GAO: Agencies need to do more to ensure proper use of contractor award fees

Despite OMB guidance, agencies’ approaches to paying contractors for performance still vary widely.

Agencies are making progress in adopting guidance on award fee contracts, but there are still widespread inconsistencies in how the government is implementing and overseeing such contracts, according to the Government Accountability Office.

A recent GAO report found that the five agencies accounting for more than 95 percent of the funds spent on award fee contracts in fiscal 2008 have divergent policies on how to manage these types of contracts and have made mixed progress in adopting 2007 guidance issued by the Office of Management and Budget.

The guidance provides instruction on how to manage these contract types, which are designed to offer a financial incentive to the contractor for meeting or exceeding certain criteria. The OMB memo directs agencies to do things such as link award fees to acquisition outcomes, design evaluation criteria to motivate top performance and avoid paying for unsatisfactory work. The Defense Department and NASA largely have accepted these principles in updated guidance on the use of award fee contracts, but the Energy, Homeland Security, and Health and Human Services departments are lagging behind, according to GAO.

Energy, DHS and HHS generally rely on separate program offices or operating divisions to develop award fee guidance, but GAO found that many acquisition professionals were unfamiliar with or unaware of the OMB guidance.

The GAO report showed that while current practices often are inconsistent with federal guidance where the revised policies have been applied, the government has realized hundreds of millions of dollars in cost savings. Improvement is likely to yield even greater savings, given the more than $300 billion agencies spent between fiscal 2004 and 2008 on award fee contracts.

John Hutton, GAO director of acquisition and sourcing management and author of the report, said award fee contracts are not inherently bad.

"Award fee contracts can motivate contractor performance when certain principles are applied," Hutton wrote in the report. "Linking fees to acquisition outcomes ensures that the fee being paid is directly related to the quality, timeliness and cost of what the government is receiving."

But the lawmakers who requested the GAO investigation said in a statement the report shows continued cause for concern.

"There are certainly times when agencies should provide incentives for contractors who perform well or go above and beyond the call of duty," said Sen. Thomas Carper, D-Del. "But I am concerned that many agencies are relying on these poor performing contractors simply because the federal government does not know what it wants or needs or how services should be delivered."

Sen. Bernie Sanders, I-Vt., said agencies' tendency to award contractors for less than satisfactory work makes it seem like they "live in Lake Wobegon, where 'all the women are strong, all the men are good-looking and all the children are above average.' "

Another GAO concern is how agencies monitor -- or fail to monitor -- the use of award fees. Of the five agencies reviewed, only Defense collects data on the use of award fees, and that is primarily to meet legislative requirements. The information typically is shared with senior procurement executives at the military services and other Defense agencies. The other departments generally do not have an adequate mechanism with which to evaluate the effectiveness of award fees in improving contractor performance, GAO concluded.

While some programs and offices have taken steps to evaluate the criteria they use to decide if a contractor has earned what is essentially a bonus, agencies told GAO that identifying methods to assess award fees across programs would be difficult.

GAO recommended that Energy, HHS and DHS update or develop guidance on using award fees by incorporating OMB's directives. The watchdog agency also instructed Defense to promote its existing guidance and to review contracts not covered by those policies.

While the report recommended that the five departments establish an interagency working group to identify how best to evaluate the effectiveness of award fees and develop methods for sharing best practices, several agencies said a sufficient review already is under way. Jerald Levine, director of the DHS GAO/OIG Liaison Office, said OMB's Office of Federal Procurement Policy is working to develop further award fee guidance as a revision to the Federal Acquisition Regulation. Levine said DHS believes working within the FAR process is the most efficient avenue for implementing GAO's recommendations.

Carper, who is chairman of the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security, said he will hold a hearing in the coming weeks to investigate why agencies are "inappropriately awarding large bonuses" and how to avoid that in the future.