Incentive contracts: the attributes that matter most in driving favorable outcomes

Defense AR Journal, Dec, 2008 by Robert L. Tremaine

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Incentive contracts have been in place for many years. They represent just one of many contractual tools the Department of Defense has at its disposal to drive certain performance behaviors. Lately, the usefulness of incentive contracts has come into question. The dividends have not been readily apparent. This research study set out to determine what generally afforded strong correlations between incentive-type contracts and expected performance outcomes. Twenty-five weapon system acquisition program offices were interviewed in various stages of their acquisition life cycle. A standardized questionnaire-survey was used to capture the data. This article addresses the findings and includes a few key recommendations intended to highlight learning assets available to the acquisition workforce on the use of incentive contracts.

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In the past several years, major weapon system development programs have drawn significant attention. The reasons are varied. In some cases, costs have skyrocketed; schedules have experienced significant delays; and performance levels have failed to meet government expectations despite the employment of management tools designed to control costs, preserve schedule, and influence performance outcomes. Some of these management tools, including contractual measures as originally conceived and specified by the Federal Acquisition Regulation (FAR), can give tremendous flexibility to the implementation of government contracts. Indeed, contractual measures is only one of many handy tools in a program manager's toolkit to help drive performance behavior. However, the Government Accountability Office (GAO) recently identified an apparent disconnect between the use of certain measures like incentives and expected outcomes in weapon system acquisitions. In short, it appeared that incentives were not driving performance outcomes as originally envisioned.

The GAO looked closely at the use of incentives in the Department of Defense (DoD). It conducted structured interviews with contracting and program officials representing 92 contracts from a study population of 597 DoD incentive-type contracts active between 1999 and 2003. In its December 2006 report (GAO-06-66), GAO asserted that "DoD has paid billions in Award and Incentive Fees without favorably influencing performance" (GAO, 2005). In essence, the GAO found few results that could be directly traced to the award of incentives. Not surprisingly, its findings set off a few alarms including the efficacy of incentives in general. Were these incentive strategies ill-conceived? Were they poorly applied? Did they work as advertised'? Have they outlived their usefulness'? What went wrong? These and many other questions immediately surfaced in the Acquisition, Technology and Logistics (AT&L) community. In response to these concerns, (then) Under Secretary of Defense for Acquisition, Technology and Logistics Ken Krieg asked Defense Acquisition University President Frank J. Anderson, Jr. to conduct a research effort designed to better understand where award/incentive fee contracts had a favorable impact on performance outcomes. Consequently, DAU assembled a small team of subject matter experts from its combined regional workforce to understand the suspicious divide. Rather than search for even more verification where incentives failed, however, the research would focus on where incentives succeeded. More specifically, where have incentives specifically worked, why were they effective, and what could be done to restore confidence in incentive contracts? Invariably, confidence in incentive contracts--which has been frequently challenged in the past--would have to be restored in order to garner continued support and calm the critics. Otherwise, the usefulness of incentive strategies would weaken and their continuance become a target of increased scrutiny and uncertainty.

In late April 2006, Anderson met with members of the research team (Table 1) and challenged them to: 1) determine what generally afforded strong correlations between incentives and desired performance outcomes and why; 2) recommend which DAU curricula should be adjusted as a result of the research team's findings in both the near- and far-term: and finally, 3) make both lessons learned and best practices widely available through DAU's Community of Practice (COP) Web site. Simply stated, proven techniques that drove favorable outcomes had to be made accessible to the AT&L-wide community right away; the research had to be purposeful.

RESEARCH APPROACH/METHOD

Up front, the DAU research team carefully reviewed the GAO's report and looked especially close at two of its most critical findings. The GAO had claimed that:

* DoD engages in practices that undermine efforts to motivate contractor performance and that do not hold contractors accountable for achieving desired acquisition outcomes; and

* DoD Programs frequently pay most of the available award fee for what they describe as improved contractor performance, regardless of whether acquisition outcomes fell far short of DoD's expectations, were satisfactory, or exceeded expectations (GAO, 2005).