The transformation of contract incentive structures - Tutorial

Acquisition Review Quarterly, Summer, 2003 by Robert Graham

The National Polar-orbiting Operational Environmental Satellite System's Acquisition and Operations contract for the next generation of weather satellites uses innovative incentive structures to motivate contractor performance. The incentive approach combines an award fee and mission success fee arrangement to include a cost mitigation approach, putting fee at risk and tying corporate executive pay to contract performance. This business approach is complemented by a shared ownership approach to the development and production of the satellites. These innovative approaches give the government the flexibility to share system responsibility while motivating the contractor toward outstanding performance on the contract.

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In the current acquisition environment of transforming from traditional to streamline acquisition approaches, there are many innovative strategies being proposed by organizations to incentivize contractor performance. The following discussion will look at the program approach and contract incentive structure for the National Polar-orbiting Operational Environmental Satellite System (NPOESS) program's Acquisition and Operations (A&O) contract. Figure 1 is a graphic representation of the NPOESS satellite system.

[FIGURE 1 OMITTED]

The A&O contract uses a dual approach, a Shared System Performance Responsibility (SSPR) approach to the program with an incentive structure that combines an award fee and mission success fee arrangement to include a cost mitigation approach, putting fee at risk and tying corporate executive pay to contract performance. The clauses on contract and the comprehensive Award Fee and Mission Success Fee Plan allow for the contractor to receive interim award fee payments while working toward the full incentive fee. This innovative approach gives the government the flexibility to share system responsibility while motivating the contractor toward outstanding performance on the contract.

PROGRAMMATICS

The NPOESS program is a presidentially-directed tri-agency program chartered to converge the separate Commerce, Defense, and National Aeronautics and Space Administration (NASA) environmental satellite programs into a single program. Figure 2 defines the Tri-Agency Relationship. A tri-agency Memorandum of Agreement (MOA) signed at the cabinet level directs the Department of Commerce (DOC) to be the lead agency for program management for the converged program, directs the use of Department of Defense (DoD) acquisition procedures, and tasks NASA to provide technology support.

* Department of Commerce, through National Oceanic and Atmospheric
  Administration (NOAA), will have lead agency responsibility for the
  converged system. The Department of Commerce (DOC) will report to a
  tri-agency executive committee. NOAA will provide the System Program
  Director and an Integrated Program Office (IPO).

* National Aeronautics and Space Administration (NASA) will have lead
  agency responsibility to support the IPO in facilitating the
  development and insertion of new cost effective technologies that
  enhance the ability of the converged system to meet its operational
  requirements.

* Department of Defense will have lead agency responsibility to support
  the IPO in major system acquisitions necessary to the National
  Polar-orbiting Operational Environmental Satellite System (NPOESS)
  program.

Figure 2. Tri-Agency Relationship

The NPOESS satellite is the next generation weather satellite with state-of-the-art technologies and the A&O contract is the innovative vehicle to accomplish the successful development, production, and launch of these satellites. The NPOESS program integrates the capabilities and products provided by the DOC Polar-orbiting Operational Environmental Satellite (POES) Program, the DoD Defense Meteorological Satellite Program (DMSP), and the NASA long-term continuous climate record collection. This single converged system will satisfy the needs of defense, civil, commercial, and the scientific communities.

The program ended a Preliminary Design Risk Reduction (PDRR) phase with the award of the A&O contract. In addition, the NPOESS Integrated Program Office (IPO) conducted a Phase 0 development from early 1995 through December 1999 and has had a series of ongoing sensor development programs that started in 1997. The Phase 0 development and PDRR phases competitively awarded contracts for state-of-the-art sensor technology that would be used on the NPOESS satellite. The PDRR contractors were competitively down-selected to one contractor for completion of the engineering and development effort for each sensor. These sensor contracts were subsumed as subcontracts by the A&O contract with a single prime contractor having overall system performance responsibility.

The Phase 0 development efforts were mainly cost-type risk reductions, and the PDRR contracts were a mix of fixed-price and cost-incentive line items accounting for the complexities and uncertainties of these efforts, which were not conducive to pre-negotiated-objective incentives. The program's award fee instrument for the PDRR efforts provides a level of flexibility and oversight, which is desirable given the developmental characteristics of these acquisitions. Furthermore, the award fee process was established to have a significant impact toward motivating the contractor to perform exceptionally. All of these efforts were designed to reduce development risk during Engineering, Manufacturing, and Development (EMD). These efforts culminated with the completion of the Preliminary Design Review (PDR) for both satellite PDRR contracts and award of a single A&O contract.