	OMB’s Guidance Is Not Consistently Addressed at All Agencies

In December 2007, the OMB Office of Federal Procurement Policy issued  guidance to chief acquisition officers and senior procurement executives  to review and update their acquisition policies on the appropriate use of  incentive fee contracts, which include award fee contracts. The following shows how OMB’s guidance is reflected in  guidance provided by each agency:  In response to GAO recommendations in 2005 and subsequent legislation,  DOD issued guidance in 2006 and 2007 that states it is imperative that  award fees are linked to desired outcomes, that the practice of rolling over  unearned award fees should be limited to exceptional circumstances, that  award fees must be commensurate with contractor performance, and that  performance that is unsatisfactory is not entitled to any award fee. Of the five agencies we reviewed, only DOD collects data on award fee  contracts. Concluding Observations and Prior Recommendations for Executive Action

Award fee contracts can motivate contractor performance when certain  principles are applied. Linking fees to acquisition outcomes ensures that  the fee being paid is directly related to the quality, timeliness, and cost of  what the government is receiving. Limiting the opportunity for contractors  to have a second chance at earning a previously unearned fee maximizes  the incentive during an award fee period. Additionally, the amount of the  fee earned should be commensurate with contractor performance based  on evaluation factors designed to motivate excellent performance. Further, no fee should be paid for performance that is judged to be  unsatisfactory or does not meet contract requirements. While DOD has  realized benefits from applying these principles to some contracts, these  principles have not been established fully in guidance at DOE, DHS, and  HHS. Having guidance is not enough, however, unless it is consistently  implemented. Further, the lack of methods to evaluate effectiveness and  promote information sharing among and within agencies has created an  atmosphere in which agencies are unaware of whether these contracts are  being used effectively and one in which poor practices can go unnoticed  and positive practices can be isolated. In our report, we recommended that DOE, HHS, and DHS update or  develop implementing guidance on using award fees.
Why GAO Did This Study

From fiscal year 2004 through fiscal year 2008, agencies spent over $300 billion on contracts which include award fees. While many agencies use award fee contracts, over 95 percent of the government's spending using this contract type in fiscal year 2008 occurred at five: the departments of Defense (DOD), Energy (DOE), Health and Human Services (HHS), and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA). In December 2007, the Office of Management and Budget's (OMB) Office of Federal Procurement Policy issued guidance to chief acquisition officers and procurement executives across the government that echoed several recommendations we made in 2005 on the use of award fees and emphasized positive practices to be implemented by all agencies. GAO's statement today is based on our May 29, 2009, report, Federal Contracting: Guidance on Award Fees Has Led to Better Practices But is Not Consistently Applied (GAO-09-630). Like the report, this statement addresses how agencies are implementing OMB's guidance. Specifically, we (1) identified the actions agencies have taken to revise or develop policies and guidance to reflect OMB guidance on using award fees, (2) determined the extent to which current practices for using award fee contracts are consistent with the new guidance, and (3) identified the extent to which agencies collect and analyze information on award fees to evaluate their use and share that information within their agencies.

What GAO Found

Award fee contracts can motivate contractor performance when certain principles are applied. Linking fees to acquisition outcomes ensures that the fee being paid is directly related to the quality, timeliness, and cost of what the government is receiving. Limiting the opportunity for contractors to have a second chance at earning a previously unearned fee maximizes the incentive during an award fee period. Additionally, the amount of the fee earned should be commensurate with contractor performance based on evaluation factors designed to motivate excellent performance. Further, no fee should be paid for performance that is judged to be unsatisfactory or does not meet contract requirements. While DOD has realized benefits from applying these principles to some contracts, these principles have not been established fully in guidance at DOE, DHS, and HHS. Having guidance is not enough, however, unless it is consistently implemented. Further, the lack of methods to evaluate effectiveness and promote information sharing among and within agencies has created an atmosphere in which agencies are unaware of whether these contracts are being used effectively and one in which poor practices can go unnoticed and positive practices can be isolated.