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New Directions for Award and Incentive Fee Contracts

Breakout session discussing the history, legislation, and best practices for award and incentive fee contracts. Topics include trust but verified, GAO report, OSD policy guidance, legislation, award fee plans, and incentive contract formation.

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New Directions for Award and Incentive Fee Contracts

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  1. New Directions for Award and Incentive Fee Contracts Breakout Session # 602 Tim Malishenko, Corporate Vice President, Contracts & Pricing The Boeing Company Date April 14, 2008 Time 1:50 – 2:50

  2. Discussion Topics • Trust but Verified • History of Award Fee Contracts • GAO Rpt on Award & Incentive Fee Contracts • OSD Policy Guidance – AT&L, DAPA • Legislation - NDAA, FY 07 • Award Fee Plans • Incentive Contract Formation • Summary

  3. Trust but Verified • Enron leads to Sarbanes Oxley • Legislative Activism: Commercial Item, Cost Data, Award Fee, Nunn-McCurdy • FAA and Southwest – Legislation? • Don’t Count on Congress to Trust Acquisition Solution is Acquisition Process & Outcomes Excellence

  4. History of Award Fee Contracts • 60’s – CPAF - NASA technique to ensure safety i.e. don’t let focus on quality and technical performance, not cost incentive • 70’s - DOD/Service Combination. F-15 FPIF/AF. Objective Incentive plus Bonus for outstanding performance • 80’s. - Fixed Price Development, Decline in CPIF & CPAF contracts. Unbalanced risk did great harm to industrial base • 90’s - Expanded CPAF in the 90's. PEO’s/PM’s Cult CPAF leverage on contractor. 80% min award fee amount was custom • 00’s – period of GAO report. 1999 to 2004

  5. Award Fee – Background • Dec 2005 - GAO report criticized DoD’s lack of outcome-oriented objective criteria • Recommended seven remedial actions, including: • Only Payment for above-satisfactory performance (Bonus Concept) • More supervisory review • Limited use of rollover • Develop metrics on use/effectiveness of award fees • Share proven strategies

  6. Mar 2006 - DUSD(A&T) Memo • Essentially endorsed most GAO recommendations, except limiting award fee payments to “above satisfactory” ratings (Bonus Concept) • 3% base fee is insufficient for satisfactory work. • Use of “rollover” an exceptional case • Defers addressing metrics and review recommendations

  7. FY07 NDAA Section 814 “Linking of Award and Incentive Fees to Acquisition Outcomes” SECDEF to issue guidance: • Link award fees to acquisition outcomes (cost, schedule, technical) • Establish standards for identifying the appropriate level of officials authorized to approve the use of award and incentive fees • Provide guidance for judging performance and related % fee award • No award fee for below satisfactory (failure to meet minimum requirements) (Bonus Concept) • Provide direction on use of “rollover”, ensure consistency across Departments and Agencies, collect/assess relevant fee data, develop metrics, share proven strategies • Assess & report on independent evaluation mechanisms (FFRDC)

  8. DUSD(AT&L) Policy, Dec 2006 • DoD Policy Discourages the use of traditional Award Fee Contracts • No more than 10% of the total available incentive/award fee should be based on subjective criteria (Bonus Concept) • Secondary Review for Award Fee Determinations

  9. OUSD (AT&L / DPAP) Apr 07 Memo • Policy: objective criteria will be used whenever possible • Preference for CPIF/FPIF which require objective criteria • Only use combination (e.g., CPIF/AF) when some subjectivemeasures necessary • Most development & LRIP contracts-use objective criteria • HCA signed D&F is required to use CPAF (Limit Use) • Most appropriate contract type is multiple incentive – CPIF/AF, FPIF/AF, FP/AF • When both objective & subjective criteria are required (Bonus Concept) Effective: all solicitations issued after 01 August 2007

  10. FAR 16.405-2(b)(1)(i) • CPAF is suitable when work to be performed is such that it is neither feasible or effective to devise predetermined objective incentive targets.

  11. DAPA - “Shall Apply to All CPAF” Award Fee May be earned as follows Rating% Pool Earned Unsatisfactory 0% Satisfactory No more than 50% Good 50% to 75% Excellent 75% to 90% Outstanding 90% to 100%

  12. Unsatisfactory=fail to meet minimum basic (minimum essential) requirements • Satisfactory=meets basic requirements • Good= meets basic and 50% of criteria • Excellent=meets basic & 75% of criteria • Outstanding=meets basic & > 90%

  13. Effective Award Fee Plans • Prospective Only • Make them bilateral, not unilateral • Effective Cost, Schedule, Technical incentives, full contract period

  14. Effective Incentive Contracts • Successful performance to objective criteria (cost and schedule) require: • Adequate requirements definition, • Realistic cost estimates (risk based source selection criteria) • Funding cost at 80% confidence level • Stable funding

  15. Balance Potential Risk and Rewards Incentive Contract Formation • Contract Type and Incentives should be commensurate with program phase & risk • Share Lines, steep share lines are move to fixed price • Low ceiling price is a move to fixed price • CPIF contracting will increase emphasis on Cost and Schedule performance • Target fees and share arrangements should be consistent with risk assessments and complexity of the contracted effort Cost-Schedule-Technical-Get to choose Two

  16. Summary • Limit Award Fee to “Bonus Concept” • Restrict Changes to Award Fee Criteria • Award Fee must be in context of balanced incentive contracts, CPIF/FPIF

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