The FAR now prohibits rollover of unearned award fees from one evaluation period  requires award fees to be linked to cost, schedule, and technical  performance acquisition objectives;  restricts payment of award fees in instances of unsatisfactory  contractor performance; and  requires agencies to collect relevant data on incentive and award fee  payments and evaluate the effectiveness of these contract types in  achieving desired outcomes. DOD Has Changed Regulations, Policies, and Practices to Improve Its Use of Incentive Contracts, in Particular by Emphasizing Use of Objective Incentives

Since 2010, DOD has taken steps to improve its use of incentive  contracts—often beyond what is required by the FAR—by revising the  Defense Federal Acquisition Regulation Supplement (DFARS), instituting  its Better Buying Power initiative, and developing new guidance and  training courses. These efforts are reflected in DOD’s reported use of incentive contracts  since 2010, which indicate a substantial growth in obligations for incentive  fee contracts and a corresponding decrease in obligations for award fee  contracts. DOD Has Updated Regulations, Policy, and Guidance

DOD made changes to the DFARS and its accompanying Procedures,  Guidance, and Information in recent years intended to support  appropriate use of incentive contracts. Consistent with DOD’s emphasis  on using incentive fee contracts and decreasing the use of award fee  contracts, our analysis of DOD’s reported contract obligations from fiscal  years 2005 through 2015 shows a shift toward using incentive fee  contracts (see figure 2). DOD Expects to Achieve Cost Objectives on Selected Contracts, but Lacks Full Information on Outcomes for Incentive Contracts

DOD expects to achieve positive cost outcomes—with contractors’  estimated costs coming in lower than target costs—for most of the 21  selected incentive fee contract actions we were able to measure. Overall,  the estimated costs for the incentivized portions of these selected  contract actions were about $30 million—or about 5 percent—below  target costs. The nine  award fee actions in our sample, which were mainly used to procure  services, did not allow for rollover and payments for unsatisfactory  performance—both of which were issues we found in our prior work. In two cases,  although the contractor met specific schedule and technical performance  goals, overall outcomes were either unsatisfactory or were yet to be  determined (see table 4). DOD Conducts Limited Data Collection on Incentive and Award Fee Contracts and Does Not Assess Incentive Outcomes Across Contracts

DOD has not consistently assessed how the selection of a particular  contract type or incentive arrangement has promoted the achievement of  cost, schedule, or technical performance goals. As some of our prior work has  found, however, incentives do not always lead to better outcomes. Federal acquisition regulations require  DOD to collect and analyze information on the use of incentives. However, it may not be necessary for DOD to embark on a broad, manual  data collection effort similar to what has been tried in the past. DOD stated it  will complete this process by the second quarter of fiscal year 2018. Appendix I: Objectives, Scope, and Methodology

The objectives of this review were to (1) identify steps the Department of  Defense (DOD) has taken to improve its use of incentive contracts since  2010, and (2) assess the extent to which selected DOD incentive  contracts achieved desired acquisition outcomes. To determine the extent to which incentive provisions in selected DOD  contracts achieved desired outcomes in cost, schedule, and technical  performance, we assessed a nongeneralizable sample, drawn from  FPDS-NG data, of incentive contracts and orders that DOD awarded  between fiscal years 2011 and 2015 and that were reported as completed  by the end of fiscal year 2015. We chose these timeframes so as to select  awards that were made after regulatory and policy changes starting in  2010 and had completed performance by the time of our review.
Why GAO Did This Study

In fiscal year 2015, DOD obligated $274 billion on contracts for products and services, a portion of which was for contracts that used incentive and award fee provisions—or incentive contracts—intended to improve cost, schedule, and technical performance outcomes. Work by GAO and others has shown that such contracts, when not well managed, can lead to unnecessary costs shouldered by the American taxpayer. Beginning in 2010, DOD made regulatory and policy changes related to incentives.
GAO was asked to review DOD's use of incentives. This report (1) identifies steps DOD has taken to improve its use of incentive contracts since 2010, and (2) assesses the extent to which selected DOD incentive contracts achieved desired acquisition outcomes.
To conduct this work, GAO reviewed relevant federal and DOD guidance; analyzed DOD obligations and new contract award data for fiscal years 2005 through 2015, before and after regulatory and policy changes; and analyzed a nongeneralizable sample of 26 contracts and task orders that contained incentives and 9 contract actions providing for award fees that were awarded between fiscal years 2011 and 2015 and reported as completed by the end of fiscal year 2015 to assess contract outcomes.

What GAO Found

Since 2010, the Department of Defense (DOD) has made changes to its regulations, policies, and guidance and taken other steps to improve its use of incentive contracts. DOD has promoted greater use of objective incentives—which measure contractor performance toward predetermined targets using a formula—through incentive fee contracts, partly to better motivate cost control. These changes are reflected in DOD's increased use of incentive fee contracts and decreased use of award fee contracts, which involve fees paid based on a more subjective evaluation of contractor performance and have not always been linked to acquisition outcomes (see figure).
DOD expects to achieve cost objectives on 15 of the 21 incentive fee contract actions that GAO reviewed and for which costs could be assessed. GAO could not assess cost performance on five additional selected incentive fee contracts because comparable cost estimates were not available. Across the 21 incentive fee contract actions, estimated costs for the incentivized portions were about 5 percent below target costs. Schedule and technical performance incentives mostly resulted in good outcomes. In two cases, however, although the contractor met specific schedule and technical performance goals, overall outcomes were either unsatisfactory or not yet determined. In the nine award fee contracts GAO reviewed, consistent with prior GAO recommendations, DOD did not allow unearned fees to be earned in a subsequent period, and GAO did not find evidence of award fees paid for unsatisfactory performance. Federal regulations require DOD to collect and evaluate information on incentives. In 2015, DOD stopped its previous effort to manually collect data twice a year on incentives valued at more than $50 million, which was burdensome and collected information that DOD did not use, according to DOD officials. GAO's review of current DOD systems found that they provide some useful data but do not allow DOD to determine how well incentives are achieving desired cost, schedule, and performance outcomes. Without such information, DOD may be disadvantaged in establishing incentive arrangements that achieve intended results.

What GAO Recommends

DOD should identify the type of information on incentives needed and collect and analyze relevant data to assess outcomes. DOD agreed to do so and stated it will take actions in fiscal year 2018 to address GAO's recommendation.