Contracting Officer Podcast Slides Knowledge Insights From Contracting

Contracting Officer Podcast Slides Knowledge & Insights From Contracting Officers 1

Episode 044 What are Incentive Contracts? Original Air Date: September 14, 2015 Hosts: Kevin Jans & Paul Schauer 2

Formatting notes • Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the link • Red bold font indicates a point of emphasis • Green bold font indicates CO’s personal comment or perspective 3

Introduction • Purpose of this podcast: To explain the intricacies of incentive contracts • Incentive contracts are complex. • They can cost you a lot of time and money in the performance phase if you don’t understand them. 4

The ‘Contract-type’ Continuum • Fixed-price • Extreme is firm-fixed-price, where the contractor has full responsibility for performance costs and resulting profit (or loss) • Cost-reimbursement • Other extreme is cost-plus-fixed-fee, where the contractor has minimal responsibility for performance costs and negotiated fee (profit) is fixed. • Allow payment of “allowable costs” per the contract (and the FAR) • Establish an estimate of total cost and a ceiling 5

Incentive Contracts (In between the extremes) • Three types: • Cost incentives – may share in cost savings • Performance incentives to motivate “better” performance • Delivery incentives to motivate faster delivery 6

When do Incentive Contracts matter? • Acquisition Time Zones (from Podcast Episode 003) • Execution Time Zones (from Podcast Episode 084) • Requirements Zone • Kick Off Zone • Market Research Zone • Performance Zone • RFP Zone (proposal zone) • Re-compete Zone • Source Selection Zone • Wrap-up Zone 7

Incentive Contracts • FAR 16. 401 • Appropriate when: • Fixed price is not appropriate, and • Required supplies or services can be acquired at lower cost or improved delivery or technical performance • By relating the amount of profit or fee payable under the contract to the contractor’s performance. • Incentive contracts are designed to obtain specific acquisition objectives by- • Establishing reasonable and attainable targets that are clearly communicated to the contractor; and 8

Incentive Contracts • Including appropriate incentive arrangements designed to - • Motivate contractor efforts that might not otherwise be emphasized, and • Discourage contractor inefficiency and waste • FAR 16. 401(c) • Two basic categories of incentive contracts: • Fixed-price incentive contracts (see FAR 16. 403 and 16. 404) • Cost-reimbursement incentive contracts (see FAR 16. 405) 9

Incentive Contracts • Fixed-price incentive contracts • Preferred when contract costs and performance requirements are reasonably certain • Usually to the Government’s advantage for the contractor to assume substantial cost responsibility and an appropriate share of the cost risk 10

Examples of Incentives • Options (not actually called an incentive in the FAR) • Awards • Fee (subjective, using award fee plan) • Term (objective or subjective, using award term plan) • Cost Sharing • Performance bonus (settle for minimum solution but bonus for best solution) • Delivery incentives (opposite of liquidated damages) 11

Incentive Contracts (‘in between’) • Need to be • Defined • Valuable • Trackable • Recognize this: • They require more administration! • Complexity drives confusion • Get buy in on administration effort! (this ain't always easy. . . ) 12

Approval Required • Because of ‘perceived abuse’ • FAR 16. 401(d): “A determination and finding, signed by the head of the contracting activity, shall be completed for all incentive- and award-fee contracts justifying that the use of this type of contract is in the best interest of the Government. ” 13

Why are Incentive Contracts important? • Creativity is built into the FAR – This is the thinking part. • The law of unintended consequences applies • For every action there is an equal and opposite reaction • Incentives compete with each other – and compete with rational behavior • Faster, better, cheaper… You can't have all 3 • Cost, performance and schedule move together (like a triangle) 14

Why are Incentive Contracts important? • No incentive contract may provide for other incentives without also providing a cost incentive (or constraint) (see FAR 16. 402 -1(a) ) • Makes sense in Cost-type contract, but seems out of place for FFP • In this case, the FFP is the constraint • Contractors assess how to maximize profit regardless of Government’s goals for the incentives • Will meet the contract requirements, but in the manner that maximizes profit 15

Why Should Government Care? • Focus: it forces the focus on what REALLY matters • Provides (or should provide) clarity on your goals • You may actually pay less for better service • You can get better performance and REWARD great performance • Or, you can spend a lot of time administering and end in the same place 16

Why Should Industry Care? • This is how you make more profit (or any, in some cases) • Make sure the incentives are aligned with delivering what the customer wants • Otherwise, your program will be a mess when the conflicts arrive • You know your customer’s priority (hopefully it matches the incentives) • You can focus on what REALLY matters to the customer • If they’ve properly incentivized it 17

Why Should Industry Care? • Incentives must match what industry can actually do! • Don’t expect a 6 -month lead time item to be delivered in one day 18

Summary • Government can provide more clarity of goals and needs with incentives • Industry can be more successful (make more money) with incentives • Caution: • Know what you’re signing up for. They are NOT easy to administer • Incentive contracts are a powerful way to encourage contractor behavior. • Be sure that incentives align Government needs with contractor’s profitability 19

Contact us • We are on Linked. In, Twitter and Facebook • We also started the Government Contracting Network Group on Facebook. Join us there! • Send your topics to paul@Contractingofficerpodcast. com • For Community support, contact Shelley Hall at shelley. hall@skywayacquisition. com 20