Procurement Notice

June 29, 2007



BACKGROUND:  This PN revises the NASA FAR Supplement to—

   1.  Require a documented cost/benefit analysis to support use of an award fee contract; and

   2.  Reemphasize the importance of tying award fee criteria to desired outcomes and limiting the number of criteria. 


These changes are made in response to the recommendations for improving NASA award fee policy in the Government Accountability Office (GAO) report entitled “NASA Procurement:  Use of Award Fees for Achieving Program Outcomes Should Be Improved” (GAO-07-58), dated January 2007.


ACQUISITIONS AFFECTED BY CHANGES:  All acquisitions that use an award fee incentive.


ACTION REQUIRED BY CONTRACTING OFFICERS:  Ensure that a credible cost/benefit analysis is documented for each use of an award fee contract and that award fee evaluation criteria are structured according to NASA policy.






REPLACEMENT PAGES:  You may use the enclosed pages to replace 16:5 thru 16:8.


TYPE OF RULE AND PUBLICATION DATE:  This PN was published as a final rule in the Federal Register (72 FR 35666 - 35667) on June 29, 2007.


HEADQUARTERS CONTACT:  Tom O’Toole, Office of Procurement, Contract Management Division, (202) 358-0478, email: thomas.otoole@nasa.gov



James A. Balinskas

Director, Contract Management Division





  PN List

   (3) When a negative incentive is used, the contract must indicate a level below which performance is not acceptable.


1816.402-2 Performance incentives.


1816.402-270 NASA technical performance incentives.  

   (a) Pursuant to the guidelines in 1816.402, NASA has determined that a performance incentive shall be included in all contracts based on performance-oriented documents (see FAR 11.101(a)), except those awarded under the commercial item procedures of FAR Part 12, where the primary deliverable(s) is (are) hardware with a total value (including options) greater than $25 million.  Any exception to this requirement shall be approved in writing by the head of contracting activity.  Performance incentives may be included in hardware contracts valued under $25 million acquired under procedures other than Part 12 at the discretion of the procurement officer upon consideration of the guidelines in 1816.402.  Performance incentives, which are objective and measure hardware performance after delivery and acceptance, are separate from other incentives, such as cost or delivery incentives.

   (b) When a performance incentive is used, it shall be structured to be both positive and negative based on hardware performance after delivery and acceptance, unless the contract type requires complete contractor liability for product performance (e.g., fixed price).  In this latter case, a negative incentive is not required.  In structuring the incentives, the contract shall establish a standard level of performance based on the salient hardware performance requirement.  This standard performance level is normally the contract's minimum performance requirement.  No incentive amount is earned at this standard performance level.  Discrete units of measurement based on the same performance parameter shall be identified for performance above and, when a negative incentive is used, below the standard.  Specific incentive amounts shall be associated with each performance level from maximum beneficial performance (maximum positive incentive) to, when a negative incentive is included, minimal beneficial performance or total failure (maximum negative incentive).  The relationship between any given incentive, either positive and negative, and its associated unit of measurement should reflect the value to the Government of that level of hardware performance.  The contractor should not be rewarded for above-standard performance levels that are of no benefit to the Government.

   (c) The final calculation of the performance incentive shall be done when hardware performance, as defined in the contract, ceases or when the maximum positive incentive is reached.  When hardware performance ceases below the standard established in the contract and a negative incentive is included, the Government shall calculate the amount due and the contractor shall pay the Government that amount.  Once hardware performance exceeds the standard, the contractor may request payment of the incentive amount associated with a given level of performance, provided that such payments shall not be more frequent than monthly.  When hardware performance ceases above the standard level of performance, or when the maximum positive incentive is reached, the Government shall calculate the final performance incentive earned and unpaid and promptly remit it to the contractor.

   (d) When the deliverable hardware lends itself to multiple, meaningful measures of performance, multiple performance incentives may be established.  When the contract requires the sequential delivery of several hardware items (e.g., multiple spacecraft), separate performance incentive structures may be established to parallel the sequential delivery and use of the deliverables. 

   (e) In determining the value of the maximum performance incentives available, the contracting officer shall follow the following rules:         

       (1) For a CPFF contract, the sum of the maximum positive performance incentive and fixed fee shall not exceed the limitations in FAR 15.404-4(c)(4)(i).

       (2) For an award fee contract.         

               (i) The individual values of the maximum positive performance incentive and the total potential award fee (including any base fee) shall each be at least one-third of the total potential contract fee.  The remaining one-third of the total potential contract fee may be divided between award fee and the maximum performance incentive at the discretion of the contracting officer.

               (ii) The maximum negative performance incentive for research and development hardware (e.g., the first and second units) shall be equal in amount to the total earned award fee (including any base fee).  The maximum negative performance incentives for production hardware (e.g., the third and all subsequent units of any hardware items) shall be equal in amount to the total potential award fee (including any base fee).  Where one contract contains both cases described above, any base fee shall be allocated reasonably among the items.       

       (3) For cost reimbursement contracts other than award fee contracts, the maximum negative performance incentives shall not exceed the total earned fee under the contract.


1816.404 Fixed-price contracts with award fees.

   Section 1816.405-2 applies to the use of FPAF contracts as if they were CPAF contracts.  However, neither base fee (see 1816.405-271) nor evaluation of cost control (see 1816.405-274) apply to FPAF contracts.


1816.405 Cost-reimbursement incentive contracts.


1816.405-2 Cost-plus-award-fee (CPAF) contracts.


1816.405-270 CPAF contracts.         

   (a) Use of an award fee incentive shall be approved in writing by the procurement officer.  The procurement officer's approval shall include a discussion of the other types of contracts considered and shall indicate why an award fee incentive is the appropriate choice, including evidence that any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits (see FAR 16.405-2(b)(1)(iii)).  Award fee incentives should not be used on contracts with a total estimated cost and fee less than $2 million per year.  The procurement officer may authorize use of award fee for lower-valued acquisitions, but should do so only in exceptional situations, such as contract requirements having direct health or safety impacts, where the judgmental assessment of the quality of contractor performance is critical.

   (b) Except as provided in paragraph (c) of this section, an award fee incentive may be used in conjunction with other contract types for aspects of performance that cannot be objectively assessed.  In such cases, the cost incentive is 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.

   (c) Award fee incentives shall not be used with a cost-plus-fixed-fee (CPFF) contract.


1816.405-271 Base fee.        

   (a) A base fee shall not be used on CPAF contracts for which the periodic award fee evaluations are final (1816.405-273(a)).  In these circumstances, contractor performance during any award fee period is independent of and has no effect on subsequent performance periods or the final results at contract completion.  For other contracts, such as those for hardware or software

development, the procurement officer may authorize the use of a base fee not to exceed 3 percent.  Base fee shall not be used when an award fee incentive is used in conjunction with another contract type (e.g., CPIF/AF).

   (b) When a base fee is authorized for use in a CPAF contract, it shall be paid only if the final award fee evaluation is  "satisfactory" or better.  (See 1816.405-273 and 1816.405-275)  Pending final evaluation, base fee may be paid during the life of the contract at defined intervals on a provisional basis.  If the final award fee evaluation is "poor/unsatisfactory", all provisional base fee payments shall be refunded to the Government.


1816.405-272 Award fee evaluation periods.          

   (a) Award fee evaluation periods, including those for interim evaluations, should be at least 6 months in length.  When appropriate, the procurement officer may authorize shorter evaluation periods after ensuring that the additional administrative costs associated with the shorter periods are offset by benefits accruing to the Government.  Where practicable, such as developmental contracts with defined performance milestones (e.g., Preliminary Design Review, Critical Design Review, initial system test), establishing evaluation periods at conclusion of the milestones rather than calendar dates, or in combination with calendar dates should be considered.  In no case shall an evaluation period be longer than 12 months.

   (b) A portion of the total available award fee  contract shall be allocated to each of the evaluation periods.  This allocation may result in an equal or unequal distribution of fee among the periods.  The contracting officer should consider the nature of each contract and the incentive effects of fee distribution in determining the appropriate allocation structure. 


1816.405-273 Award fee evaluations. 

   (a)  Service Contracts.  On contracts where the contract deliverable is the performance of a service over any given time period, contractor performance is often definitively measurable within each evaluation period.  In these cases, all evaluations are final, and the contractor keeps the fee earned in any period regardless of the evaluations of subsequent periods.  Unearned award fee in any given period in a service contract is lost and shall not be carried forward, or "rolled-over," into subsequent periods.

   (b) End Item Contracts.  On contracts, such as those for end item deliverables, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final.  At that point, the total contract award fee pool is available, and the contractor's total performance is evaluated against the award fee plan to determine total earned award fee.  In addition to the final evaluation, interim evaluations are done to monitor performance prior to contract completion, provide feedback to the contractor on the Government's assessment of the quality of its performance, and establish the basis for making interim award fee payments (see 1816.405-276(a)).  These interim evaluations and associated interim award fee payments are superseded by the fee determination made in the final evaluation at contract completion.  The Government will then pay the contractor, or the contractor will refund to the Government, the difference between the final award fee determination and the cumulative interim fee payments.

   (c) Control of evaluations.  Interim and final evaluations may be used to provide past performance information during the source selection process in future acquisitions and should be marked and controlled as “Source Selection Information - See FAR 3.104”.


1816.405-274 Award fee evaluation factors.           

   (a) Explicit evaluation factors shall be established for each award fee period.  Factors should be tied to desired outcomes.  If used, subfactors should be limited to the minimum necessary to ensure a thorough evaluation and an effective incentive.

   (b) Evaluation factors will be developed by the contracting officer based upon the characteristics of an individual procurement.  Normally, technical and schedule considerations will be included in all CPAF contracts as evaluation factors.  Cost control shall be included as an evaluation factor in all CPAF contracts.  When explicit evaluation factor weightings are used, cost control shall be no less than 25 percent of the total weighted evaluation factors.  The predominant consideration of the cost control evaluation should be a measurement of the contractor's performance against the negotiated estimated cost of the contract.  This estimated cost may include the value of undefinitized change orders when appropriate.

   (c)(1) The technical factor, if used, must include consideration of risk management (including mission success, safety, security, health, export control, and damage to the environment, as appropriate) unless waived at a level above the contracting officer, with the concurrence of the project manager.  The rationale for any waiver shall be documented in the contract file.  When safety, export control, or security are considered under the technical factor, the award fee plan shall allow the following fee determinations, regardless of contractor performance in other evaluation factors, when there is a major breach of safety or security.

       (i) For evaluation of service contracts under 1816.405-273(a), an overall fee determination of zero for any evaluation period in which there is a major breach of safety or security.

               (ii) For evaluation of end item contracts under 1816.405-273(b), an overall fee determination of zero for any interim evaluation period in which there is a major breach of safety or security.  To ensure that the final award fee evaluation at contract completion reflects any major breach of safety or security, in an interim period, the overall award fee pool shall be reduced by the amount of the fee available for the period in which the major breach occurred if a zero fee determination was made because of a major breach of safety or security.

   (2)        A major breach of safety must be related directly to the work on the contract.  A major breach of safety is an act or omission of the Contractor that consists of an accident, incident, or exposure resulting in a fatality or mission failure; or in damage to equipment or property equal to or greater than $1 million; or in any “willful” or “repeat” violation cited by the Occupational Safety and Health Administration (OSHA) or by a state agency operating under an OSHA approved plan.

       (3)   A major breach of security may occur on or off Government installations, but must be directly related to the work on the contract.  A major breach of security is an act or omission by the contractor that results in compromise of classified information, illegal technology transfer, workplace violence resulting in criminal conviction, sabotage, compromise or denial of information technology services, equipment or property damage from vandalism greater than $250,000, or theft greater than $250,000.

       (4) The Assistant Administrator for Procurement (Code HS) shall be notified prior to the determination of a zero award fee because of a major breach of safety or security.