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Cost-plus-award-fee (CPAF) has been the most frequently used type of contract on NASA programs. In the early 1990’s, a complete review of CPAF contracting at NASA was conducted. As a result of that study, changes were made in the requirements for use of, and in the structure of, CPAF contracts. The Agency’s regulatory award fee policy can be found in the NASA FAR Supplement at 1816.405-2.

In 1999 and 2000, an Agency-wide Assessment of NASA's Performance Based Contracting Implementation was conducted. Included in the Assessment Team's report were recommendations concerning award fee contracts. In addition, the FAR was updated in May 2000 to reflect a preference for awarding performance-based contracts. Since many NASA award fee contracts are performance based contracts, this guide is being updated to reflect these recommendations and changes.

The purpose of this Guide is to explain and elaborate on the Agency’s award fee policy, providing examples and dealing with practical concerns that could not be addressed in the regulations. It replaces earlier versions of the Award Fee Contracting Guide issued by the Associate Administrator for Procurement in June 1994, and in December 1997.

Improved award fee contracting procedures alone will not improve the effectiveness of NASA's CPAF contracts. The entire acquisition process plays a role in the success of these procedures. Assessing and addressing risk, program planning, thorough requirements definition, expanded use of performance based contracts, and selection of proper contract type, coupled with effective contract and program management, are essential to the success of NASA programs. The current award fee policy and this Guide are but one element in improving NASA's contracting actions.

/Original Signed/     June 27, 2001
____________________     _____________________
Tom Luedtke     Date
Associate Administrator    
for Procurement    



Table of Contents


1.1 Performance Based Contracting
1.2 Summary of Contract Types
1.3 Selecting and Applying AF Contracts
1.4 Cost Benefit Analysis
1.5 Combinations with Other Contract Types


2.0 General
2.1 CPAF Structure
2.2 Estimated Cost
2.3 Award Fee, Base Fee and Maximum Fee
2.4 Hardware Performance Incentives


3.1 General Guidelines
3.2 Organizational Levels and Functions
3.2.1 Basic Structure
3.2.2 Optional Levels and Functions
3.2.3 Training
3.2.4 Steps in the Evaluation Process
3.3 Performance Evaluation Plan
3.4 Performance Evaluation Factors and Subfactors
3.4.1 Performance Evaluation Factors
3.4.2 Quantitative and Qualitative Standards
3.4.3 Weighting of Evaluation Factors
3.5 Evaluation Periods and Award Fee Allocation
3.5.1 Evaluation Period Length
3.5.2 Allocation of Award Fee
3.5.3 Evaluation of Delivery or Task Order Contracts
3.5.4 Interim and Final Evaluations
3.6 Grading and Scoring Contractor Performance
3.6.1 Award Fee Rating Table
3.6.2 Zero Score for Poor Performance
3.6.3 Scoring of Cost Control
3.6.4 Calculating Earned Fee - Example
3.6.5 Changes in Emphasis - Example
3.7 Administrative Matters
3.7.1 Communication
3.7.2 Contractor Input
3.7.3 Timeliness
3.7.4 Documentation
3.7.5 Payment



I Introduction
II Standard Hardware Performance Level
III Maximum Performance Incentives
IV Units of Measurement
V Performance Incentive - Example
VI Prorating the Performance Incentive
VII Multiple Performance Incentives



1.1 Performance Based Contracting

Performance-based contracting is the preferred way of contracting for services (including R&D) and supplies. Performance-based contracting is contracting for results, not just best efforts, and involves structuring all aspects of an acquisition around the purpose of the work to be performed. A PBC must have performance requirements and performance standards (criteria for determining whether the performance requirements are met) and some kind of contract performance incentive (positive or negative), where appropriate. PBC contract performance requirements should be described in terms of "what" the required output is and should not specify "how" the work is to be accomplished. A PBC must also have a surveillance plan that documents NASA’s approach to monitoring the contractor’s performance to ensure that the taxpayer dollars are spent wisely. The level of surveillance documented in the plan must be commensurate with the risk associated with the contractor performing the work and the risk inherent with the work itself. In addition to the above, a PBC cannot be a level-of-effort (either fixed-price or cost reimbursement) or time-and-materials contract.

Performance-based contracting complements the Government’s overall approach to managing for results, not to effort or process. Under a PBC, a contractor can determine the best and most cost effective ways to fulfill the Government’s need. A PBC may also reduce unnecessary contract administration costs by moving NASA away from audit-oriented and subjectively assessed level-of-effort contracts to fixed price or completion type contracts. Constructing PBCs that contain clearly defined performance requirements, easily understood performance standards, and an objective incentive mechanism (where possible) will provide contractors with a clearer understanding of the Government’s expectations, thereby facilitating enhanced contractor performance and reducing the chance of disputes.

When determining contract type, the goal is to select one that will assign reasonable risk to the contractor and provide the contractor with the greatest incentive for efficient and economical performance. FAR Part 16, NFS Part 16, and section 1.2 provide useful guidance and considerations when selecting a contract type. In addition, FAR Part 37 establishes an order of precedence for service contract types: (i) fixed-price performance-based contract or task order, (ii) a performance-based contract or task order that is not firm-fixed price, and (iii) a contract or task order that is not performance-based.

When selecting a contract type for a PBC, an additional consideration should be the acquisition team's level of confidence in the performance requirements and performance standards. In some cases, NASA has years of experience of contracting or comprehensive understanding for the work being contemplated and can therefore develop performance requirements and performance standards that it has high confidence in. That is, the team has high confidence that the performance requirements adequately define the work and that the related performance standards accurately and fairly measure the contractor’s performance (e.g., cost, schedule, technical) over the contract period of performance. When the acquisition team has high confidence in their performance requirements and standards, a FFP PBC (that specifies procedures for reductions to the price when required work is not performed or does not meet contract requirements) that assigns more risk to the contractor is preferred.

When it is not possible to use a FFP contract, a contract with objectively measurable incentives (e.g., FPIF, or CPIF) should be considered. Because the work required under some NASA contracts may be quite dynamic, contain requirements difficult to predict, and/or have lengthy periods of performance, it may be difficult to develop objective performance incentives that are appropriate for the contract duration. A mechanism that has been used in some NASA contracts to increase the confidence level for the use of objective performance incentives is a mandatory "re-look" provision. The "re-look" provision specifies a period of time during the contract performance where NASA and the contractor agree to review the objective incentive criteria for its appropriateness. Should any change be determined to be necessary, the parties can mutually agree to modify the objective incentive criteria.

In some cases, an assessment of risk may show that a PBC with objective measures and rewards may be neither feasible nor effective. NASA’s confidence in its performance requirements and performance standards should be one of the factors in the decision whether to pursue a contract with objective fee or award fee mechanisms. If NASA does not have high confidence that its performance requirements and performance standards will provide for an accurate and fair objective measure of the contractor’s performance, a subjective award fee may be appropriate for consideration. When a subjective assessment of contractor performance will enhance the likelihood of meeting mission objectives, an award fee contract may be an appropriate PBC type. Award fee contracts should not be used, however, until the use of a FFP contract, or a contract with objective performance requirements and standards has been considered and determined to be inappropriate.

For some contracts, a risk assessment may show that more than one contract type is appropriate. For instance, NASA may have sufficient confidence that some of the contract work may be appropriate for the utilization of an objective performance incentive, but lacks confidence that the remainder of the work is appropriate for the use of an objective performance incentive. In this case, a hybrid contract (refer to Section 1.5) that uses both an objective performance incentive and a subjective award fee may be appropriate (although the administrative cost of such an arrangement should be a consideration). When NASA has used hybrid contracts, "gates" between the subjective award fee and the objective performance incentive that emphasize a particular area of performance have frequently been used. The gates specify that the contractor must earn a specified minimum award fee score (overall award fee score or a score for specified categories) before the contractor is allowed the opportunity to earn an objective fee incentive. For example, a contract may require a minimum overall award fee score of 70, and/or a minimum score of 80 for safety before the contractor is eligible to earn an objective performance incentive.

Award fees may also be used on a contract in conjunction with a cost incentive. In such cases, the cost incentive will be based on objective formulas inherent in the other contract types (e.g., FPI, CPIF), and the award fee provision should not separately incentivize cost performance.

An objective for longer duration programs should be to assign more risk to the contractors by migrating from PBCs that emphasize subjective award fees to contracts that emphasize objective performance incentives. Some NASA contracts have begun this process by incorporating an objective element into the award fee process. For example, prior to the start of an award fee period, NASA may define in a letter of emphasis (refer to the section 3.2.4.a) that a certain percentage of the award fee will be objectively assessed. An advantage of including an objective assessment in the award fee process is that the criteria may be revised if the performance evaluation board feels it does not adequately measure or motivate the contractor prior to the next award fee period. When the contract administration team feels confident that the objective assessments in the award fee process effectively measure and motivate the contractor, it can determine whether the objective part of the award fee process could be made a pure objective performance incentive.

1.2 Summary of Contract Types

There are a variety of contract types available for use in Government contracting. These contract types, which are discussed in detail in the Federal Acquisition Regulation (FAR), Part 16, fall into two categories--fixed-price and cost-reimbursement. The most commonly used types are described below based on the degree of risk assumed by the contractor with each type. These range from cost-no-fee (CNF) and cost-plus-fixed-fee (CPFF), where the contractor has minimal risk for performance costs and the fee amount (if any) is not adjusted in response to actual costs or performance, to firm-fixed-price (FFP), representing contractor assumption of all cost risk.

Cost Risk
to Contractor

Cost Risk
to Contractor
|------------------ |------------ |------------ |------------ |-------------- |

Selecting the proper contract type requires the exercise of sound judgment. The objective is to negotiate a contract type that fairly allocates performance risk between the contractor and the Government and incentivizes the contractor to perform effectively, efficiently and economically. FAR 16.104 lists some factors to consider when selecting the proper contract type.

In cost-reimbursement type contracts, the contractor is only required to make its "best effort" to complete the work. Once contract funds run out, the contractor is not obligated to continue performance under this contract or otherwise incur costs in excess of the amount then allotted by the Government to the contract. Also, because contractors are reimbursed allowable, allocable and reasonable costs, they must have an accounting system that can accurately track and segregate costs by contract.

Cost - In cost, or cost-no-fee, contracts, the contractor is reimbursed allowable, allocable and reasonable costs but receives no fee. Generally, cost contracts are used for research and development work performed by non-profits and educational institutions, for facilities contracts, and for research and development or production contracts with for-profit contractors when they expect to derive some commercial benefit from the contracts. They provide little incentive to the institution or contractor to control costs.

Cost sharing - Cost-sharing contracts provide for reimbursement of an agreed-upon portion of a contractor's allowable, allocable and reasonable costs and no payment of fee. The contractor assumes responsibility for a share of the incurred costs in expectation of receiving substantial compensating benefits. Cost-sharing contracts can be used for basic and applied research efforts performed by non-profit and educational institutions as well as for-profit contractors.

Cost-plus-fixed-fee (CPFF) - CPFF contracts include an estimated cost to deliver a specified product (completion type) or level-of-effort (term type) and a fixed fee amount. In general, the contractor is totally reimbursed for the allowable, allocable and reasonable costs incurred on the contract and is paid a fixed fee regardless of costs reimbursed. CPFF contracts are used for research, design, or study efforts where cost and technical uncertainties exist and it is desirable to retain as much flexibility and opportunity for change as possible. They provide only a minimum incentive to the contractor to control costs.

Cost-plus-award-fee (CPAF) - CPAF contracts include an estimated cost and an award fee amount that is paid based upon periodic subjective evaluations of contractor performance. The award fee determination is made unilaterally by the Government and is not subject to Disputes clause procedures. Procurement officer approval is required to use this type of contract. In non-services contracts, while not encouraged, a base fee may be included which is paid based on the contractor achieving at least satisfactory performance. Contracts for hardware may also include a performance incentive (see Appendix B, Performance Incentives in Hardware Contracts).

CPAF contracts offer significant evaluation flexibility in two ways: the flexibility to evaluate on a judgmental basis, taking into consideration both contractor performance levels and the conditions under which such levels were achieved; and the flexibility to adjust evaluation plans quickly to reflect changes in Government management emphasis or concern.

Cost-plus-incentive-fee (CPIF) - CPIF contracts provide for a target cost and target fee, a minimum and maximum fee and a fee adjustment formula (e.g., 70/30, 60/40), all established at contract award. The fee and fee adjustment formula incentivize only cost performance. If desired, separate incentives may be included for other significant performance elements such as accomplishments, schedule, or quality. Upon contract completion, the formula is applied and, subject to the minimum and maximum fee limits, the fee is increased from target fee for underruns and decreased for overruns. Regardless of the final cost outcome, the contractor's risk is limited since the fee paid cannot be less than the minimum fee. However, the minimum fee can be zero or even a negative number. All allocable, allowable and reasonable costs incurred on the contract are paid.

Fixed-price incentive (FPI) - FPI contracts include a target cost and target profit, a ceiling price and a profit adjustment formula. Unlike CPIF contracts, there is no ceiling or floor on profit. At the end of the contract, using the formula, target profit is either increased for a cost underrun or decreased for an overrun up to a ceiling price. The contractor assumes full responsibility for all costs incurred beyond the ceiling. The contractor must successfully perform to the contract requirements within the ceiling price. FPI contracts are appropriate when a realistic firm target cost and profit and a profit formula can be established at the outset of the contract which will provide a fair and reasonable incentive for the contractor. Technical and cost uncertainties must be reasonably identified and the parties should be confident that performance can be achieved.

Fixed-price contracts with award fees (FP-AF) - A fixed price consisting of all estimated costs and profit is established at contract award along with an additional, separate award fee amount. The fixed price is paid for satisfactory performance; the award fee is earned, if any, for performance beyond that required. Procurement officer approval is required for this type of contract. FP-AF combinations are used when the Government, although wanting to incentivize the contractor to deliver at an excellent or outstanding technical level, is unable to define that level in quantitative terms; or when metrics aren’t available or their use is not practical. (See FAR 16.404 for conditions for use of this type of contract)

Firm-fixed-price (FFP) - A price consisting of all estimated costs and profit is established at contract award, and it is not subject to adjustment in light of actual costs of performance. The contractor must deliver conforming products or services regardless of the cost. Under this type of contract, the contractor assumes the maximum cost risk; however, opportunity to earn profit is not limited, thus encouraging contractor efficiency and economy. It allows accurate obligation of funds at the start of the contract and is the easiest and least costly type of contract for the Government to administer.

1.3 Selecting and Applying AF Contracts

A CPAF contract is appropriate to use when key elements of performance cannot be objectively measured. In this situation, most elements of contractor performance can only be evaluated using subjective criteria. The extent to which performance against the criteria merits an award fee amount is determined using judgment. CPAF contracts should not be used to avoid the effort of establishing objective targets for CPIF or FPI contracts.

If, after examining all types of contracts (not just those discussed above--see FAR Part 16), it appears that the CPAF type contract is the most appropriate for a particular procurement, there are certain interrelated factors that still must be considered by the contracting officer before making a decision: the dollar value, complexity and criticality of the procurement; the availability of Government resources to monitor and evaluate performance; and the benefits expected to result from such Government oversight.

Since award fee contracts require additional administrative effort, they should only be used when the contract values, performance period, and expected results warrant that additional management effort. See section 1.4, Cost Benefit Analysis, for a detailed discussion of administrative costs.

Evaluation of performance under a CPAF contract requires much greater effort than in either CPIF or CPFF. Careful selection of the most appropriate contract type and careful tailoring should prevent a situation in which the award fee administrative burden is out of proportion to the improvements expected in the quality of the contractor's performance and in overall project management.

Award-fee contracts are not appropriate for repetitive buys of hardware. In those cases, major configuration changes are minimal and the manufacturing process (and hence costs) are reasonably well understood. Therefore, CPIF, FPI or FFP contracts should be used instead. The type of contract selected will depend on the circumstances of each individual procurement. Those procurements where there is less production experience may use CPIF or FPI, and those where there is a reasonable amount of experience, FFP.

CPAF contracts have been widely used for the procurement of non-routine services where it is difficult to precisely define what is required and what constitutes good effort. A simple example is a contract for basic research where it is extremely difficult to describe exactly what constitutes successful research in purely objective terms. Responsiveness to changing customer requirements, programming needs, and state of the art, for example, can be difficult to quantify. A CPAF contract would allow the Government to subjectively evaluate elements of basic research quality during

contract performance. It also allows for gradations of scoring that would be impossible in a purely objective approach. CPAF contracts can also be used with other more complex and sophisticated services.

CPAF contracts can also be used to procure design, development and initial fabrication of

state-of-the-art hardware, such as a new type of planetary probe or an experimental aircraft. Where technical challenges are difficult to predict, the award fee process allows the Government to assess contractors' efforts in light of those technical problems and appropriately recognize their accomplishments (or lack thereof). Also, the areas of importance may fluctuate in unpredictable ways over the course of the contract and the CPAF evaluation process accommodates this.

1.4 Cost Benefit Analysis

Before selecting an award fee contract, the contracting officer should perform a cost benefit analysis of the expected benefits versus the added administrative costs. The value added to the program by using an award fee type contract must be greater than the costs to administer it. This exercise is especially valuable in light of full cost accounting, where the administrative cost of managing a contract will be visible, and charged to the program it supports.

Administrative cost is calculated using the grade levels and hours required to monitor, evaluate, brief and implement the award fee process. Major cost drivers are the number of award fee evaluation periods (generally two per year), performance monitors, and Performance Evaluation Board (PEB) members.

For example, assume a 6-month evaluation period, 5 performance monitors who spend an average of 3 hours per week on their monitoring duties, 6 PEB members who meet twice for 3 hours during the period and spend one additional hour briefing the Fee Determining Official (FDO), a Recorder who spends an average of 8 hours per week on award fee duties, and a contracting officer who spends 5 hours per period. The administrative cost for one evaluation period, assuming a fully burdened labor hour rate of $60, would be as follows:

5 monitors x 3 hrs x 26 wks x $60 = $23,400
6 PEB members x 7 hrs x $60 = $ 2,520
1 Recorder x 8 hrs x 26 wks x $60 = $12,480
1 CO x 5 hrs x $60 = $ 300
Government Administrative Cost

This is a conservative estimate and does not represent all associated administrative costs that may arise (e.g., the FDO’s time). The $38,700 must then be multiplied by the number of evaluation periods to calculate the total administrative cost for the award fee contract.

To complete the cost benefit analysis, the contracting officer compares the quantitative administrative burden to the often intangible benefits the Government receives through the award fee arrangement. The benefits might be measured in dollars saved by tighter cost control or enhanced technical capability.

1.5 Combinations with Other Contract Types

The contract type that places the most responsibility on the contractor to successfully perform should be selected, commensurate with the technical and cost uncertainties. Sometimes, however, there are some portions of a contract effort, or certain aspects of performance, that are suited to objective measurement and others that are not. In these situations, aspects of more than one contract type can be combined in a single contract, creating a hybrid contract. Because of the complexity in structuring and administering hybrid contracts, they should only be used when the contracting officer decides

that the possible increased administrative costs are more than offset by potential benefits to the Government.

NASA's award fee policy strongly encourages use of a separate performance incentive when procuring hardware as the primary deliverable, if an award-fee contract is used and the estimated value exceeds $25 million (see Appendix B, Performance Incentives in Hardware Contracts). This performance incentive is not a contract type and therefore its use does not represent a hybrid contract.

The following are two situations in which hybrid contracts may be useful:

(a) When different requirements are combined as separate contract line items in one contract and those requirements have different levels of uncertainty and risk to both of the parties, a different incentive arrangement can be selected for each contract line item. For example, CPAF might be appropriate for building a satellite while another requirement in the same contract to process the satellite data might be CPIF. When different contract types are combined in this manner, it is imperative that financial data for each contract line item be segregated to allow for different cost and fee payments based on each type and to provide specific management information and accountability. Also, some contract clauses will not be applicable to all requirements.

(b) Two different contract types can also be combined within a contract to incentivize the same effort. For example, a contract type in which the contractor accepts more cost risk could be used to incentivize cost control, and an award fee could be included to reward technical or management performance. Such combinations are referred to by their combined initials, with the cost incentive appearing first (for example, a CPIF arrangement incentivizing cost in combination with a CPAF feature to incentivize technical and management excellence would be referred to as a CPIF/AF contract). The CPAF information included in this guide generally applies to the award fee features of these combinations.

With procurement office approval, award fee arrangements may be used in either fixed- price or cost-reimbursement contracts and may be used in combination with other types of incentive fees. CPIF/AF and FPI/AF combinations can be used when the Government considers cost, quality and/or technical performance to be important and wants to incentivize all of them. In such cases, the cost estimates are considered sufficiently reliable to support the use of a CPIF or FPI formula incentive on cost, but the quality and/or technical performance cannot be objectively evaluated on the basis of predetermined targets and automatic fee adjustment formulas.

Award fee incentives shall not be added to FFP contracts as a means to further reward contractors for meeting basic contract requirements or to allow the Government insight into contractor processes or management.

CPFF/AF combinations are not appropriate. The fixed fee of a CPFF contract is the equivalent of a base fee whose use is restricted by NASA policy on base fee (see section 2.3, Award Fee, Base Fee and Maximum Fee).

Given the interrelationship between contract costs and the other critical performance elements, care needs to be exercised to ensure that combinations of objective cost incentive and subjective/judgmental award fee determinations do not result in contractors making trade-off decisions inconsistent with Government objectives and performance priorities. Poorly structured incentives can result in increased costs for little or no improvement in performance, or cost savings with a corresponding loss in performance.

No performance element should be incentivized more than once. If a separate cost incentive is used in a contract, then cost cannot also be incentivized in the award fee. Similarly, performance elements should be carefully structured and defined to avoid overlap, so as to preclude downgrading in multiple elements for a single type of poor performance. While there may be situations where such multiple "hits" are warranted, they should be infrequent.

Evaluations of performance and determinations of award fee amounts in a CPAF contract are subjective. Award fee decisions are exempt from the Disputes clause. However, incentives not part of award fee (such as cost incentives in CPIF or FPI contracts or performance incentives in award fee hardware contracts) usually are subject to the Disputes clause. When such incentives are used in conjunction with an award fee in a contract, it may be prudent to include an alternate form of disputes resolution. This would enable both parties to avoid lengthy and costly litigation in the event of a dispute. Legal counsel must be consulted prior to using any alternate disputes resolution procedures.



2.0 General

While combinations with other contract types are possible (see section 1.5, Combinations with Other Contract Types), most award fee contracts are of the cost-plus-award-fee (CPAF) type. A fixed-price-award-fee (FPAF) contract type is available, but used less frequently. Although the discussion in this section specifically addresses CPAF contracts, it also applies to FPAF contracts and award fee incentives used in conjunction with other contract types.

2.1 CPAF Structure

CPAF contracts include an estimated cost; an award fee (and possibly a base fee); a performance incentive, when appropriate; and a fee payment plan. The contract also includes a provision specifying that award fee determinations will be made unilaterally by the designated Fee Determination Official (FDO), in accordance with an approved evaluation plan and that such determinations will not be subject to appeal under the Disputes clause of the contract.

2.2 Estimated Cost

Estimated cost is the total cost amount specified in the contract. One of the major reasons for using CPAF contracts is that both Government and contractor personnel recognize that technical uncertainties exist which make it difficult to accurately predict at the outset the actual costs that will be incurred by the contractor in performing under the contract.

2.3 Award Fee, Base Fee and Maximum Fee

Under a CPAF contract, an available award fee pool is negotiated and included in the contract. However, the actual award fee earned by the contractor is determined by the Government's assessment of the contractor's performance. Criteria for contract performance are included in the contract, and the contractor is then judged on how well it performs in relation to those criteria. While the contractor can comment on the Government's evaluation, it cannot dispute the score and the resulting fee. The contractor can earn any amount of award fee, from all of the award fee pool to none of it. A contractor will not be paid any award fee or base fee for less than satisfactory overall performance.

The amount of award fee and any base fee available to be earned under a CPAF contract is established at the time of contract award. The sum of the award fee amount and base fee, if any, should reflect the character and difficulty of the contract effort. When evaluated in light of the profit analysis factors in FAR 15.404-4(d), this sum should be sufficient to compensate the contractor for outstanding performance. While fees should not be excessive for the effort contracted for, they must be large enough to adequately motivate contractor performance.

Base fee is a fixed amount that the contractor earns for satisfactory contract performance (see section 3.6, Grading and Scoring Contractor Performance). A base fee is not included in service contracts where each periodic award fee evaluation is independent of other evaluation periods. The use of base fee is available, but strongly discouraged, in contracts where all evaluations are interim until the last evaluation, such as for study, design or hardware. These contracts may include a base fee in an amount not to exceed 3 percent of estimated contract cost, if base fee is absolutely necessary.

One of the most difficult situations is a hybrid contract, where there might be multiple performance incentives in addition to an award fee (see section 1.4, Combinations with Other Contract Types). The amounts allocated to each incentive and fee area must be sufficient to adequately motivate and reward a contractor to excel in each. A balance must be achieved in which no incentive is either so insignificant that it offers little reward for the contractor or so large that it overshadows all other areas and neutralizes their motivational effect. The number of factors being incentivized also plays a part.

When too many factors are incentivized, then the prospect increases of any one item being too small (and thus overlooked), or the incentives being (or perceived as being) inconsistent and working at cross purposes (see section 3.4.1, Performance Evaluation Factors). Using too many factors can also be confusing and would increase the administrative burden. (The same problem can occur within the award fee pool with evaluation factors and subfactors.)

2.4 Hardware Performance Incentives

All performance-based contracts should consider incentives in accordance with NFS 1816.402. Award-fee contracts with primary deliverables of hardware and with a total estimated cost and fee greater than $25 million should include both positive and negative performance incentives. In award-fee hardware contracts valued under $25 million the expected benefits of including such incentives must be carefully examined to assure they will outweigh the associated administrative burden. See Appendix B for additional details.



3.1 General Guidelines

As is true with many aspects of award fee contracting, the most effective organizational and administrative approach will differ with each particular situation. The overall objective in all cases is an equitable and timely approach that does not create or impose an unreasonable administrative burden given the value and complexity of the specific contract effort.

The following are some basic guidelines concerning the organization and administration of award fee contracts:

a. Avoid creating too many organizational layers. Excessive layers contribute to unnecessary paperwork, delays in turnaround time, and inordinate staffing demands.

b. At the same time, the assessments of front-line contracting officers and project managers should be reviewed by higher level management officials who are not involved in the daily interface with the contractor and have a broader perspective. For example, a concern noted by a first-line evaluator might be the result of Agency management influences and decisions to which the contractor responded to the detriment of certain other aspects of its contract performance. Only higher level management officials may be aware of this and are in a position to evaluate this response, and its effect upon contract performance in terms of Agency-wide or installation-wide priorities and operational requirements. Evaluations must, however, remain based on contractually required performance and not influenced by extra-contractual considerations.

c. Tailor performance evaluation plans to the specific situation, but do not reinvent the wheel. The tailored, case-by-case application of successfully used procedures and practices generally works best.

d. Finally, remember that the objective is to evaluate performance, not micromanage it. The Government tells the contractor what results are expected and are important. It then evaluates and rewards the contractor as appropriate for achieving the desired results. Communication with contractor personnel about performance should not lead to Government direction of efforts in a manner that compromises the contractor's responsibility or ability to manage under the contract.

3.2 Organizational Levels and Functions

3.2.1 Basic Structure

No single organizational approach is best for all situations. However, the following basic, three-level organizational structure is generally employed. This structure and associated responsibilities can and should be modified as necessary to meet the requirements of individual programs or projects. The most effective and efficient organizational approach will always be the one with the minimum number of personnel and layers of personnel needed to accomplish the job.

Basic Structure Optional Level
Fee Determination Official
Performance Evaluation Board
|----------------------------------------------- Functional Monitors
Performance Monitors

Fee Determination Official (FDO) -The FDO is organizationally senior to the Performance Evaluation Board (PEB) membership and either is the head of the contracting activity or has been designated FDO by the head of the contracting activity. The FDO should be identified in the evaluation plan by position title only, not name when the plan is included in the contract. This clearly establishes the level of the award fee determinations, while eliminating the need to modify the contract in the event there is a change in the incumbent FDO. The responsibilities of the FDO include:

a. Establishing the PEB;

b. Considering the PEB Report (PEBR) for each evaluation period and discussing it with the PEB Chair and, if appropriate, with others such as the contractor;

c. In the case of service contracts, determining the amount of award fee earned and payable for each evaluation period. In the case of other contracts such as for study, design or hardware, where all evaluation ratings are interim except the last one (see section 3.5.4, Interim and Final Evaluations), determining the amount of interim fee to be paid for each evaluation period. The FDO must ensure that the amount and percentage of award fee earned accurately reflects the contractor’s performance. Any variances between the PEB recommendation and FDO determination must be justified and documented in the official contract file;

d. Issuing and signing the award fee determination report or letter for the evaluation period, specifying the amount of award fee determined and the basis for that determination; and

e. Approving the award fee evaluation plan and any changes required during performance, unless such responsibilities are delegated to the PEB.

Performance Evaluation Board (PEB) -The purpose of the PEB is to evaluate the contractor’s overall performance for the award fee evaluation period which leads to a recommended award fee amount to the FDO and recommend changes, if any, to the FDO. Among its other duties, the PEB has overall responsibility for the development of the performance evaluation plan. It is important to establish the Board in sufficient time so it can develop (or ensure development of) and distribute an approved plan BEFORE the start of the first evaluation period. Other PEB responsibilities include:

a. Conducting ongoing evaluations of contractor performance based upon Performance Monitor Reports and such additional performance information as may be obtained from the contractor and other sources. It is important that the PEB evaluate a contractor’s performance according to the standards and criteria stated in the performance evaluation plan;

b. Submitting a PEB Report (PEBR) to the FDO covering the Board's findings and recommendations for each evaluation period; and

c. Recommending appropriate changes in the performance evaluation plan to reflect program evolution for approval by the FDO, if that individual chooses to review such changes.

The PEB is established by the FDO. However, in the case of larger, higher priority procurements, the head of the contracting activity may assume this responsibility. (In certain instances, the head of the contracting activity and the FDO may be the same individual). The PEB brings a broader management perspective to the evaluation process than exists at the monitor level, and its members accordingly should be at a relatively high management level. The qualifications of PEB members will vary depending upon the nature, dollar value and complexity of the procurement. However, those individuals with overall primary responsibility for the technical and contracting aspects of contract performance should be included. Board members should be familiar with the type of work to be evaluated and be able to devote enough time to their assignment to perform thorough and prompt reviews.

Some activities have established a permanent PEB, generally consisting of three members. This permanent Board is augmented on each award fee contract by two or more ad hoc members with backgrounds or responsibilities particularly suited for evaluating the type of work involved. The objective is to ensure that the PEB performs consistently from one contract to another and always has available those skills necessary to make fair judgments.

The official responsible for appointing PEB members should designate one as the Chair. The functions of a PEB Chair include:

a. Calling PEB meetings, controlling attendance and chairing the meetings;

b. Recommending the appointment of nonvoting members to assist the PEB in performing its functions, e.g., a recording secretary;

c. Appointing monitors for the contract effort and assuring they are provided appropriate instructions and guidance;

d. Requesting and obtaining performance information from other units or personnel involved in observing contractor performance, as appropriate;

e. Calling on personnel from various organizational units to consult, as needed, with the PEB;

f. Assuming responsibility for the actual preparation and approval of the PEBR and other documentation such as Board minutes; and

g. Ensuring the timeliness of award fee evaluations.

Performance Monitors - Monitors provide the continuous evaluation of the contractor’s

performance in specific assigned areas of responsibility. This often daily oversight is the foundation of the award fee evaluation process. Performance monitors are specialists intimately familiar with their assigned areas of cognizance; their monitor duties generally are in addition to, or an extension of, their regular responsibilities. In performing their duties, monitors should: maintain ongoing communication with their contractor counterparts, conduct assessments in an open, objective and cooperative spirit, and emphasize negative performance as readily as positive performance.

Monitors are designated by the PEB Chair and are responsible for:

a. Monitoring (not directing), evaluating and assessing contractor performance in their assigned areas. This activity is conducted according to contract requirements and the award fee plan so that evaluations are fair and accurate; b. Periodically preparing a Performance Monitor Report (PMR) for the PEB and, if necessary, providing verbal presentations as well; and

c. Recommending any needed changes in the performance evaluation plan for consideration by the PEB and the FDO.

The following questions should be considered by performance monitors in preparing their PMRs. These questions can prove helpful in assuring that the evaluation data are complete and pertinent and accurately assess how well the contractor performed in the monitors' respective assigned areas during the period.

a. What (in the monitor's area) was the contractor supposed to do during the period? What was actually accomplished?

b. How critical are the efforts accomplished, or not accomplished, by the contractor? c. What was the impact of any efforts completed early or late? How critical was the time frame involved?

d. How well did the contractor perform the tasks that were accomplished?

e. What are the major strengths and weaknesses (in sufficient detail to discuss with the contractor)?

f. Were any Government-directed changes made or did any obstacles arise which impacted performance? What corrective actions were implemented? How effective were they?

g. Has the contractor efficiently and effectively used available resources (e.g., personnel and facilities) to improve its performance (including cost control)?

h. Has the contractor's performance been clearly assessed in regard to all tasks and specific objectives?

i. On level-of-effort contracts, what has the contractor accomplished for the dollars spent?

(Accomplishments should be rewarded, not spending dollars.)

3.2.2 Optional Levels and Functions

In certain high dollar value, complex efforts, the following organizational level also might be used:

Functional Monitors (FMs) - Functional Monitors, sometimes referred to as Performance Evaluation Coordinators or Contract Technical (or Business) Managers, provide centralized direction to the various performance monitors and consolidate the findings of the performance monitors for review at the next highest evaluation level. The FM level should be used only when a very large number of performance monitors are involved in the evaluation process. Each FM (appointed by the PEB Chair, with appropriate notification to the contractor) is responsible for one of the broad functional areas to be evaluated, such as technical or project management. FMs duties include:

a. Furnishing instructions to performance monitors in their assigned areas;

b. Ensuring that the contractor is promptly notified whenever a problem is identified requiring immediate contractor attention (However, FMs should refrain from giving technical direction unless they are designated contracting officer's technical representatives (COTRs) and their contracts contain a technical direction clause.); and

c. Coordinating, consolidating and analyzing data submitted by their performance monitors and preparing a concisely written Functional Monitor Report (FMR) for presentation to the next highest evaluation level for each evaluation period.

3.2.3 Training

Training of all personnel involved in the award fee process is essential for successful monitoring and evaluation of contractor performance and should assist them in performing their respective duties. Training should cover such things as the award fee plan, roles and responsibilities, documentation requirements, and evaluation techniques. Training should address:

a. What is being evaluated?

b. How will information be gathered; what techniques will be used? (e.g., inspection, sampling of work, observation, review of reports or correspondence, or customer surveys)

c. When or how often will information be obtained? (e.g., daily, weekly or monthly)

d. How will performance monitors secure information from functional specialists to cover areas in which the monitors may not be personally involved?

e. Evaluation scoring processes and the need for consistency between scoring and evaluation summaries.

3.2.4 Steps in the Evaluation Process

Assuming the basic three-level organizational structure described in section 3.2, Organizational Levels and Functions, the sequence of events leading to an award fee determination is as follows:

a. A certain number of days before the period starts (specified in the performance evaluation plan), the contractor is provided with any changes to the performance evaluation plan.

In addition, the PEB may determine that it wants to highlight to the contractor a performance area that it should pay particular emphasis to during the period. For instance, an area of performance during the period may be of particular risk to the program. The PEB may want to focus the contractor’s attention on this area of risk by highlighting it. This is typically done at NASA centers by issuing a "letter of emphasis" to the contractor a certain number of days prior to the start of the evaluation period, as specified in the performance evaluation plan.

b. During the course of the evaluation period, performance monitors track contractor performance. Interim (mid-term) evaluations are encouraged to identify strengths and weaknesses in the contractor’s performance during the period being evaluated. Interim evaluations are documented in narrative or briefing format and should involve the FDO.

c. At the end of the period, the performance monitors assess the contractor's performance and report to the PEB.

d. The PEB considers the performance monitors' reports and any other pertinent information, including information provided by the contractor during the evaluation period, and prepares a report for the FDO with findings and recommendations.

e. The contractor is provided an opportunity to comment on its performance during the evaluation period (see section 3.7.2, Contractor Input) using one, or a combination of one or more, of the following methods:

    o The contractor may provide a written or oral self-assessment of its performance to the PEB to be considered by it in preparing its findings and recommendations.

    o The contractor is provided a copy of the draft findings and recommendations and may be afforded an opportunity to identify factual errors. Any errors identified by the contractor should be addressed by the PEB in its final report. The draft recommendation is not a subject for negotiation; the PEB should not engage in discussions with the contractor.

    o The contractor is provided a copy of the final PEB Report at the same time as the PEB submits it to the FDO. Contractor comments are submitted to the FDO for consideration.

f. The FDO may meet with the PEB to discuss the PEB's report. Any such meeting should not be allowed to devolve into a negotiation. The FDO then makes a final determination in writing as to the amount of fee to be paid. The FDO provides the determination to the contracting officer and a copy to the Contractor. The FDO's rating must be provided to the contractor as quickly as possible, but no later than 45 calendar days after the end of the period being evaluated. Payment to the contractor shall also be made as quickly as possible, but no later than 60 days after the end of the period. The FDO and PEB should always provide a debriefing to the contractor after the rating has been issued.

3.3 Performance Evaluation Plan

Just as we would not expect all managers to manage alike, so we would not expect all award fee contracts to be structured and administered in the same way. The performance evaluation plan (PEP) does, however, always include certain principal features:

a. Evaluation requirements;

b. The method for determining award fee;

c. The method for implementing any changes in plan coverage; and

d. The organizational structure for award fee administration.

Appendix A at the conclusion of this guide is a sample format incorporating these features and may prove useful for checklist purposes in the development of actual evaluation plans. Remember that each evaluation plan must be tailored to the particular situation.

In developing a performance evaluation plan, keep in mind that the plan should:

a. Provide for evaluations of contractor performance levels, taking into consideration contributing circumstances and contractor resourcefulness;

b. Focus the contractor on areas of greatest importance in order to motivate it to make the best possible use of company resources to improve performance;

c. Clearly communicate evaluation procedures and provide for effective, two-way communication between the contractor and the Government personnel responsible for evaluating performance and making award fee determinations;

d. Provide for an equitable and timely evaluation process (see section 3.2.4, Steps in the Evaluation Process);

e. Establish an effective organizational structure, commensurate with the complexity and dollar value of the particular procurement, to administer the award fee provisions; and

f. Be kept as simple as feasible; the simpler the plan, the more effective it is likely to be. The objective should be a workable plan with a high probability of successful implementation. The performance evaluation plan is usually not included in the contract, thus preserving the Government's right to alter the plan unilaterally to reflect any changes occurring in management emphasis or concern. If it is included in the contract, language must be included which allows the Government to change the plan unilaterally. The contractor must be informed of any changes and be given a copy of the current plan in advance of the evaluation period or periods to which it applies. The fact that the plan can be unilaterally changed does not give the Government the right to unilaterally change other award fee provisions or other terms of the contract, absent contract language allowing it to do so.

3.4 Performance Evaluation Factors and Subfactors

3.4.1 Performance Evaluation Factors

It is neither necessary nor desirable to include all functions required by the statement of work as part of the performance evaluation plan. However, those functions selected should be balanced so that contractors, when making trade-offs between evaluation factors, assign the proper importance to all of the critical functions identified. For example, the plan should emphasize technical performance and cost considerations, because an evaluation plan limited to technical performance might result in increased costs out of proportion to any benefits gained (see section 3.6.3, Scoring of Cost Control).

Furthermore, spreading the potential award fee over a large number of performance evaluation factors dilutes emphasis. Instead, broad performance factors should be selected, such as technical, project management and cost control, supplemented by a limited number of subfactors describing significant evaluation elements over which the contractor has effective management control. Prior experience can be helpful in identifying those key problem or improvement areas that should be subject to award fee evaluations.

Some basic areas of performance need to be evaluated and rewarded on every contract. Other areas are critical only in some instances. For example, all incentive-type contracts, including award fee, are required to contain a cost incentive or constraint (see FAR 16.402). Therefore, cost control will always be included as an evaluation factor, if there isn't a separate cost incentive in the contract (see section 1.5, Combinations with Other Contract Types). In general, controlling the cost of the hardware or service being provided, its quality (technical merit, design innovation, reliability, etc.), and its timely delivery will always be important-- although their relative importance and the measure

of what constitutes good performance may vary by procurement. The relative importance of the factors and the method of evaluating contractors, should be tailored to fit the needs of each procurement. For example, providing an item on time is generally critical to the contract. However, earlier delivery might also be of benefit to the Government and therefore worth incentivizing. The earlier a weather satellite can be launched to provide warning of severe weather for a particular portion of the globe, the better. On the other hand, early deliveries might be of no benefit, or even cost the Government money. A planetary probe might have only certain launch windows every few years. Earlier hardware delivery would not enable the mission to proceed earlier and might result in increased costs to the Government for storage.

The evaluation factors used in award fee contracting should not be standardized. Rigid standardization tends to generate evaluation plans that are either too broad or include factors inapplicable to a given function. In either case, evaluators are likely to experience difficulties in providing meaningful comments and ratings. It is preferable to tailor performance evaluation plans and factors to fit the circumstances of each individual procurement. As contract work progresses from one evaluation period into the next, the relative importance of specific performance factors may change. However, the award fee approach permits unilateral modification of the detailed evaluation plan to reflect these changes in Government management emphasis.

Depending upon the procurement situation, performance evaluation factors may include outcomes, outputs, inputs or a combination of both. An outcome factor is an assessment of the results of an activity compared to its intended purpose. Outcome-based factors are the least administratively burdensome type of performance evaluation factor, and should provide the best indicator of overall success. Outcome-base factors should therefore be the first type of evaluation factor considered for use, and are often ideal for non-routine efforts.

An output factor is the tabulation, calculation, or recording of activity or effort and can be expressed in a quantitative or qualitative manner. Output factors may be more desirable for routine efforts, but are administratively more burdensome than outcome factors due to the tabulation, calculation, or recording requirements. When output factors are used, care should be taken to ensure that there is a logical connection between the reported measures and the program's mission, goals, and objectives.

Examples of outcome and output factors that demonstrate the differences between the two follow (examples are fictitious):

Outcome: Safely and successfully launch the Space Shuttle while meeting the

Mission manifest.

Output(s): Deliver flight ready Space Shuttle Orbiter, Main Engines, External

Tank, and Solid Rocket Boosters to the Kennedy Space Center not

later than July 15, 2003.

Assemble Space Shuttle Orbiter, Main Engines, External Tank, and

Solid Rocket Boosters into a flight ready Space Shuttle Vehicle not

later than December 15, 2003.

Safely and successfully launch the Space Shuttle vehicle on January 5,



Outcome: Ensure that 99.5 percent of payment vouchers are paid within 30 days of receipt.

Output: Process 5,000 payment vouchers in FY 2003.


Outcome: Ensure that program spare parts are maintained at a level sufficient

to provide a 6-month supply at normal monthly drawdown.

Output: Store a minimum of 20,000 program spare parts.


Outcome: The X-vehicle will be flight certified and operational by December 1, 2003.

Output: Complete 85 percent of required flight worthiness testing of the X-Vehicle by November 15, 2002.


Input factors refer to intermediate processes, procedures, actions or techniques that are key elements influencing successful contract performance. These may include testing and other engineering processes and techniques, quality assurance and maintenance procedures, subcontracting plans, purchasing department management, and inventory, work assignment and budgetary controls.

While it is sometimes valuable to consider input and output factors when evaluating contractor performance, it is NASA’s preference to use outcome factors when feasible since they are better indicators of success relative to the desired result. For example, in the case of service contracts where performance is demonstrated and measurable in each evaluation period, input factors may be of value in building a historical database, but may be of little or no value in the evaluation process. Accomplishments, such as achieving small and small disadvantaged subcontracting goals, are what is important, as opposed to efforts expended. In other contracts, however, where the quality of performance cannot be determined with certainty until the end of the contract, input factors can be useful indicators of how well the contractor is achieving its ultimate performance objective. However, a heavy emphasis on input factors, while meant to provide positive motivation to the contractor in certain areas of performance, may in some cases cause the contractor to divert its attention and focus from the overall output or outcome desired. Input factors are not always true indicators of the contractor's ultimate performance and so should be relied on with caution.

Some examples of performance evaluation factors, subfactors and criteria are shown below. They do not cover all possibilities, but illustrate some of the key performance areas that can be selected as evaluation factors.

a. Technical Performance - Accomplishment achieved in the areas of:

    o Design: Approach in design concepts, analysis, detailed execution and low cost design and manufacturing. Design of test specimens, models and prototypes.

    o Development: Conception/execution of manufacturing processes, test plans and techniques. Effectiveness of proposed hardware changes.

    o Quality: Quality assurance, e.g., appearance, thoroughness and accuracy, inspections, customer surveys.

    o Technical: Meeting technical requirements for design, performance and processing, e.g., weight control, maintainability, reliability, design reviews, test procedures, equipment, performance.

    o Processing Documentation: Timely and efficient preparation, implementation and closeout.

    o Facilities/GFE: Operation and maintenance of assigned facilities and Government Furnished Equipment.

    o Schedule: Meeting key program milestones and contractual delivery dates; anticipating and resolving problems; recovery from delays; reaction time and appropriateness of response to changes.

    o Safety: Providing a safe work environment; conducting annual inspections of all facilities; maintaining accident/incident files; timely reporting of mishaps; providing safety training for all personnel.

    o Information Management: Ability of computer system to provide adequate, timely and cost effective support; meets security requirements; management information systems ensures accurate, relevant and timely information.

    o Material Management: Efficient and effective processing of requisitions, with emphasis on priority requisitions; responsiveness to changes in usage rates.

b. Project Management - Accomplishment achieved in the areas of:

o Program Planning/Organization/Management: Assignment and utilization of personnel; recognition of critical problem areas; cooperation and effective working relationships with other contractors and Government personnel to ensure integrated operation efficiency; support to interface activities; technology utilization; effective use of resources; labor relations; planning, organizing and managing all program elements; management actions to achieve and sustain a high level of productivity; response to emergencies and other unexpected situations.

o Compliance with contract provisions: Effectiveness of property and material control, Equal Employment Opportunity Program, Minority Business Enterprise Program, system and occupational safety and security. o Effectiveness in meeting or exceeding small business and small disadvantaged business subcontracting goals.

o Subcontracting: Subcontract direction and coordination. Purchase order and subcontractor administration.

o Timely and accurate financial management reporting.

c. Cost Control - The contractor's ability to control, adjust and accurately project contract costs (estimated contract costs, not budget or operating plan costs) through:

o Control of indirect and overtime costs. o Control of direct labor costs.

o Economies in use of personnel, energy, materials, computer resources, facilities, etc.

o Cost reductions through use of cost savings programs, cost avoidance programs, alternate designs and process methods, etc. o "Make versus buy" program decisions.

o Reduced purchasing costs through increased use of competition, material inspection, etc.

The predominant consideration when evaluating cost control should be an objective measurement of the contractor's performance against the estimated cost of the contract, including the cost of undefinitized contract actions when appropriate. The estimated cost baseline should be adjusted to reflect cost increases or decreases associated with changes in Government requirements or funding schedules which are outside the contractor's control. In rare circumstances, contract costs might increase for reasons outside the contractor's control and for which the contractor is not entitled to an equitable adjustment, such as weather-related launch delays or changes made which fall below contract change thresholds. Such situations should be taken into consideration when evaluating contractor cost control. In the case of contracts for services where contractor performance is consistent and complete within each evaluation period and does not carry over into succeeding periods, negotiated estimated cost can generally be apportioned among the evaluation periods. Cost control for each evaluation period can then be measured against that period's share of the estimated costs. However, where contractor performance cannot be ascertained until the end of the contract (such as contracts for R&D and hardware) and cost expenditures can vary significantly from one evaluation period to the next, it makes more sense to evaluate interim contractor cost control against a cumulative expenditure profile that reflects the estimated cost.

3.4.2 Quantitative and Qualitative Standards

Once evaluation factors are selected, standards or criteria are developed for measuring contractor performance and assessing the amount of award fee earned.

Quantitative or objective performance measurement standards are based on well-defined parameters for measuring performance. They include customer surveys, inspection reports and test results. Quantitative measures should be used whenever the given performance can be precisely or finitely measured. Sufficient information or experience must be available to permit the identification of realistic standards against which quantitative measurements may be compared. Whenever quantitative, or objective, criteria can be established for all important factors, a more objective type of contract, e.g., CPIF or FPI, should be selected in lieu of CPAF or FPAF.

Unlike the predetermined targets and fee adjustment formulas used in CPIF or FPI type contracts, any comparison of contractor performance against quantitative standards in the award fee environment will need to be tempered by a qualitative evaluation of existing circumstances. Quantitative measurements are not a substitute for judgment. Keep in mind that any reasonable assessment of effectiveness requires an evaluation process encompassing both performance levels and the conditions under which those levels were achieved. To be realistic, any standard (or range of acceptable performance levels) should reflect the nature and difficulty of the work involved.

Qualitative or subjective performance standards rely on evaluator's opinions and impressions of performance quality. Qualitative assessments must be as informed as possible and not rely on personal bias or a purely intuitive feeling. Some examples are:

Staffing: Optimal allocation of resources; adequacy of staffing; qualified and trained personnel; identification and effective handling of employee morale problems; etc.

Planning: Adequate, quality, innovative, self-initiated and timely planning of activities; effective utilization of personnel; quality of responses; etc.

Another example of a qualitative standard is a "quality review", such as a questionnaire requiring "yes" or "no" answers, with a high proportion of "yes" answers indicative of high quality performance. Note that narrative support for questionnaire answers is required.

Where feasible, quantitative or objective measures are preferred over qualitative or subjective ones. The greater the ability to identify and quantify the facts considered in arriving at a judgmental assessment, the more credible that assessment is likely to be (and the easier it will be to prepare the supporting documentation required).

3.4.3 Weighting of Evaluation Factors

In addition to identifying how performance will be evaluated and measured, the detailed performance evaluation plan should indicate the relative priorities assigned to the various performance areas and evaluation factors and subfactors. This may be accomplished through the use of narrative phrases such as "more important," "important," and "less important" or through the use of percentage weights. When percentages are used, the plan should state that they are for the sole purpose of communicating relative priorities, and in no way imply an arithmetical precision to the judgmental determinations of overall performance quality and the amount of award fee earned.

Cost control should always be a substantial factor. When percentage weights are used, cost control will be at least 25 percent of the total award fee. When adjectives or narratives are used in lieu of explicit weights, cost control will be a substantial factor. No other factor will be less than 10 percent. This ensures that the factors are balanced and, when making trade-offs, the contractor assigns the proper importance to all factors.

The methodology used to establish percentage weights is described and illustrated in the following example:


a. First, list the primary evaluation factors in descending order of importance and assign a percentage weight to each factor starting with the least important. Assign the least important factor no less than 10 percent (unless the least important factor is cost control, which must be assigned a minimum of 25 percent). All assigned weightings for primary evaluation factors must total 100 percent. Round all numbers off to the nearest whole number to avoid giving the impression (through the use of decimal places) that the procedure is a precise one.

b. Next, assign percentage weights to the subfactors supporting each of the primary evaluation factors such that the total of the subfactor weights for each performance factor totals the assigned weight for that factor as shown in the example below. The actual factors and subfactors used as well as the weights assigned in any given contract may be different from those shown in the example. For instance, indirect cost control, subcontract costs, other direct costs, etc. should be evaluated when they are significant elements of cost.

Factors/SubfactorsAssigned Weight
Project Mgmt. 32%
Cost Control 26%
Labor Cost Control
Overhead Cost Control _____ 11%
Total 100%

3.5 Evaluation Periods and Award Fee Allocation

3.5.1 Evaluation Period Length Award fee evaluation periods should be at least six months in length. If appropriate to particular circumstances, a shorter evaluation period may be authorized by the procurement officer. However, too short an evaluation period can prove administratively burdensome and lead to hasty evaluations or late evaluations which result in late fee determinations. On the other hand, one of the benefits of using award fee contracts is improved communications between Government and contractor personnel. This benefit may be jeopardized if evaluation periods are too lengthy.

Evaluations may be tied to the accomplishment of milestones, but care must be taken to ensure that the evaluations do not occur at infrequent intervals or are subject to lengthy slippage.

3.5.2 Allocation of Award Fee

After the amount of the award fee pool is established, deduct the base fee (if any) and allocate the remainder of the pool over the award fee evaluation periods. For service contracts where each evaluation is final, the allocation of award fee determines its distribution for final payment purposes. For other contracts, where all evaluations (and payments) are interim except the final evaluation, award fee is allocated among the evaluation periods solely for the purpose of making interim payments against the final evaluation. That final evaluation will determine the amount of total award fee actually earned by the contractor and will supersede any interim evaluations and payments made.

The distribution of the award fee pool depends in large part on the acquisition strategy, and individual circumstances of each procurement. Contractor expenditure profiles should also be considered. The total may be allocated equally among the evaluation periods if the risks and type of work are similar throughout the various evaluation periods. Otherwise, if there is a greater risk or critical milestones occur during specific evaluation periods, a larger portion of the pool may be distributed to those periods. This permits the Government to place greater emphasis on those evaluation periods. For example, if a contract has a short initial evaluation period for the contractor to become familiar with the work (e.g., computer services), the initial period of performance may have a smaller allocation while the remaining pool is divided equally among the remaining evaluation periods. If the schedule for a significant event changes, any potential award fee amount associated with that event must be reallocated accordingly for interim payment purposes.

The following example illustrates an unequal allocation of award fee among the four performance periods, reflecting different degrees of emphasis.

Estimated Cost $5,000,000
Award Fee (10%) $ 500,000
Base Fee (0%) $ 0
Total $5,500,000


1 2 3 4 Total
ALLOCATION(%) 10% 26% 40% 24% 100%
ALLOCATION($) $50,000 $130,000 $200,000 $120,000 $500,000


3.5.3 Evaluation of Delivery or Task Order Contracts

A delivery or task order contract may provide for orders with specific requirements that are independent of any other orders’ requirements, and that have separate, distinct sources of funding. For such orders, an award fee amount could be allocated to each individual order along with the estimated cost. Contractor performance on each order would be evaluated against the award fee criteria on a task-by-task basis. There are instances where the government wants to motivate the contractor’s performance at the contract level versus each individual order. This condition may exist when the overriding objective is not how each individual order is executed, but how the contractor’s performance of multiple orders contributes to meeting the overall contract objectives. For example, it may not be cost effective to evaluate contractor performance on a task order basis, or when unknown/undefined requirements may materialize during the contract. An unknown requirement may arise that has a higher priority than an existing order. The primary objective is for the government/contractor team to make trade-offs between the orders in a constrained environment (funding, staffing, etc.) to ensure the optimal capability is achieved at the system performance level. Therefore, the ultimate measure of success is judged as meeting the overall contract objectives and not necessarily on the performance of a single order. In this case it is in the government’s best interest to incentivize the contractor to focus its efforts and perspective on overall contract

performance versus the individual orders. This does not preclude management of individual orders.

To ensure that there is no confusion about how the contractor’s performance will be evaluated, the award fee plan must clearly state whether the evaluation criteria are applicable at the contract or individual order level.

3.5.4 Interim and Final Evaluations

In service contracts the contract deliverable is the performance of a service and contractor

performance is measurable at each evaluation period. Performance is not cumulative and its quality cannot be improved or reduced by future performance. For that reason, in service contracts, all evaluations are final and unearned award fee is not "rolled over" into subsequent evaluation periods or retroactively "taken back." On other contracts such as study, design or hardware, where the true quality of contractor performance cannot be measured until the end of the contract, the contract deliverable is an end item. Contractor performance leading up to delivery of the end item is an indication of whether and how well it will produce the end item, but it is not the end item itself. Since the actual quality of the end item cannot be determined until the end of the contract when it is delivered, only the last evaluation is final. All of the preceding evaluations and ratings are interim.

At the end of the contract, the contractor's total performance is evaluated against the performance evaluation plan to determine total earned award fee. That final rating supersedes all interim ratings. It is not the average of the interim ratings. Instead, it reflects the contractor's position at the end of the contract rather than its interim progress toward that position. For example, how well a contractor has controlled costs can only be determined at the end of the contract when the contractor is evaluated against its final cost position. Whether the contractor was overrunning or underrunning the contract estimated cost at various points in time is irrelevant. The contractor's success is measured

against the end result. Likewise, the contractor's ability to meet the contract schedule can only be determined when the hardware is delivered and accepted by the Government. Whether the contractor was behind or ahead of schedule during the course of the contract is not relevant in the final evaluation. The same thing is true of the other evaluation factors and subfactors.

Any significant events that contributed over the course of the contract to the contractor's position (such as launch delays or delays in receipt of Government furnished equipment), must be considered in the final award fee determination. Those events should be examined as they relate to the final contract outcome and not to the individual evaluation periods in which they occurred.

3.6 Grading and Scoring Contractor Performance

Grading and scoring methods are used to translate evaluation findings into recommended award fee amounts or ranges. Their purpose is to help the Fee Determination Official (FDO) decide the amount of award fee earned in final evaluations or the amount of interim award fee to be paid for interim evaluation periods. These methods are evaluation tools and are not a substitute for exercising judgment in the award fee determination process. The decision process cannot be reduced to a mathematical formula or methodology. Either a weighted or nonweighted process can be used to evaluate performance.

One method is for evaluators to start from the satisfactory performance level and adjust the scores upwards or downwards, depending on the contractor's performance for the period, using the rating table in section 3.6.1, Award Fee Rating Table. Another method is for evaluators to use "blind" evaluation sheets where they are asked to rate different criteria using numbers based on the adjectival ratings. The weights that will eventually be applied to their ratings do not appear on the sheets. This approach relieves to some extent the pressure placed on the evaluators by contractor employees.

As a general guideline, a contractor which satisfactorily meets its contractual commitment will fall into the "good" (71-80) range. To earn an "excellent" score (91-100), a contractor must provide exceptional performance--a combination of excellent cost, schedule and technical management.

Some general considerations in the development of a grading and scoring methodology are as follows:

a. When Government actions impact contractor performance either positively or negatively, e.g., changes in funding allocation or increased emphasis on certain technical requirements which require the contractor to make unexpected and extensive tradeoffs with other technical requirements, those actions should be considered in the scoring and grading process.

b. The methodology should be kept as clear and simple as possible. In particular, the situation where specially tailored evaluation factors are force-fit to a "standard" grading table or scoring formula should be avoided.

c. The maximum fee should be attainable by the contractor. To be a credible and effective motivator, an award fee contract should provide the contractor with a reasonable opportunity to earn the maximum award fee available. Although a reasonable opportunity generally does not mean absolute perfection in all possible performance areas, the contractor's performance should be outstanding in virtually all areas. On the other hand, guaranteeing a contractor the maximum fee on every contract, regardless of the difficulty or complexity, does not adequately address the issues of risk and effort.

d. Documentation of assigned performance values is required in support of award fee recommendations and computations such as those in section 3.6.4, Calculating Earned Fee - Example. (See section 3.7.4, Documentation.)

3.6.1 Award Fee Rating Table

The following rating table is to be used for all award fee contracts. It includes adjectival ratings as well as a numerical scoring system of 0-100. Earned award fee (or interim award fee amounts in the case of interim evaluations) is calculated by applying the total numerical score to the award fee pool. For example, a numerical score of 85 yields an award fee of 85 percent of the award fee pool for that evaluation period. For exceptions see 3.6.2, Zero Score for Poor Performance. The table below lists the award fee evaluation adjectival ratings with their corresponding score ranges. In addition, a narrative description is also provided to assist the PEB in applying the ratings. Criteria for evaluation factors and subfactors should reflect the table.

Range of.
Perf Points
Excellent (100-91) Of exceptional merit; exemplary performance in a timely, efficient and economical manner; very minor (if any) deficiencies with no adverse effect on overall performance.
Very Good (90-81) Very effective performance, fully responsive to contract requirements ; contract requirements accomplished in a timely, efficient and economical manner for the most part; only minor deficiencies.
Good (80-71) Effective performance; fully responsive to contract requirements; reportable deficiencies, but with little identifiable effect on overall performance.
Satisfactory (70-61) Meets or slightly exceeds minimum acceptable standards; adequate results; reportable deficiencies with identifiable, but not substantial, effects on overall performance.
(less than 61) Does not meet minimum acceptable standards than in one or more areas; remedial action required in one or more areas; deficiencies in one or more areas which adversely affect overall performance.

3.6.2 Zero Score for Poor Performance

No fee will be paid when the total evaluation score is less than 61. In addition, any factor that receives a score of less than 61 for "poor/unsatisfactory" performance will not be rewarded and shall be converted to a factor score of zero. Such zeroing-out should not be done at the subfactor level. See section 3.7.5, Payment, for a discussion of no payment for "poor/unsatisfactory" performance.

The assignment of zero points to "poor/unsatisfactory" ratings is illustrated in section 3.6.4, Calculating Earned Fee - Example, and in section 3.6.5, Changes in Emphasis - Example.

3.6.3 Scoring of Cost Control

Cost control will be a substantial factor in any award fee performance evaluation plan, except when a fixed-price or CPIF contract is used. The contractor's success in controlling costs must be measured against contract estimated costs, and not against budgetary or operating plan costs. The following scoring guidelines will help ensure that cost control receives the proper emphasis:

a. Whenever there is a significant cost overrun that was within its control, a contractor should be given a score of zero. If the overrun is insignificant, a higher score may be given. The reasons for the overrun and the contractor's efforts to control or mitigate the overrun should be considered in the evaluation.

b. Cost underruns within the contractor's control should normally be rewarded. However, the extent to which an underrun is rewarded will depend on the size of the underrun and the contractor's level of performance in the other award fee evaluation factors. Contractors should not be rewarded for excelling in cost control to the detriment of other important performance factors. For that reason, whether a cost underrun is rewarded in the evaluation process and, if so, the degree to which it is rewarded depends, not only on the size of the underrun, but also on how well the contractor is performing overall in the other evaluation areas.

The following rules apply:

o If the contractor's average score for all other evaluation factors is 81 or greater (very good or excellent) and it achieves a cost underrun, the contractor can receive up to the maximum score for cost control, depending on the size of the underrun.

o If the average numerical score for all other factors is 80 or less but at least 61 (good or satisfactory) and an underrun is achieved, a contractor will only be rewarded for the cost underrun as if the contractor had met the estimated contract costs.

o If the average score for the non-cost factors is less than 61, the contractor will receive a score of zero for cost control.

c. When the contractor achieves the negotiated estimated cost of the contract, it should not receive the maximum score for cost control. The maximum score for cost control should only be awarded for achieving an underrun. Some lesser score will be assigned, reflecting the degree to which the contractor has prudently managed costs while meeting contract requirements.

3.6.4 Calculating Earned Fee - Example

The following example illustrates how evaluation scores for weighted factors and subfactors are calculated to arrive at a total award fee recommendation. Again, keep in mind that the use of weighted factors to calculate an award fee amount is an evaluation aid; the result does not represent a required award fee amount. The appropriate award fee amount can be determined only within the context of the specific procurement situation (see section 3.4.3, Weighting of Evaluation Factors).

a. Background: This CPAF contract covers design and verification testing of an improved engine. The contractor is also required to deliver eight production engines. The total estimated cost and award fee is $300,000,000. The available award fee for the current interim evaluation period (#7) is $2,600,000.

Evaluation factors and assigned weights for the current evaluation period are taken from the example in section 3.4.3, Weighting of Evaluation Factors. They are restated here. Actual factors and their weights in any given contract may be different from those shown in this example.

Evaluation Factor/Subfactor
Assigned Weight



Project Management


Cost Control

Labor Cost Control

Overhead Cost Control

b. PEB Findings: The findings of the PEB for the most recent evaluation period are summarized below:

o Contractor performance was rated very strong overall in the technical area. Accomplishments included successful design and installation of in-flight wear monitors, and successful test of a redesigned turbopump. Some weaknesses were identified, the most serious of which was an incompatibility between two components which was not resolved during the period, resulting in a slight schedule slip.

o In the area of project management, strengths were identified, including communication of program activities to the proper management levels, on-schedule delivery of critical subcontracted hardware, and exceeding subcontracting goals. Weaknesses included ineffective checks and balances for processing hardware and insufficient management involvement at vendor sites which has jeopardized hardware integrity.

o In the cost control area, the cost overrun increased by 14% in this period due in large part to labor costs. Projected overhead increases were also reported; however, the contractor has identified and will implement cost reduction measures which are expected to ameliorate the problem. (Note - promises of future actions are not normally considered in the current period evaluation, but in this case the overhead increase is also only a projection.)

c. Calculating Weighted Performance Points: As a result of the evaluation, the following performance points were assigned and weighted for the subfactors:


Subfactor Performance
Weighted Perf. Points*
Design 95 (Excellent) .24 54
Quality 90 (Very Good) .12 26
Schedule 80 (Good) .06 11

Total for Technical 91
Planning 70 (Sat.) .26 57
Subcontracts 86 (Very Good) .06 16

Total for Proj. Mgmt 73
Labor Cost Control 50 (Poor/Unsat.) .15 29
OH Cost Control 70 (Sat.) .11 30

Total for Cost Control 59 = 0**

*Weighted Performance Points are calculated as follows: [Performance Points x Assigned Subfactor Weight]/Assigned Factor Weight = Weighted Performance Points. For example, for Design: [95 x .24]/.42 = 54

** Note that an unsatisfactory rating for a factor results in a zero score for that factor. Therefore, the Cost Control factor received a zero score for receiving a rating of less than 61 percent. Significant cost overrun within the contractor's control should result in a score of zero for cost control.

Next, total weighted performance points were calculated for the primary evaluation factors as follows:

x Assigned
= Total Weighted
Performance Points
Technical 91 x .42 = 38
Proj. Mgmt. 73 x .32 = 23
Cost Control 0 x .26 = 0

61 (Sat.)

Total for All Factors

d. Converting Performance Points to Award Fee Score: The award fee percentage is the same number as the total weighted performance points. In this example, 61 weighted performance points equals 61% of available award fee. Award fee recommendation: $1,586,000 (61% of $2,600,000).

3.6.5 Changes in Emphasis - Example

If the Government's relative priorities change as work progresses from one phase into the next, or as unexpected problems or developments occur such as schedule slippages, the evaluation plan may be revised on a unilateral basis, to communicate such changes to all parties. The following example illustrates how the Government can adjust evaluation weights to redirect contractor emphasis to areas needing improvement and the effect of that readjustment on earned award fee.

Estimated Cost $5,000,000
Award Fee (10%) $ 500,000
Total $5,500,000


1 2 3 4 Total
ALLOCATION(%) 24% 18% 18% 40% 100%
ALLOCATION($) $120K $90K $90K $200K $500K


Factor Weight x Performance Points = Weighted Perf. Points
TECHNICAL .42 x 91 (Excellent) = 38
PROJECT MGMT .32 x 73 (Good) = 23
COST CONTROL .26 x 0 (Poor/Unsat.) = 0

Total 61

The contractor earns $73,200, 61% of $120,000.


If factor weights were adjusted to increase the emphasis on cost control and its performance, and thus its performance points, remained basically the same, this would be the result:

Factor Weight x Performance Points = Weighted Perf. Points
TECHNICAL .40 x 91 = 36
PROJECT MGMT .32 x 73 = 23
COST CONTROL .28 x 0 = 0

59 = 0

The contractor would receive an award fee score of 2 percentage points less in the second period than it would have if the factor weights had not changed. As a result, the contractor would receive an overall score of Poor/Unsatisfactory and no award fee for the second period.

Now, assume that the contractor responds to the shift in emphasis by improving its performance in cost control from Poor/ Unsatisfactory to minimally satisfactory, without reducing its score in any other area, as follows:

Factor Weight x Performance Points = Weighted Perf. Points
TECHNICAL .40 x 91 = 36
PROJECT MGMT .32 x 73 = 23
COST CONTROL .28 x 61 = 17

76 (Good)

By increasing its performance in cost control by 31 points (from 30 to 61)--and as a result, its total score by 17 percent to Good--the contractor is now entitled to receive an award fee payment.

If the cost control weight had not been increased in the second period, the contractor would have continued to be paid fee (61 percent of $90,000 or $54,900) for unsatisfactory cost control performance. By changing the factor weights to put more emphasis on cost control, the contractor is either rewarded for improved cost control with more fee than it would have received

had the weights had not been changed (76% of $90,000 or $68,400) or penalized for not showing improvement in that area (59 percent = no award fee payment for the period).

3.7 Administrative Matters

3.7.1 Communication

A major benefit of a properly structured and administered award fee contract is that it provides for more effective communications among Government and contractor personnel, at management levels where decisions can be made and results achieved. One way to ensure that communication channels are established early and that all key Government and contractor personnel understand their responsibilities under the contract is to hold a post-award conference soon after contract award. Attendees should review and discuss the performance evaluation plan as well as contract requirements.

Frequent and honest communication is essential, both between the Government and contractor and within their respective organizational frameworks. To illustrate, it may be just as important for the FDO to communicate the rationale for the award fee determination to all those who participated in the Government evaluation process as it is for him to communicate that rationale to the contractor. Both Government and contractor personnel should be encouraged through the award fee process to identify potential problems as promptly as possible (as opposed to withholding such "bad news" for fear it might result in unfavorable criticism).

3.7.2 Contractor Input

The contractor should be provided an opportunity to furnish a self-assessment of its performance. Once the PEB report is prepared, the Board may allow the contractor to comment on the draft report. Contractor participation at this point ensures that all pertinent data was considered and no errors of fact were used as a basis for decisions. Such communications, however, must not result in negotiation of award fee ratings. The ratings should be fair and reasonable, but are ultimately a unilateral Government determination.

Throughout the period of performance, the contractor should be encouraged to submit suggestions for improving or changing the evaluation process. In addition to the various formal communications channels just discussed, both parties should recognize that frequent, less formal discussions are valuable in ensuring ultimate program success. Both the Government and the contractor should work to eliminate any unnecessary contractual, organizational or conceptual barriers that constrain information sharing and other communications needed for successful joint problem solving.

3.7.3 Timeliness

The timeliness of award fee evaluations is critical. Long delays will minimize any benefits accruing from periodic evaluations and reports. Unless evaluation results are transmitted to the contractor in a timely manner, and any award fee payments promptly made, these results and payments may not have the desired influence upon the contractor's performance during the follow-on evaluation period. For that reason, all final and interim award fee ratings will be provided to the contractor within 45 calendar days after the end of the period being evaluated. Any fee payments due the contractor will be paid no later than 60 calendar days after the end of the evaluation period to which they apply.

The timeliness of changes in the evaluation plan is also important. Proposed changes should be processed expeditiously and the contractor notified in advance of the evaluation period to which they apply..

3.7.4 Documentation

The reporting formats used by monitors should be structured to ensure clarity and conciseness. Where possible, several evaluation parameters may be consolidated in a single format. Consistency can be achieved by using the same general format for all closely related work at a given activity. However, caution is required here. Carefully tailored evaluation plans can be compromised by inflexible and ill-conceived rating formats. Any format adopted should provide a place for the monitors to make narrative comments. These narrative comments provide detailed, pertinent information not addressed in the completed format. For example, they cover the circumstances under which reported performance levels were achieved, especially if these circumstances were abnormal in any way. These comments also discuss the contractor's efficiency in managing assigned personnel and other resources. Enough detail should be included in reports to the PEB to ensure that their findings and recommendations are accurate and fair and can be supported to the FDO.

Appropriate documentation is vital to support the recommendations of PEB's, particularly where these recommendations differ from the conclusions reported by cognizant monitors. Minutes of meetings or other documentation should summarize the information reviewed, including any additional or explanatory information provided by the contractor and the consideration given to all such information. Since the evaluation is a judgment based upon all pertinent information, that information needs to be identified, discussed and substantiated in the documentation. The FDO will want to review the documentation to satisfy any concerns regarding contractor performance before deciding whether to accept the recommended award fee or some higher or lower amount. Examples of concerns that a FDO might have are:

a. the facts that led to the assignment of a poor/unsatisfactory rating (55 performance points) in the subfactor entitled "Budgeting" (or any subfactor);

b. the rationale for a poor/unsatisfactory rating of 55 points as opposed to a satisfactory rating of 61; and

c. the circumstances under which this poor/unsatisfactory level was achieved and the relationships, if any, between it and the excellent performance levels reported for the technical subfactors of "Design" and "Quality".

Sufficient documentation should be provided to the FDO on which to base a decision and to explain that decision to the contractor. Similarly, the FDO must document the basis for the determination, especially in situations involving a contractor rebuttal of PEB findings and conclusions or an award fee determination different from that recommended by the PEB.

Documentation of interim ratings should be less detailed since they will be superseded by the final rating at the end of the contract.

3.7.5 Payment

Final award fee payments and interim payments against interim evaluations shall be made within 60 days after the end of the evaluation period for which payment is being made.

When the total rating for an evaluation period is "poor/unsatisfactory" (below 61), no award fee is paid for that period. For example, a total award fee rating of 57 would yield an award fee of zero, not 57 percent. For contracts such as hardware, design or study, no award fee will be paid for a final evaluation rating of "poor/unsatisfactory." In these cases, any provisional award fee payments made as a result of "satisfactory" or better ratings (61 and above) on interim evaluations will be repaid by the contractor. The installation financial management office shall be promptly notified of any amounts due to be repaid so that a bill may be sent to the contractor.

The amount of interim award fee paid each period will not exceed the interim evaluation score (applied as a percentage) or 80 percent of the award fee allocated to the period, whichever is less. No further award fee payments will be made when the contracting officer determines that the total amount of interim payments made to date will substantially exceed the amount which would be paid based upon the anticipated final evaluation score. The PEB should be notified of such a determination. The contracting officer's determination should be based on a comparison of award fee amounts paid to actual evaluation scores to date, projected future scores based on a combination of past performance trends and any known data which might have an influence on future performance, and any other pertinent data. Stopping award fee payment serves two purposes: It ensures that contractors will not receive award fee which they have not earned and to which they will ultimately not be entitled, and it minimizes the award fee that will be owed the Government by the contractor at the end of the contract.

Provisional Payments - Circumstances such as very long evaluation periods may make it necessary to make award fee payments more frequently than at the end of each evaluation period. These provisional payments, representing a percentage of the award fee amount allocated to each evaluation period, are made at regular intervals during each period. They are superseded at the end of each period by the interim or final award fee determination amount. The percentage of allocated award fee to be paid provisionally will be stipulated in the contract and may not exceed 80 percent of available award fee in any period.

Provisional payments are discontinued during any period in which the Government determines that the total provisional payments made during that period will substantially exceed the amount which would be paid based upon the anticipated evaluation score for the period. In the event the amount of provisional payments made exceeds the amount of the award fee determination for that period, the contractor will either credit the next payment voucher for the amount of the overpayment or refund the difference.

Incentive Payments - Once the standard performance level has been achieved, positive performance incentive amounts corresponding to achieved units of measurement should be paid to the contractor promptly, as soon as they have been earned, up to the maximum positive performance incentive amount. (See Appendix B section IV, Units of Measurement, for a discussion of prorating incentive amounts within units of measurement.) When the maximum positive performance incentive has been achieved, all remaining positive incentive is to be promptly paid to the contractor. A negative performance incentive payment shall be demanded of a contractor in writing by the contracting officer as soon as a hardware item fails to achieve the standard performance level.




Contract No. _________________ With ____________________


Part________________________________ Page_____________________
I. Introduction

II. Organizational Structure for Award Fee Administration

III. Evaluation Requirements

IV. Method for Determining Award Fee

V. Changes in Plan Coverage

III-A Evaluation Periods and Maximum Available Award Fee for Each Period

III-B Performance Areas and Evaluation Criteria

III-B.1 Evaluation Criteria for Performance Area No.

III-C Grading Table

IV-A Actions and Schedules for Award Fee Determinations

IV-B General Instructions for Performance Monitors


(Signature) (Date)_ (Typed Name) (Title)

APPENDIX A (cont'd.)

I. Introduction

1. This plan covers the administration of the award fee provisions of Contract No._______ , dated _____________ , with ______________ . The contract was awarded after completion of negotiations in accordance with the provisions of RFP No. .

2. The following matters, among others, are covered in the contract: a. The contractor is required to (very brief statement identifying scope of contract) . b. The term of the contract is from _________ through __________ . c. The estimated cost of performing the contract is $ __________ . d. The award fee, excluding base fee, is $ ___________ . e. The base fee is $ ___________ . f. This contract contains positive and negative performance incentives. The maximum positive performance incentive amount is $__________ . The maximum negative performance incentive amount is [$___________ or 100% of earned fee]. g. The estimated cost and award fee, including any base fee, are subject to equitable adjustments arising from changes or other contract modifications. h. The award fee payable will be determined periodically by the Fee Determination Official in accordance with this plan. i. Award fee determinations are not subject to the Disputes clause of the contract. j. The FDO may unilaterally change the matters in this plan, as covered in Part V and not otherwise requiring mutual agreement under the contract, provided the contractor receives notice of the changes at least ___________ work days PRIOR TO the beginning of the evaluation period to which the changes apply.

(Note: The statements at 2.a through 2.f. can be altered as necessary to address any option(s). Omit subparagraph 2.f and renumber subsequent subparagraphs if the contract does not include performance incentives.)

II. Organizational Structure for Award Fee Administration

The following organizational structure is established for administering the award fee provisions of the contract.

1. Fee Determination Official (FDO) a. The FDO is [insert title or management responsibility, not name]. b. Primary FDO responsibilities are: (1) Determining the award fee earned and payable for each evaluation period as addressed in Part IV. (2) Changing the matters covered in this plan as addressed in Part V as appropriate.

2. Performance Evaluation Board (PEB) a. The Chair of the PEB is [insert title]. The following are voting members: [insert titles]. b. The Chair may recommend the appointment of non-voting Members to assist the Board in performing its functions. c. Primary responsibilities of the Board are: (1) Conducting periodic evaluations of contractor performance and the submission of a Performance Evaluation Report (PEBR) to the FDO covering the Board's findings and recommendations for each evaluation period, as addressed in Part IV. (2) Considering changes in this plan and recommending those it determines appropriate for adoption by the FDO, as addressed in Part V.

3. Performance Monitors a. One or more monitors will be assigned to each performance area to be evaluated. The assignment will be made by the PEB Chair as addressed in Part IV. b. Each monitor will be responsible for complying with the General Instructions for

Performance Monitors, Attachment IV-B, and any specific instructions of the PEB Chair as addressed in Part IV. Primary monitor responsibilities are: (1) Monitoring, evaluating and assessing contractor performance in assigned areas. (2) Periodically preparing a Performance Monitor Report for the PEB, or others as appropriate. (3) Recommending appropriate changes in this plan for consideration, as addressed in Part V.

III. Evaluation Requirements

The applicable evaluation requirements are attached as indicated below.

Requirement Attachment
Evaluation Periods and Maximum Available Award Fee for Each Period III-A
Performance Evaluation Factors and Evaluation Criteria III-B
Evaluation Criteria for Performance Evaluation Factor No. III-B.1
Grading Table III-C

The percentage weights indicated in Attachment III-B and the Attachment III-C grading table are quantifying devices. Their sole purpose is to provide guidance in arriving at a general assessment of the amount of interim or final award fee earned. In no way do they imply an arithmetical precision to any judgmental determination of the contractor's overall performance and amount of interim or final award fee earned.

IV. Method For Determining Award Fee

A determination of the award fee earned for each evaluation period will be made by the FDO within 45 days after the end of the period. The method to be followed in monitoring, evaluating and assessing contractor performance during the period, as well as for determining the award fee earned or paid, is described below. Attachment IV-A summarizes the principal activities and schedules involved.

1. The PEB Chair will ensure a monitor is assigned for each performance evaluation factor or subfactor to be evaluated under the contract. Monitors will be selected on the basis of their expertise relative to prescribed performance area emphasis. Normally, monitor duties will be in addition to, or an extension of, regular responsibilities. The PEB Chair may change monitor assignments at any time without advance notice to the contractor. The PEB Chair will notify the contractor promptly of all monitor assignments and changes.

2. The PEB Chair will ensure that each monitor receives the following:

a. A copy of this plan along with any changes made in accordance with Part V.

b. Appropriate orientation and guidance.

c. Specific instructions applicable to the monitors' assigned performance areas.

3. Monitors will evaluate and assess contractor performance and discuss the results with contractor personnel as appropriate, in accordance with the General Instructions for Performance Monitors, Attachment IV-B, and the specific instructions and guidance furnished by the PEB Chair.

4. Monitors will submit ________ [insert monthly, quarterly, etc.] Performance Monitor Reports and, if required, make verbal presentations to the PEB.

5. The PEB Chair will request and obtain performance information from other units or personnel normally involved in observing contractor performance, as appropriate.

6. _________ [Insert monthly, quarterly, etc.] the PEB will consider Performance Monitor Reports and other performance information it obtains and discuss the reports and information with monitors or other personnel, as appropriate.

7. The PEB will meet __________[insert monthly, quarterly, etc.] with the contractor and discuss overall performance during the period. As requested by the PEB Chair, monitors and other personnel involved in performance evaluations will attend the meeting and participate in discussions.

8. Promptly after the end of each evaluation period, the PEB will meet to consider all the performance information it has obtained. At the meeting, the PEB will summarize its preliminary findings and recommendations for coverage in the Performance Evaluation Board Report (PEBR).

9. Then the PEB may meet with the contractor to discuss the board's preliminary findings and recommendations. As requested by the PEB Chair, monitors and other personnel involved in performance evaluation will attend the meeting and participate in discussions. At this meeting, the contractor is given an opportunity to submit information on its behalf, including an assessment of its performance during the evaluation period. After meeting with the contractor, the PEB will consider matters presented by the contractor and finalize its findings and recommendations for the PEBR.

10. The PEB Chair will prepare the PEBR for the period and submit it to the FDO for use in determining the award fee earned. The report will include an adjectival rating and a recommended performance score with supporting documentation. The contractor may be notified of the PEB evaluation and recommended rating and score. The contractor may provide additional information for consideration by the FDO. When submitting the report, the Chair will inform the FDO whether the contractor desires to present any matters to the FDO before the award fee determination is made.

11. The FDO will consider the PEBR and discuss it with the PEB Chair and other personnel, as appropriate.

12. The FDO will consider the recommendations of the PEB, information provided by the contractor, if any, and any other pertinent information in determining the amount of award fee [insert “earned”, or “to be paid” if interim evaluations apply] for the period. The FDO's determination of the amount of award fee [insert “earned” or “to be paid”] and the basis for this determination will be stated in the Award Fee Determination Report (AFDR).

13. The contractor will be notified by the contracting officer of the FDO's determination. The contractor will be provided with a debriefing by the FDO and PEB.

14. Performance Incentives. After delivery of the hardware unit(s), hardware performance will be measured and its success, or failure, determined by the contracting officer based on the units of measurement and associated dollar amounts which appear in contract clause H- . Either positive or negative performance incentives will apply depending on whether the hardware unit's performance exceeds or falls short of the standard performance level.

V. Changes in Plan Coverage

1. Right to Make Unilateral Changes

Any matters covered in this plan not otherwise requiring mutual agreement under the contract, may be changed unilaterally by the FDO prior to the beginning of an evaluation period by timely notice to the contractor in writing. The changes will be made without formal modification of the contract if the plan is not incorporated into the contract.

2. Steps to Change Plan Coverage

The following is a summary of the principal actions involved in changing plan coverage [actions may be modified to reflect different approval/notification levels].

Action Schedule (Workdays)
o PEB drafts proposed changes Ongoing.
o PEB submits recommended changes to FDO for approval _________ days prior to end of each period.
o Through CO, FDO notifies contractor as to whether or not there are changes ___________days before start of the applicable period.

The PEB will establish lists of subsidiary actions and schedules as necessary to meet the above schedules.

3. Method for Changing Plan Coverage

The method to be followed for changing the plan coverage is described below: a. Personnel involved in the administration of the award fee provisions of the contract are encouraged to recommend plan changes with a view toward changing management emphasis, motivating higher performance levels or improving the award fee determination process. Recommended changes should be sent to the PEB for consideration and drafting

b. Prior to the end of each evaluation period, the PEB will submit its recommended changes, if any, applicable to the next evaluation period for approval by the FDO with appropriate comments and justification.

c. _______ work days before the beginning of each evaluation period, the contracting officer will notify the contractor in writing of any changes to be applied during the next period. If the contractor is not provided with this notification, or if the notification is not provided within the agreed-to number of work days before the beginning of the next period, then the existing plan will continue in effect for the next evaluation period.

APPENDIX A (cont'd.)


Contract No. _______________ With _________________________


Period Number Start Date End Date Max. Avail.
Award Fee
---------------------- ----------------------- ---------------------- ---------------------------

APPENDIX A (cont'd.)


Contract No. _________________ With _________________


The performance factors to be evaluated are identified below. The evaluation criteria for each factor are attached, as indicated.

Brief Factor
Factor Weight See Attachment
-------------------- ---------------------- -------------------- -----------------



* A separate attachment must be prepared for each factor.

APPENDIX A (cont'd.)


Contract No. ________________ With __________________


[Factor Identification Per Attachment III-B]

Factor Weight _______

Description of Factor:

Subfactors to Consider:

Evaluation Criteria: Criteria Weights:

Basis or Standard for Measuring Performance:

APPENDIX A (cont'd.)


Contract No. ________________ With ____________________


Range of
Perf. Points
Excellent (100-91) Of exceptional merit; exemplary performance in a timely, efficient and economical manner; very minor (if any) deficiencies with no adverse effect on overall performance.
Very Good (90-81) Very effective performance, fully responsive to contract requirements; contract requirements accomplished in a timely, efficient and economical manner for the most part; only minor deficiencies.
Good (80-71) Effective performance; fully responsive to contract requirements; reportable deficiencies, but with little identifiable effect on overall performance.
Satisfactory (70-61) Meets or slightly exceeds minimum acceptable standards; adequate results; reportable deficiencies with identifiable, but not substantial, effects on overall performance.
(less than 61) Does not meet minimum acceptable standards in one or more areas; remedial action required in one or more areas; deficiencies in one or more areas which adversely affect overall performance.

Any factor receiving a grade of “poor/unsatisfactory” (less than 61) will be assigned zero performance points for purposes of calculating the award fee amount. The contractor will not be paid any award fee when the total award fee score is "Poor/Unsatisfactory" (less than 61).

APPENDIX A (cont'd.)


Contract No. ___________________ With ______________________


The following is a summary of the principal actions involved in determining the award fee for the evaluation periods.
Action (Workdays)
1. PEB Chair and members appointed. _________ days prior to first period
2. PEB Chair appoints performance
monitors and informs contractor.
_________days prior to first period
3. Monitors receive orientation and
__________days prior to first period
4. Monitors assess performance and
discuss results with contractor.
Ongoing after start of period
5. Monitors submit Performance Monitor
Reports to PEB.
Last day of each
______ [insert month, quarter, etc.]
6. PEB considers Performance Monitor
Reports and other requested
performance information.
7. PEB discusses overall performance with
contractor during period.
__________ days after end of period
of each __________ [insert month, quarter, etc.]
8. PEB meets and summarizes preliminary
findings and position of PEBR.
___________ days after end of period
9. PEB may meet with contractor to discuss
preliminary findings and position.
___________ days after end of period
10. PEB establishes findings and
recommendations for PEBR.
_____________ days after end of period
11. PEB Chair submits PEBR to FDO. _____________ days after end of period
12. FDO considers PEBR and discusses
with PEB, as appropriate.
_____________days after end of period
13. FDO sends PEBR to contractor. NLT 45 days after end of period
14. Payment made to contractor based on
contract modification.
NLT 60 days after end of period

The PEB will establish lists of subsidiary actions and schedules as necessary to meet the above schedules.

APPENDIX A (cont'd.)


Contract No. ________________ With _________________


1. Monitoring and Assessing Performance

a. Monitors will prepare outlines of their assessment plans, discuss them with appropriate contractor personnel to assure complete understanding of the evaluation and assessment process.

b. Monitors will plan and carry out on-site assessment visits, as necessary.

c. Monitors will conduct all assessments in an open, objective and cooperative spirit so that a fair and accurate evaluation is obtained. This will ensure that the contractor receives accurate and complete information from which to plan improvements in performance. Positive performance accomplishments should be emphasized just as readily as negative ones.

d. The monitor will discuss the assessment with contractor personnel as appropriate, noting any observed accomplishments and/or deficiencies. This affords the contractor an opportunity to clarify possible misunderstandings regarding areas of poor performance and to correct or resolve deficiencies.

e. Monitors must remember that contacts and visits with contractor personnel are to be accomplished within the context of official contractual relationships. Monitors will avoid any activity or association which might cause, or give the appearance of, a conflict of interest.

f. Monitor discussions with contractor personnel are not to be used as an attempt to instruct, to direct, to supervise or to control these personnel in the performance of the contract. The role of the monitor is to monitor, assess and evaluate not to manage the contractor's effort.

2. Documenting Evaluation/Assessment

Evaluations and assessments conducted and discussions with contractor personnel will be documented as follows:

3. Evaluation/Assessment Reports

Monitors will prepare a formal Performance Monitor Report in accordance with the following instructions and submit it to the PEB.

(Specify format, frequency of submission and minimum information requirements)

4. Verbal Reports

Monitors will be prepared to make verbal reports of their evaluations and assessments as required by the PEB Chair.



I Introduction

All performance-based contracts should consider incentives in accordance with NFS 1816.402. Award-fee contracts with primary deliverables of hardware and with a total estimated cost and fee greater than $25 million should include both positive and negative performance incentives. In award-fee hardware contracts valued under $25 million, the expected benefits of including such incentives must be carefully examined to assure they will outweigh the associated administrative burden.

Performance incentives are objective and measure hardware performance after delivery and acceptance. They are separate and distinct from award fee, which is subjective and measures contractor performance up to delivery and acceptance. Unlike award fee decisions, performance incentive decisions are subject to the Disputes clause.

A performance incentive used in a CPAF contract must include both positive and negative incentives as well as a standard performance level for each major hardware deliverable. An example of the use of performance incentives is included in Appendix B section V, Performance Incentive - Example.

FPAF contracts are not required to have negative performance incentives, because less- than-minimum performance would be grounds for withholding payment or a default termination. However, contracting officers should ensure that the contract specifies the withholding amounts or defines Government acceptance to ensure termination rights are preserved.

II Standard Hardware Performance Level

In formulating the performance incentives, first establish the standard performance level, which is based on the salient hardware performance requirement. This level is normally the minimum acceptable performance requirement for the hardware item. Since this level represents minimum contract requirements for which the contractor would be rewarded by the proposed award fee payments, the contractor earns no performance incentive amount at this level. Examples of salient performance requirements are length of time in operation, amount of data transmitted, and altitude achieved.

III Maximum Performance Incentives

Next, maximum positive and negative performance incentives must be established as follows:

-$X $0 +$Y

The maximum negative performance incentive applies if there is a total, permanent and immediate failure of the item when it is first put into operation. Maximum positive and negative performance incentives are established separately and would not necessarily be equal. For research and development hardware (e.g., the first and second units produced, including prototype units), the maximum negative performance incentive is always equal to the amount of total earned award fee (including any base fee). Since the dollar amount of the maximum negative performance incentive cannot be determined until after the final award fee evaluation, a dollar amount cannot be assigned at the time of contract award. Instead, a percentage could be inserted in the contract. In the illustration above, the maximum negative incentive amount (-$X) could be stated as "100 percent of earned award fee". For production hardware (e.g., the third and all subsequent units of any hardware item), the maximum negative performance incentive for each unit is equal in amount to the total potential award fee (including any base fee for each unit). In this case, the dollar amount rather than a percentage would be inserted in the contract. If a contract contains a mixture of research and development and production hardware, allocate the total of award fee and any base fee among those items for purposes of establishing the maximum negative incentives.

The maximum positive performance incentive is paid for achieving the maximum level of beneficial performance. The maximum positive incentive level, which exceeds the standard performance level, must be a performance level which is of significant value to the Government. Contractors should not be rewarded for above-standard performance levels that are of no benefit to the Government. For example, the standard performance level for a particular satellite might be to map 50 percent of a planet's surface and successfully transmit that data back to earth. This is what is reasonable to expect based on current instrument and spacecraft capabilities. In this situation, it would be very useful if the satellite performed beyond that level and successfully mapped and transmitted data on 100 percent of the planet's surface. However, beyond that level, continued mapping may be of little or no benefit. Therefore, the maximum performance incentive would be the complete (i.e., 100 percent) mapping. Continued performance beyond that would not be rewarded.

Maximum positive performance incentives should not be established so that the performance occurs (and payment is thus made) so far out in the future that the incentives lose their ability to motivate the contractor. For example, there may be situations where there is no limit to the benefit that the Government receives from continued hardware performance beyond the standard performance level (or the limit is reached many, many years into the future). For example, a weather satellite with a standard performance level of five years might have some value indefinitely. In such situations, the contracting officer should negotiate some reasonable maximum performance incentive and include that in the contract. The maximum positive performance incentive should require exceptional, but not unrealistic, performance. It should not be obtainable only in extremely remote or unlikely circumstances.

In accordance with NFS 1816.402-270(e), the maximum positive performance incentive, and the sum of the award fee and any base fee, must each equal at least one-third of the maximum contract fee amount. The remaining one-third of maximum contract fee can be allocated in whatever manner is most appropriate--all to the performance incentive, all to award fee or split in any way between them.

As mentioned earlier, maximum negative and positive performance incentives are established separately. It is unlikely they would be equal. Example: Assume, in the weather satellite example mentioned above, that the contract is for production hardware and the following was negotiated:

$ 4M = Award Fee
$ 0 = Base Fee
$ 5M = Maximum Positive Performance Incentive
$ 4M = Maximum Negative Performance Incentive

Because this is a production hardware contract, the maximum negative performance incentive is equal to the potential award fee, $4 million. Both the award fee and the maximum positive performance incentive are at least 1/3 of the maximum contract fee. In this example, the performance incentive is equal to 55 percent of the maximum contract fee of $9 million.

IV Units of Measurement

Discrete units of measurement are established at the time of award for performance both above and below the standard performance level. These are based on the same salient performance requirement against which the standard performance level is measured. An incentive amount is assigned to each unit of measurement for purposes of calculating the amount of incentive either owed by the Government to the contractor or by the contractor to the Government at the end of hardware performance.

-$X $0 +$Y

(In the case of research and development hardware (where the maximum negative performance incentive is equal to earned award fee, which cannot be established until the end of the contract), individual "percentages of earned fee" would be assigned to units of measurement below the standard performance level.)

The calculation of the incentive amount earned takes place when hardware performance ends or the maximum positive performance is achieved. When the contractor exceeds the standard performance level, the contractor is paid an incentive amount determined at the time of contract award for the level of performance achieved up to the maximum positive performance amount. The contractor does not earn any additional incentive for units of measurement achieved beyond the maximum positive performance amount. When hardware performance ends before the standard performance level is reached, the contractor pays the Government the negative incentive dollar amount or percentage of earned fee assigned to that performance level. If hardware performance cannot be demonstrated through no fault of the contractor (e.g., Government's inability to launch a satellite), the contractor may be entitled to a specified incentive amount. The contract should address the possibility of this type of non-performance and establish the circumstances under which a presumptive portion of the positive performance incentive will be paid (e.g., a percentage of the maximum positive performance incentive). The contract should also address the situation where a hardware failure is temporary or correctable.

All units of measurement should be equal throughout the performance incentive period (maximum negative through maximum positive performance incentives). Greater or lesser emphasis can be placed on different units by varying the incentive dollar amounts assigned, depending on the potential benefit to the Government from each unit. Some units may be of greater value to the Government than other units and the contractor should be incentivized accordingly. For instance, different data transmittal rates by a satellite could have different values to the users quite apart from the arithmetical differences between the rates. In that situation, higher, or lower, values should be assigned to the units of measurement in which those rates fall.

V Performance Incentive - Example The following example demonstrates how the performance incentives on a CPAF hardware contract could be structured and incentive amounts calculated.

Prototype Engine Contract:

Let's assume that this CPAF contract is for delivery of a new engine which will reduce emissions of certain pollutants from 1000 parts per million (ppm) to 600 ppm. The contract standard performance is thus 600 ppm and the contractor will earn no performance incentive for an engine that achieves that target. The performance incentive ranges from the maximum negative incentive (in this example, 1000 ppm or no improvement at all over current engine performance) to the maximum positive incentive (100 ppm or the point at which the effect of the pollutants on the environment becomes relatively insignificant).

Each unit of measurement is 50 ppm. However, the values associated with the units are not equal. Performance slightly better than the standard performance level (600 ppm) is of minimal value. Significantly improved performance is more valuable, thereby warranting a greater allocation of positive performance incentive. Then, as engine performance approaches the maximum, additional ppm achieved is of decreasing value. This is illustrated in more detail below. Because this engine will be the first unit produced, the positive performance incentives can be stated in dollars, but the negative performance incentives must be stated in percentages of the final award fee score, as follows:

$ 3M = Award Fee
$ 0 = Base Fee
Earned Award Fee = Maximum Negative Performance Incentive
(Amount repaid to Government by contractor)
$ 3M = Maximum Positive Performance Incentive
(Amount earned by contractor in addition to award fee earned)

Negative Performance Levels


% of Award
Fee Earned
100% 95% 90% 80% 65% 50% 30% 10% 0%
PPM 1000 950 900 850 800 750 700 650 600

Positive Performance Levels

Performance Level

Maximum Positive Incentive
$0 $.2M $.4M $.7M $1M $1.4M $1.8M $2.2M$2.6M$2.8M $3M
PPM 600 550 500 450 400 350 300 250 200 150 100

Assuming the following circumstances, let's see how the performance incentive would operate.

The contractor's performance was rated at 90% on the final award fee rating. The contractor earned, and was paid, $2,700,000 out of a total award fee of $3,000,000. The prototype engine is now put into operation by the Government and is monitored to determine actual emissions based on real-life (as opposed to factory test) conditions. The results of the evaluation, and the consequences for the contractor in performance incentives, are set forth in the various outcomes below:

Outcome 1 - The engine demonstrates emissions of only 100 ppm. It is an outstanding success. The contractor is paid $3,000,000 in performance incentives. Added to the $2,700,000 in award fee already paid, it earns a total contract fee of $5,700,000.

Outcome 2 - The engine demonstrates emissions of only 300 ppm. For demonstrated performance that is much better than was expected, the contractor is paid $1,800,000 in performance incentive. Added to the $2,700,000 in award fee already paid, it earns a total of $4,500,000.

Outcome 3 - The engine demonstrates emissions of 550 ppm. This is slightly better than expected and the contractor earns $200,000 in performance incentive. Added to the $2,700,000 in award fee already paid, it earns a total fee of $2,900,000.

Outcome 4 - The engine demonstrates emissions of 600 ppm--exactly what was contracted for. As agreed by the parties, the performance incentive does not come into play. The contractor earns the $2,700,000 in award fee already paid.

Outcome 5 - The engine demonstrates emissions of 650 ppm. This falls short of what was contracted and paid for. The improvement from 1000 ppm is still of some value to the Government, as is reflected in the negative performance incentive assessed for the engine's inability to meet the specified performance. The negative performance incentive associated with this performance level was established at 10% of the earned award fee. Since the contractor earned $2,700,000, the negative performance incentive is $270,000. After the contractor has paid that amount to the Government, it is left with net earnings of $2,430,000 for this effort.

Outcome 6 - The engine demonstrates emissions of 900 ppm. This falls well short of the performance level contracted for and is only a slight improvement over current technology. The negative performance incentive of 90% of earned award fee, or $2,430,000, reflects this. After the contractor has paid that amount to the Government, it earned $270,000 fee on the contract. Remember that the contractor has been paid (and the Government is out) all incurred allowable and allocable costs on the contract, which has yielded very little of value to the Government.

Outcome 7 - The engine demonstrates emissions of 1000 ppm or worse. In actual use, the engine has totally failed to meet the objectives of the contract. The Government has spent a considerable amount of money on contract costs and the contractor has delivered no value in return. The Government has also lost the time and opportunity to contract with another contractor which could have delivered hardware that would have met the Government's need. The negative performance incentive assessed equals 100% of the earned award fee, or $2,700,000. After the contractor pays the Government that amount, its net earnings on the contract are $0. However, the contractor has recovered all of its allowable and allocable costs.

VI Prorating the Performance Incentive

What would happen in our example, if the delivered engine performed at 325 ppm, a performance level for which no exact incentive amount is established? Since actual performance would fall between 350 ppm and 300 ppm, the contractor would be entitled to some performance incentive greater than $1,400,000 but less than $1,800,000. The contract should provide for prorating the incentive amount allocated to each unit in the event performance ceases between two units--especially when the unit of measurement is large, e.g., a large amount of data or a long period of time. In the case of a positive performance incentive, the contractor would receive a larger incentive amount for a level of quality beyond the last unit attained. In the case of a negative performance incentive, if the hardware fails before the end of a unit of measurement, the contractor would pay the Government a larger amount of incentive. In either case, the incentive amount would more closely correspond to the actual performance level for the hardware and be fairly calculated.

VII Multiple Performance Incentives

It may be advisable to include multiple performance incentives in one hardware contract. When a hardware item has more than one salient performance requirement, separate performance incentives with individual units of measurement should be established for each critical requirement. For example, both performance life and amount of data collected might be critical performance requirements for a satellite. Performance incentive dollars would be split between the two incentives and both would operate independently. A different unit of measurement would be selected for each, e.g., number of months of performance life and megabits of data collected. If there are numerous salient performance requirements that could be incentivized, only those that are most critical to the success of the hardware unit's performance should be selected. Incentivizing too many requirements would dilute the monetary importance of each requirement to the contractor and also create an administrative burden for the Government.

When several hardware items are being delivered and each has a different delivery schedule, multiple incentive structures might be required to recognize significant differences in program maturity (e.g., when early units are research and development and later ones production; or when technology advances occur which allow units delivered later to have a greater performance capability thereby necessitating a higher standard level of performance for those units). In both cases, for purposes of determining the negative performance incentives, the award fee amounts should be proportionately prorated. For instance, if there are two performance incentives, one of which has 60% of the positive performance incentive and the other 40%, then the negative performance incentive on the first should equate to 60% of the award fee, with 40% going to the maximum negative performance incentive for the second one. Multiple performance incentive structures should be used only when the technical or maturity differences between units are significant enough to warrant the time-consuming effort involved in structuring and administering those incentives.


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Owner: Tom O'Toole ,
Curator: Susie
Updated  August 2001 by Jeff Cullen,