Defense rewarded contractors despite poor performance

By Kimberly Palmer

The Government Accountability Office reported that the Defense Department paid contractors about $8 billion in award fees despite the fact that their performance often did not warrant such rewards.

Award fees, which are supposed to compensate contractors for outstanding performance, are used frequently by Defense and civilian agencies. The report (GAO-06-66) found, however, that Defense gave awards to contractors for mediocre and even poor performance.

For example, a contract for a Comanche reconnaissance attack helicopter was delayed for 33 months and cost $3.7 billion more than originally planned, yet the contractor was paid $202.5 million in award fees, GAO said. In another example, a space-based infrared system increased in cost by $3.7 billion, or 99.5 percent of expected costs, and was delayed by more than 12 months. The contractor received an award fee of $160.4 million.

"The power of monetary incentives to motivate excellent contractor performance and improve acquisition outcomes is diluted by the way DoD structures and implements incentives," the report stated. It examined 93 award fee contracts in place from fiscal 1999 to 2003.

GAO attributed the problem to employees' failure to assess how well contractors are performing. Instead of looking at contract outcomes, contract managers focused on other factors such as how responsive contractors were to feedback from Defense officials.

The report recommended that the undersecretary of Defense for acquisition, technology and logistics check that contractors are only paid awards for excellent performance. It also recommended that the under secretary provide more guidance on award fees. Defense generally agreed with the recommendations.

Award fees have generated controversy because it is unclear whether they actually elicit outstanding performance. In May, industry experts told an acquisition panel that performance-based contracting suffers from poor implementation. There are no governmentwide rules on how award fees and performance-based contracts should be implemented.

At the same time, many consultants and industry groups advocate the increased use of performance-based contracting because they say it improves outcomes. The Office of Management and Budget encourages the use of the technique and has directed acquisition officials to apply it on 40 percent of eligible contracts for services valued over $25,000.

The GAO report comes on the heels of a Defense acquisition panel recommending an overhaul of the Defense acquisition system.