Performance, Award Fee and Costs Incentives during System Design and Development

Report Number: NPS-CM-09-141

Series: Contract Management

Category: Performance Incentives & Award Fees

Report Series: Sponsored Report

Authors: Gregory Hildebrandt

Title: Performance, Award Fee and Costs Incentives during System Design and Development

Published: 2010-03-01

Sponsored By: Acquisition Research Program

Status: Published--Unlimited Distribution

Research Type: NPS Faculty

Full Text URL: http://acquisitionresearch.net/files/FY2009/NPS-CM-09-141.pdf

Keywords: General Accounting Office (GAO), System Development and Demonstration (SDD), Cost-Sharing Ratio, Performance Incentives, Award Fee, Accounting Profit, Economic Profit, Cost Uncertainty, Moral Hazard,

Abstract:

The analysis addresses the use of Performance Incentives and Award Fees in DoD contracting during System Development and Demonstration (SDD). There is discussion of the F/A-18E/F contract that included cost-sharing, Performance Incentives and Award Fees. However, we first discuss recent GAO criticism of profits received on Award Fee contracts and the response by DoD and other organizations. Next, the general policy guidelines established in 1969 by DoD and NASA that are still in effect are reviewed, as are the recommendations made by academic economists beginning in the 1970s. We also discuss the recent introduction of System Design Specifications. While these specifications contain a great deal of information that can be used when developing Performance Incentives and Award Fees, this new policy represents a movement away from performance specifications and may constrain a contractor