Office executive has testified.

The Defense, Energy, Health and Human Services, Homeland Security departments and NASA awarded 95 percent of the contractor award fees in 2008, John Hutton, GAO' director of acquisition and sourcing management, told a Senate subcommittee August 3.

From fiscal 2004 to fiscal 2008, agencies spent $300 billion on contracts that included award fees, GAO has found. The auditing agency  said it examined 645 evaluation periods for 100 contracts in which contractors were paid a total of $6 billion in award fees.

The Office of Management and Budget (OMB), in guidance issued in 2007, said the award fees are to be linked to favorable acquisition outcomes that involve costs, schedules and performance. OMB also said agencies should eliminate “rollovers” in which contractors are given second or third chances to earn an award, motivate excellent performance and prohibit payments for unsatisfactory performance.

However, some of the five agencies examined by the GAO have implemented those guidelines more effectively than others, Hutton said.

“By implementing the revised guidance, some DOD components reduced costs and improved management of award fee contracts. Potential changes at NASA  — such as documented cost-benefit analyses — are too recent for their full effects to be judged. At [Energy], DHS and HHS, individual contracting offices have developed their own approaches to executing award fee contracts which are not always consistent with the principles in the OMB guidance or between offices within these departments,” Hutton told the Senate Homeland Security and Governmental Affairs’ Committee's Federal Financial Management, Government Information, Federal Services and International Security Subcommittee.

However, all those agencies and departments have difficulties evaluating whether the awards inspire better contractor performance, Hutton said.

“None of the five agencies has developed methods for evaluating the effectiveness of an award fee as a tool for improving contractor performance,” Hutton said. “Instead, program officials noted that the effectiveness of a contract is evident in the contractor’s ability to meet the overall goals of the program and respond to the priorities established for a particular award fee period. However, officials were not able to identify the extent to which successful outcomes were attributable to incentives provided by award fees versus external factors such as a contractor’s interest in maintaining a good reputation.”

Officials also said it would be difficult to develop performance measures that could be used for multiple programs, Hutton added.

Jeffrey Zients, deputy director for management at OMB, testified that the Federal Acquisition Regulation Council is preparing to release a new FAR rule on contractor award fees to be published in the next 30 days to 60 days.

Meanwhile, officials from DOD, DHS and NASA said they are following guidelines and making improvements in use of award fees. Edward Simpson, director of the office of procurement and assistance management at Energy, said the agency will make changes to improve the use of award fees for motivating excellence and ban award fees for unsatisfactory performance. “DOE will address GAO’s concern immediately,” Simpson testified. HHS officials were not represented at the hearing.