Guidance a Agencies Does Not Consistently Reflect OMB Guidance

DOE, HHS, and DHS varied in the extent to which they had existing  guidance specific to award fees and the extent to which that guidance was  consistent  acquisition officers and senior procurement executives in December 2007, with OMB guidance. At DOE, DHS, and HHS,  individual contracting offices have developed their own approaches to  implementing award fee contracts which are not always consistent with  the principles in the OMB guidance or between offices within these  departments. For example, an HHS contract for call center services awarded fees based  on 19 performance categories which included results based criteria, such  as response times, but also included criteria based more on efforts, such  as requiring the contractor to ensure that staffing levels were  appropriate for forecasted volumes during hours of operation, rather  than measuring results. However, not all DOD programs have followed its guidance. DOD’s own  analysis of its use of award fees in 2007 also showed that it pays a median  of 93 percent of available award fees. However, while the median award fee  scores indicate satisfaction with the results of the contracts, programs  across the agencies we reviewed continue to use evaluation tools that  could allow for contractors to earn award fees without performing at a  level that is acceptable to the government under the terms of the contract. While the evaluation tool used by NNSA does not allow for payment of  award fees for unsatisfactory performance, the evaluation method used by  the Office of Science allows a contractor to earn up to 84 percent of the  award fee for performance that is defined as not meeting expectations. Agencies Are Not Collecting, Analyzing, and Sharing Information on Award Fees to Evaluate the Effectiveness of Their Use. While DOD has collected information on award fee  contracts in 2007 and 2008 in accordance with legislative requirements,  these data are not being used to evaluate the effectiveness of award fee  contracts. Within DOD, we found that information sharing on best practices and  lessons learned is inconsistent between contracting commands. NASA officials stated that the use of award fees and the criteria being used  to measure contractor performance are frequent topics in these meetings. Limiting the opportunity for contractors  to have a second chance at earning previously unearned fee maximizes the  incentive during an award fee period. We recommend that the Secretaries of Energy, Health and Human  Services, and Homeland Security update or develop implementing  guidance on:    developing criteria to link award fees to acquisition outcomes such as  cost, schedule, and performance;    using an award fee in combination with incentive fees to maximize the  effectiveness of subjective and objective criteria;    determining when rolling over unearned fees to subsequent periods  establishing evaluation factors, including definitions of performance,  associated fees, and evaluation scales, that motivate contractors  toward excellent performance; and    prohibiting payments of award fees for performance that is judged to  be unsatisfactory or does not meet contract requirements. Appendix I: Scope and Methodology

To identify the actions agencies have taken to revise or develop policies or  guidance on the use of award fees, we assessed procurement policies at  the departments of Defense (DOD), Energy (DOE), Health and Human  Services (HHS), and Homeland Security (DHS) and the National  Aeronautics and Space Administration (NASA). These five agencies  provided over 95 percent of the total dollars obligated against contracts  with an award fee in fiscal year 2008, according to the Federal  Procurement Data System (FPDS). We reviewed our prior work on the use  of award fees at DOD and NASA to identify policies and guidance in place  and examined these agencies in regards to changes that were implemented  based on our recommendations, legislative requirements, internal  guidance, and governmentwide guidance from the Office of Management  and Budget (OMB). To determine whether current practices for using award fee contracts are  consistent with OMB guidance, we reviewed data from 645 evaluation  periods in 100 contracts at the five agencies from fiscal year 2004 through  fiscal year 2008, allowing for a comparison of practices before and after  OMB’s guidance.
Why GAO Did This Study

In prior work, GAO found that contractors were paid billions of dollars in award fees regardless of acquisition outcomes. In December 2007, the Office of Management and Budget (OMB) issued guidance aimed at improving the use of award fee contracts. GAO was asked to (1) identify agencies' actions to revise or develop award fee policies and guidance to reflect OMB guidance, (2) assess the consistency of current practices with the new guidance, and (3) determine the extent agencies are collecting, analyzing, and sharing information on award fees. GAO reviewed the Departments of defense (DOD), Energy (DOE), Health and Human Services (HHS), and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA)--agencies that constituted over 95 percent of the dollars spent on award fee contracts in fiscal year 2008.

What GAO Found

From fiscal year 2004 through fiscal year 2008, agencies have spent over $300 billion on contracts that include monetary incentives, or award fees, for performance that is evaluated against subjective criteria. OMB's guidance on using award fees includes principles such as limiting the opportunities for earning unearned fees in subsequent periods, linking award fees to acquisition outcomes, designing evaluation criteria to motivate excellent performance, and not paying for performance that is unsatisfactory. These principles are largely reflected in DOD's and NASA's updated guidance on the use of award fees. For example, DOD now prohibits payment of award fees for unsatisfactory performance, and NASA requires a documented cost-benefit analysis to support the use of an award fee contract. However, DOE, DHS, and HHS vary in the extent to which their agency-wide guidance reflects the OMB guidance. These departments generally rely on operational divisions to develop award fee guidance; however, many acquisition professionals at these agencies were unaware of the contents of the OMB guidance. Current practices for using award fee contracts at agencies GAO reviewed often are inconsistent with the new guidance. However, where the revised policies have been applied, the results have been hundreds of millions of dollars in cost savings and better use of government funds. For example, by limiting second chances at unearned fees in eight programs, GAO estimates that DOD will save over $450 million through fiscal year 2010. These practices, however, are not being implemented across DOD. NASA programs now document cost benefit analyses to justify using award fee contracts. Without clear guidance, agencies within DOE, HHS, and DHS have developed various approaches to using award fees. For example, while DOE's median award fee paid indicates satisfaction with the results of its contracts, its Office of Science uses a scoring system that could allow for payment of up to 84 percent of an award for performance that does not meet expectations. Most of the agencies we reviewed continue to allow contractors second chances at unearned fees. For example, at DHS, a contractor was able to earn 100 percent of its unearned fee in a subsequent period. Agencies do not always use criteria that are based on measuring results. For example, one HHS contract for a call center included criteria that focused more on efforts, such as maintaining proper staffing levels during hours of operation, rather than on measuring results. Only DOD collects data on the use of award fees. However, the data are largely used to respond to legislative requirements for award fee information. Agencies generally do not have methods to evaluate the effectiveness of award fees. While individual programs and some offices have taken steps to evaluate award fee criteria, officials stated that identifying metrics to compare performance across programs would be difficult. Further, while GAO found effective practices within some agencies, the lack of a governmentwide or, with the exception of DOD, agencywide forum to share information allows these to remain isolated examples of potential best practices.