Officials say they are cracking down on contractor award fees

Procurement officers for NASA and the departments of Health and Human Services, Homeland Security, Defense and Energy told a Senate subcommittee Monday they were taking steps to ensure performance bonuses attached to contracts are awarded responsibly.

Alluding to bonuses paid to executives by Wall Street financial firms receiving federal bailout funds, Senate Homeland Security and Governmental Affairs Federal Financial Management Subcommittee Chairman Thomas Carper, D-Del., said "rewards and incentives that are not properly aligned can lead to failure."

The use of "award-fee" contracts at the departments and NASA have come under fire over the years as awards have been paid out even though performance measures were not met by contractors.

William McNally, NASA's assistant administrator for procurement, said the agency had banned the practice of "rolling over" awards, which gives contractors an opportunity to earn an award from a previous evaluation period that was lost due to poor performance.

McNally said the practice was banned because it removes the incentive to improve performance.

Jeffrey Zients, the Office of Management and Budget's deputy director of management, said there needs to be verifiable evidence of an extraordinary situation for rolling over awards "if it's not an outright ban."

John Hutton, the Government Accountability Office's director of acquisition and sourcing management, agreed, telling the subcommittee it would be "hard-pressed" to find a time when rolling over an award is appropriate.

Zients said OMB has issued findings for responsibly managing award fees so that awards are not paid for unsatisfactory work or failing to meet requirements of a contract. Award payments are linked to timeliness, cost and quality of work, he said.

Zients also praised the Defense Department for taking action to link award payments to project outcomes and scaling back "rollover."

OMB and the Federal Acquisition Regulation Council are working toward new regulations that will provide more specific guideposts for doling out award-fee contracts, he added, noting that the agencies share the subcommittee's skeptical view of rolling over awards.

"These facts are being taken into careful consideration in deliberations over whether the practice should be banned altogether," Zients said.

The new regulations will provide a better foundation to eliminate wasteful practices, such as allowing contractors to receive fees for unsatisfactory performance or routinely tying fees to effort rather than achievement, Zients said. Within the next 30 to 60 days, the FAR Council will publish a new rule to increase the attention agencies give to determining if an award fee is appropriate during the acquisition planning phase and provide evaluation standards to help agencies differentiate between performance levels and the corresponding award fee. Zients said the rule also will prohibit award fees for unsatisfactory performance and provide clear guidance on the use of rollovers.

Sen. Tom Coburn, R-Okla., wondered why contractors do not share the same risk as the government in contracts being completed on time. He suggested that contractors should have capital at risk so there is a greater incentive to improve performance.

Elizabeth Newell of Government Executive contributed to this report.

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