Get ready for award-fee report cards

A new rule for evaluating performance on award-fee contracts has raised risks for contractors.

Contractors working on award-fee contracts might be getting report cards from now on.

The Obama administration has devised a new system for handing out evaluations for award fees as a means to standardize how agencies assess companies’ work. The Federal Acquisition Regulation states that those agreements, named award-fee or cost-reimbursement contracts, are suitable only when an agency can’t nail down a set price for the work. And agencies have had trouble setting a uniform measurement.

Contractors get the award fees, or bonus money, for doing a good job on contracts if they can reach specific preset objectives. Award-fee contracts often put more financial risk on contractors because agencies don’t specify all the details for the work, as they would in a fixed-price contract. Agencies use fixed-price contracts when they can articulate what they want, but they choose award-fee contracts when they are unsure of specific requirements.

A new interim rule, issued by the civilian and defense acquisition councils in October, sets up a system for evaluating work. Grades range from excellent to unsatisfactory. A contractor can get an excellent rating if it exceeds almost all of the objectives of a contract. To receive that rating, the contractor must have significantly exceeded the award-fee criteria and met the overall cost, schedule and technical performance requirements of the contract as laid out in the award-fee plan. The agency would grade the company between 91 and 100 percent in its evaluation. The company then would be able to earn that percent of the award money.

A contractor can earn an average, or satisfactory, rating if it only meets the objectives, the rule states. However, the company can get no more than 50 percent of the pool of award-fee money with that rating. And a contractor would be unable to get any money if it gets an unsatisfactory rating on its performance, the rule states.

“It’s like grades in school,” said Trey Hodgkins, vice president of national security and procurement policy at TechAmerica, a trade organization for information technology contractors.

Catalyst for change

The rule is a result of agencies' frustration with paying contractors for insufficient work. Agencies spent more than $300 billion on contracts that encourage good work with award fees from fiscal 2004 through 2008, according to a Government Accountability Office report published in May,

GAO also found that contractors were paid billions in award fees regardless of acquisition outcomes. For example, the Defense Department paid more than $8 billion in award fees from fiscal 1999 to 2003, regardless of performance or outcome, according to GAO. The watchdog agency said DOD has since improved its evaluations.

Contractors now will get their grades regularly, as the proposed rule requires. Agencies will need to evaluate a company’s work at regular intervals of the contract. The reviews will help the contractor be aware of how well it’s doing and where it needs to improve, the proposed rule states. The rule recommends conducting a review every three months.

The interim rule also would prohibit the rollover of unearned award fees from one evaluation period to another. Rolling over award fees allows a contractor to earn lost award fees in a subsequent evaluation period.

“The councils believe rollover diminishes the effectiveness of the award-fee rating given for a specific evaluation period,” the notice states. However, officials point out that the rollover concept is used sparingly across government, and its limited use has decreased.

Overall though, the administration said the rule won’t have a significant effect on small businesses. Large companies receive most of the contracts that have award fees because those types of contracts are more complex and have more risk to bear by the company.

Treacherous waters

The new proposed award-fee rule changes the risk for companies that consider entering the race for an award-fee contract, industry representatives said. Contractors will take another look at whether they can do the work on time, on schedule and within the budget, Hodgkins said. They know the money they were expecting in the form of award fees won’t be there if they miss the mark, and they can’t make it up, he said.

“They’ve changed the level of risk [for contractors]. It’s become a much more treacherous exercise," he said.

The result might be that agencies see fewer companies, including technology companies, competing for award-fee contracts, which would shrink agencies’ pool of choices, he said.

Contractors enter an award-fee contract expecting to do well and earn all the extra money, Hodgkins said. They structure their bids with that in mind. He said the companies include the award fees as a part of the profit from the contract.

He also expects the new rule to change how companies arrive at their proposals’ costs and prices to make sure they get the necessary revenue to be successful in the work.

Meanwhile, the evaluation process seems simple enough, but certain important aspects of a contract are subjective, experts say.

Performance is not always measurable, even though the point of award-fee contracting is to tie the fee to the contractor’s work, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources Inc. This type of contract permits many qualitative measures and encourages the quantitative measures, he said.

“It’s a struggle for many government organizations to select meaningful metrics for their organizations, let alone translate those metrics to a contract,” he said.

Bjorklund said he had many experiences with award-fee contracts while he was in government. Bjorklund and fellow officials didn’t know how the contract would turn out many times, and they were unsure how to quantitatively measure what the contractor did when uncertainties existed.

“But we were able to adjust the award-fee criteria quarterly to give the contractor a ‘carrot’ goal to achieve in the next fee period, as we learned more about how the program was evolving,” he said.

Hodgkins said contractors might shy away from award fees if those fees are subject to change in ways they're not expecting and make the extra money unattainable. Companies might decide against an award-fee contract if they can't be sure they will earn the highest marks from the agency.

The new grading system “is not bad. It’s not good. It’s just different,” he said. And that could make all the difference in contractors' decision to compete.

Making the grade

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