Conflict Over Award Fees Within Federal Government

(MoneyWatch)  Several months ago the Government Accountability Office (GAO) reviewed a large number of defense and other Federal contracts to see how award fees were being done. Many contracts have fee which is given to the contractor based on their performance. This is true of both cost plus and fixed price contracts. The goal of the fee is to add to a contractor's profit by reward good results. This is in a hope that it will improve performance.

The GAO found that many contractors received their fees even if they did not perform well. This does not necessarily mean that award fees are a bad idea but that the criteria was poorly spelled out or the agency involved didn't apply it properly. In reaction Congress asked that the government promote new rules on how fees are used and to try and limit them to only select contracts. The new rules relating to this should be ready and published in the Fall.

Some acquisition and procurement officials and offices have pushed back. Not only do these new rules continue to reduce the flexibility available to contracting officers in choosing the best vehicle they require more data collection and reports. There have been complaints that the data even when collected properly will not lead to valuable or measurable data.

One of the common responses of Congress and the Federal bureaucracy to perceived and actual problems is to demand reports, data and more levels of oversight. This may delay contract awards as there are more hoops to jump through. There is a goal right now of eliminating cost plus contracts to the absolute minimum especially in the area of defense. Some believe that cost plus are just a way for companies to rip off the government. It is true that any contract like that with schedule or technical problems is going to increase in value. The longer something takes the more it costs and the more labor required also increases the funding required. That is why cost plus are used development of new systems or complex technical programs.

If a program is in steady state production without major changes to configurations or capabilities then fixed price is the way to go. The government and contractor have a good idea of the cost of the product and then the profit is just negotiated. There is little risk to either side of losing money in that situation.

Cost plus contracts have also been criticized when they are used for time and material service contracts. The government pays for a certain amount of labor at a fixed hourly rate. The concern is that the agency keeps adding hours and that drives the cost up from where it was originally negotiated. That these types of contracts grow cannot necessarily be blamed on the companies involved. Normally the rates are pre-negotiated and if the government decides to add work to the contract then it will have to add money as well. There is no doubt that a company will try to sell additional work but that is only in their best interest.

The different types of contracts exist to allow the government to get the best value for their money. Limiting the choices will ultimately make it harder for contracting officers to do this. Does that mean that everything is perfect? No; but adding more rules and requirements may not help reach the goals of Congress or the government.