IMPROVEMENTS IN

COST-PLUS-AWARD-FEE PROCESSES ARE

NEEDED TO ENSURE MILLIONS PAID IN FEES

ARE JUSTIFIED

Department of Transportation

Report Number: ZA-2010-092

Date Issued: August 25, 2010
U.S. Department of

Memorandum

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

Subject: ACTION: Improvements in Cost-Plus-Award-Fee 

Processes Are Needed To Ensure Millions Paid In 

Fees Are Justified

Department of Transportation

Report Number ZA-2010-092

Date: August 25, 2010

From: Lou E. Dixon

Principal Assistant Inspector General for 

Auditing and Evaluation

Reply to 

Attn. of: JA-60

To: Acting Deputy Assistant Secretary for Administration 

Office of the Secretary of Transportation 

Ramesh K. Punwani

Assistant Administrator for Financial Services/CFO

As of June 2008, the Department of Transportation (DOT) had 47 open cost-plusaward-fee (CPAF) contracts—contracts that provide financial incentives based on 

contractor performance. These contracts have a potential maximum value of 

approximately $5.5 billion, including over $271 million in available award-fee 

pools. While CPAF contracts can encourage excellence in contract performance, 

they require effective monitoring to ensure contract dollars are spent wisely and 

award fees are justified based on contractor performance and related expected 

outcomes. 

In December 2007, the Office of Management and Budget’s (OMB) Office of 

Federal Procurement Policy issued guidance to chief acquisition officers and senior 

procurement executives to review and update their acquisition policies on the 

appropriate use of incentive contracts, which includes CPAF contracts. Concerns 

about the use of CPAF contracts across the Government prompted us to examine 

how DOT’s Operating Administrations manage the use of CPAF contracts. 

Specifically, we:

(1) assessed award-fee ratings and payments made by Operating 

Administrations based on documentation used to support them;
2

(2) evaluated Operating Administrations’ award-fee guidance, payment

structure, and evaluation criteria; and 

(3) identified challenges in DOT’s management of CPAF contracts.

To conduct our work, we reviewed relevant policies and guidance, including 

Federal Acquisition Regulations (FAR), OMB directives, the Federal Aviation 

Administration’s (FAA) Acquisition Management System (AMS), and guidance 

from other Federal agencies.

1

 We reviewed 24 CPAF contracts from 7 Operating 

Administrations—FAA, Federal Highway Administration (FHWA), Federal 

Railroad Administration (FRA), Maritime Administration (MARAD), Office of the 

Secretary (OST), Pipeline and Hazardous Material Safety Administration 

(PHMSA), and the Research and Innovative Technology Administration (RITA)—

to evaluate their design, implementation, and amount of award fees paid. Twentyone of these contracts were randomly selected from a universe of 41 CPAF 

contracts as of December 31, 2006; the remaining 3 were follow-on contracts.2

We conducted this audit in accordance with generally accepted government 

auditing standards. Exhibit A contains the details of our scope and methodology, 

including the unique acquisition regulations applicable to DOT and its Operating 

Administrations. 

 

The 24 contracts have a potential maximum value of over $3 billion, including 

about $170 million estimated in available award fees. 

RESULTS IN BRIEF 

Operating Administrations consistently gave contractors high ratings and 

substantial award fees, totaling about $15 million for the rating periods we 

reviewed. However, the ratings associated with $14 million—or 92 percent—of 

the award fees lacked sufficient support to demonstrate that the contractor met or 

exceeded the award-fee evaluation criteria, as OMB guidance directs. On almost 

all contracts, performance monitors assigned an adjectival rating,3

 1 Departments of the Army, Navy, and Air Force; the Environmental Protection Agency (EPA); and the National 

Aeronautics and Space Administration (NASA). We used guidance from these agencies as a benchmark for 

identifying practices that we considered most beneficial to ensure effective use of award fees. FAA also issued an 

Award-Fee Contracting Guide in September 2007. 

such as excellent 

or satisfactory, or a numerical rating without explaining the reasons for the rating. 

For the majority of contracts where performance monitors documented their 

support, the examples and comments provided were often too general to determine 

2

 A new contract that calls for the same supplies and services as a previous contract. 3 Adjectival ratings describe what constitutes each level of performance within each performance category and provide 

assistance in establishing evaluation criteria.
3

whether the ratings and award fees were warranted. For example, on a Volpe4

contract for a broad range of information technology support services, a 

performance monitor gave a work assignment a rating of excellent for timeliness of 

deliverables. The support for this rating was “There were no schedule issues.” The 

performance monitor did not provide further descriptions relating how the 

contractor exceeded expectations or timeliness was excellent. Due to these 

findings, we extrapolated the results of our sample to the universe of 41 DOT 

CPAF contracts and estimate with 90 percent confidence5 that as of 

December 31, 2007, approximately $140.6 million was paid in award fees without 

proper justification, which we therefore identified as unsupported costs.

With the exception of FAA, Operating Administrations lack specific guidance on 

the use of award-fee contracts. Further, Operating Administrations’ award-fee 

payment structures provide little incentive for contractors to excel in carrying out 

the terms of their contracts. For example, 9 of the 10 contracts we reviewed that 

include a base fee allowed awards ranging from 20 percent to 75 percent of the 

award-fee pool to be paid for average performance—a practice not allowed by 

other Federal agencies. In addition, performance evaluation plans6

We found a number of weaknesses in the management of the Department’s CPAF

contracts. First, DOT has not developed adequate training for performance 

monitors and other personnel involved in the award-fee process. Second, DOT has 

failed to ensure adequate separation of duties in evaluating contractor performance 

and awarding fees. Other Federal agencies provide for separation of such duties by 

requiring evaluation teams to consist of a fee-determining official (FDO), 

performance evaluation board (PEB), and performance monitors. The PEB is 

responsible for reviewing the performance monitors' evaluations, the contractor's 

for 13 contracts 

we reviewed allow awards for below-average results. For example, the contractor 

on an FHWA contract for non-personnel support services could receive 70 percent 

of the award-fee pool—more than a half million dollars—for performance slightly 

below the minimum acceptable standards. Operating Administrations’ 

performance evaluation plans also used vague criteria, such as "quality and 

timeliness of deliverables" and “quality of planning,” making it difficult for 

performance monitors to understand and consistently apply the ratings. In addition, 

for almost all contracts, the evaluation criteria simply required the contractor to 

meet normal contract expectations, such as submitting accurate invoices and 

maintaining an effective relationship with government staff.

 4 Volpe is part of the Research and Innovative Technology Administration (RITA) of the Department of 

Transportation. 5 Relative precision of the estimate is ± 46.3 percent. 6 A performance evaluation plan is an important element of a CPAF contract usually containing performance evaluation 

criteria, the award-fee pool allocated by evaluation period, organizational structure, roles and responsibilities, 

payment structure (ratings/grades/weights), and the award-fee process. 
4

self-evaluation, and any other information available in order to arrive at an overall 

objective and impartial position on the contractor's performance. The FDO is 

independent of the PEB and makes the final decision on the amount of award fee 

earned. At DOT, however, this is not always the case. In some instances, DOT 

officials not only assessed contractor performance but also recommended and 

approved award-fee amounts. At the same time, it is unknown whether DOT’s use 

of CPAF contracts has been appropriate. This is largely because Operating 

Administrations commit to these contracts without justifying their costeffectiveness, as required by the FAR and recommended by FAA’s AMS, and DOT 

has not determined whether its CPAF contracts have produced better outcomes than 

other contract types. Finally, inactive funds on completed CPAF contracts are not 

always deobligated. About $4.6 million remained obligated on an FAA contract 

that had been completed for about 2 years.

Our report makes a number of recommendations that could greatly improve the

design, administration, and overall management of DOT's CPAF contracts and 

therefore, increase the effectiveness of award fees as motivators for excellent 

contractor performance.

BACKGROUND

Federal agencies use several contract types to acquire a variety of products and 

services. Contract types are grouped into two broad categories: fixed-price and 

cost-reimbursement. Cost-reimbursement contracts, which include CPAF 

contracts, are suitable for use only when uncertainties involved in contract 

performance do not permit costs to be estimated with sufficient accuracy to use a

fixed-price-type contract. Unlike other cost-reimbursable contracts, a CPAF 

contract provides financial incentives intended to control program risk and 

encourage excellence in contract performance. The FAR provides that CPAF 

contracts should be used to achieve acquisition outcomes, such as delivering 

products and services on time, within cost goals, and with optimal technical results. 

A CPAF contract allows the Government to evaluate a contractor's performance 

according to specified criteria and grant an award amount within designated 

parameters. A contractor may receive a base fee on a CPAF contract regardless of 

performance. To evaluate contractor performance and determine appropriate award 

fees, agencies must implement an effective award-fee process.

Within DOT, the Office of the Senior Procurement Executive is responsible for 

Department-wide acquisition policy and oversight, with the exception of FAA, 
5

which has independent procurement authority.7 This includes the oversight for the 

Transportation Acquisition Regulation (TAR) system, which establishes acquisition 

policies and procedures that implement and supplement the FAR. For CPAF 

contracts, DOT personnel conduct periodic—usually semiannual—evaluations of 

the contractor’s performance against specified criteria, document their observations 

and conclusions, and then recommend the amount of award fee to be paid. 

Performance criteria are typically provided in the contract’s performance 

evaluation plan, which also states the award-fee pool8 to be allocated by evaluation 

period; roles and responsibilities of acquisition and procurement staff, including 

performance monitors; and a payment structure for computing award-fee amounts.9

In December 2007, OMB’s Office of Federal Procurement Policy issued guidance10

to chief acquisition officers and senior procurement executives to review and 

update their acquisition policies on the appropriate use of incentive contracts, 

which includes CPAF contracts. Specifically, the guidance directs them to ensure 

that award fees are linked to cost, schedule, and other performance outcomes and 

are not earned if the contractor’s performance is judged to be below satisfactory or 

does not meet the basic requirements of the contract. OMB guidance instructed 

agencies to design evaluation factors that motivate contractors to achieve superior 

results by making clear distinctions in possible award earnings between satisfactory 

and excellent performance. In addition, guidance from other Federal agencies, 

such as the Army, does not recommend that contracts with a base fee11 provide an 

award fee for performance that is deemed satisfactory, as the base fee is intended to 

compensate such performance. Additionally, provisions in the Duncan Hunter 

National Defense Authorization Act for Fiscal Year 200912 seek to prevent 

unjustified award fees paid to contractors. The Act also directs that the FAR be 

amended to provide executive agencies other than the Department of Defense with 

additional guidance on the use of award fees.13

 7

 In the Department of Transportation’s FY 1996 Appropriations Act, Congress provided FAA with broad authority to 

develop its own acquisition process without having to comply with Federal acquisition laws or regulations. FAA 

established its Acquisition Management System, a set of policies and guidance designed to address the unique needs 

of the Agency. FAA updated its AMS (Section T3.2.4, Types of Contracts) to include additional award-fee 

guidance in July 2008 and January 2010. 8 Under a CPAF contract, a pool of money is negotiated in advance, and periodic assessments are made by the 

Government to determine how much of the award-fee pool will be earned based on contractor performance and 

attainment of the program goals and objectives. 9

 Payment structures typically weigh adjectival ratings (such as excellent, fair, and poor) and numeric scores (between 

0 and 100). 10 Office of Management and Budget, Appropriate Use of Incentive Contracts, Memorandum for Chief Acquisition 

Officers and Senior Procurement Executives, December 4, 2007. 11 The base fee is an amount of money (from 0–3 percent of the estimated cost of the contract) fixed at the inception of 

the contract, which is paid to the contractor for its performance. 12 Public Law 110-417, Section 867, enacted on October 14, 2008. 13 These changes were published in the Federal Register, Volume 74, No. 197, October 14, 2009.
6

In 2008, we issued four interim reports on problems Operating Administrations

have experienced in designing and justifying CPAF contracts. Overall, we found 

that performance evaluation plans did not include measurable criteria to adequately 

evaluate contractor performance; descriptions defining adjectival ratings were 

vague and/or inconsistent and did not clearly define the basis for rating 

performance; and contracting officials did not justify the cost effectiveness of 

selecting a CPAF contract. Exhibit B briefly summarizes these reports.

CONTRACTOR RATINGS ARE NOT ADEQUATELY SUPPORTED 

TO JUSTIFY SUBSTANTIAL AWARD-FEE PAYMENTS

Despite the significant award-fee payments made to contractors, Operating 

Administrations often did not demonstrate that the payments were warranted. We 

reviewed a total of 24 contracts; however, rating periods were not yet completed 

for 2 contracts. For the 22 contracts we reviewed with completed rating periods, 

only 2 had sufficient documentation supporting performance monitors’ evaluations 

and ratings, and 3 had no assigned ratings even though the rating period ended and 

such ratings were required. The remaining 17 contracts lacked adequate support to 

determine whether the assigned ratings and the resulting award fees were justified. 

For some contracts, performance monitors did not provide comments or examples 

to support their adjectival or numeric ratings14

or to indicate key evaluation criteria 

were satisfied. For those contracts where performance monitors did provide 

narrative to support ratings, the comments or examples were general and lacked the 

detail needed to demonstrate the ratings were warranted. For example, support for 

285 of 310 “superior” ratings on a MARAD contract15

In a 2008 report on FAA’s System Engineering and Technical Assistance II (SETA 

II) contract,

included comments such as 

“most pleased with the progress and quality of work to date” and “the contractor 

has overcome obstacles and made it work.” Despite this vagueness, MARAD paid 

the contractor 99 percent (about $142,000) of the available award-fee pool over the 

two rating periods in our sample. 

16

 14 Adjectival ratings are terms such as “excellent” and “satisfactory”; numeric ratings use a scale of 1 to 4.

we noted that FAA no longer required performance monitors to 

provide detailed comments on contractor performance—including identifying 

specific strengths, weaknesses, and deficiencies—although it continued to 

15 The MARAD contract was for comprehensive support services to maintain and enhance logistics programs. 

Performance areas included quality/timeliness of work, effectiveness in controlling and/or reducing cost, 

integration/coordination of effort, and effectiveness of program management. 16 Report Number FI-2009-002, “Interim Report on Award-Fee Criteria for the System Engineering and Technical 

Assistance II Contract,” dated October 7, 2008. All OIG reports and testimonies can be viewed on our website at: 

www.oig.dot.gov. 
7

encourage monitors to do so.17

Table 1. Percentage of Award Fees Paid for Rating Periods Reviewed

While it is unclear to what extent performance 

monitors continue to provide detailed comments on FAA’s CPAF contracts, we 

could not find adequate documentation for the SETA II contract to support the 

contractor’s consistently high ratings and award fees—approximately $2 million or 

90 percent of the available award-fee pool for two completed rating periods.

For the ratings we reviewed, Operating Administrations paid contractors about 

$15 million of the $16.5 million (about 91 percent) of available award fees (see 

table 1). However, the ratings associated with $14 million of the award fees lacked 

adequate support to determine whether the assigned ratings and resulting award 

fees paid were justified. Due to these findings, we extrapolated the results of our 

sample to the universe of 41 DOT CPAF contracts and estimate with 90 percent 

confidence18

OPERATING ADMINISTRATIONS' AWARD-FEE PROCESSES 

PROVIDE LITTLE CONTRACTOR INCENTIVES

that as of December 31, 2007, approximately $140.6 million was paid 

in award fees without proper justification, which we therefore identified as 

unsupported costs. 

Operating Administrations’ award-fee processes do not support the goal of 

motivating contractors to excel in carrying out the terms of the contract. Unlike 

other Federal agencies, DOT, with the exception of FAA, has little to no guidance 

on the use of award fees. Most Operating Administrations’ payment structures 

allow for award-fee payments for average or below-average performance. 

 17 According to an FAA senior official, removing the documentation requirement was intended to increase the number 

of evaluation responses submitted by performance monitors, and the response rate has since increased. We did not 

verify this. 18 Relative precision of the estimate is ± 46.3 percent. 

Operating 

Administration

Available AwardFee PoolAmount of 

Award Fee Paid

Percentage of the 

Available Award-Fee 

Pool Paid

PHMSA $29,212 $29,212 100%

FAA $10,315,731 $9,740,490 94%

MARAD $486,103 $453,731 93%

FHWA $397,660 $370,995 93%

FRA $71,806 $61,467 86%

RITA $5,097,965 $4,353,537 85%

OST $81,325 $66,687 82%

Total: $16,479,802 $15,076,118 91%
8

Operating Administrations’ performance plans also lacked clear evaluation criteria, 

leaving ratings open to interpretation.

Lack of Specific Guidance on the Use of CPAF Contracts Underlies

Inappropriate Performance Ratings and Award Payments

Senior acquisition officials at DOT and FAA acknowledged that specific award-fee 

guidance is needed to ensure CPAF contracts achieve acquisition outcomes. 

However, DOT's TAR does not provide specific award-fee guidance. For example, 

the TAR does not instruct contracting officials to make clear distinctions between 

satisfactory and excellent performance, nor does it state that award fees should not 

be paid to contractors whose performance is judged to be below satisfactory or does 

not meet the basic requirements of the contract. The guidance also lacks clarity on 

how to link performance outcomes—such as cost and schedule—to award fees. 

Operating Administrations’ large award-fee payments to contractors who perform 

satisfactorily are mainly the result of a lack of detailed guidance and training on 

how to design and administer CPAF contracts. DOT’s Office of the Senior 

Procurement Executive has yet to issue new or update existing policies in 

accordance with OMB’s December 2007 memorandum calling for chief acquisition 

officers and senior procurement executives to review and update their acquisition 

policies. DOT’s TAR, which includes general guidance on the use of CPAF 

contracts, was last revised in April 2005; the section on performance evaluation 

plans has not been updated since October 1994. In contrast, other agencies have 

developed guidance that explicitly states how to properly administer CPAF 

contracts. For example, NASA and the Departments of the Air Force, Army, and 

Navy state that performance monitors should observe contractor performance based 

on the criteria specified in the performance evaluation plan and document results 

by giving specific examples to support their conclusions. 

Operating Administrations' Payment Structures Do Not Adequately 

Discriminate Between Poor, Satisfactory, and Excellent Contractor 

Performance

To encourage contractor excellence, OMB guidance states that there should be 

clear distinctions in possible award earnings between satisfactory and excellent 

performance. OMB guidance further states that no award fee should be paid for 

performance that does not meet contract requirements or is judged to be 

unsatisfactory. NASA and the Department of the Army have developed guidance 

that similarly states that poor performing contractors should not be paid an award 

fee. Guidance from NASA and the Departments of the Air Force and Army further 
9

states that contracts with a base fee19 should not provide an award fee for 

performance that is deemed satisfactory, as the base fee is intended to compensate 

such performance.20

Despite OMB guidance and best practices from other Federal agencies, Operating 

Administrations continue to allow contractors to earn award fees without 

performing at a level that is acceptable to the Government under the terms of the 

contract. Specifically, the performance evaluation plans for 13 contracts reviewed

allow award-fee payments for below-average results. For example, the payment 

structure for FHWA’s Long-Term Pavement Performance Studies-Southern 

Regional Support contract—a 5-year contract for non-personnel support services—

allows the contractor to receive up to 70 percent of the fee for poor performance. 

Ultimately, the contractor could receive over $555,000 of the available award fee 

over the life of the contract without meeting the contract’s terms. This type of 

payment structure not only allows contractors to receive substantial payments for 

poor performance, it leaves little in the award-fee pool to encourage contractors to

meet or exceed expectations and achieve desired contract outcomes. In the FHWA 

contract, less than $240,000 is available to motivate the contractor to carry out the 

contract’s terms.21

Operating Administrations also developed payment structures that allow 

compensation for satisfactory performance on contracts with a base fee, which 

already award for satisfactory performance. Specifically, 9 of the 10 contracts we 

reviewed that include a base fee allow significant award fees to be paid for 

satisfactory performance in addition to the base fee—essentially rewarding the 

contractor twice for satisfactory performance. For example, FAA’s payment 

structure for an engineering, technical, and administrative support contract for 

civilian and military aircraft guidance and surveillance systems currently allows the 

contractor to earn an award fee for “good” performance—which the contract

defines as meeting contract requirements with some weaknesses—in addition to the 

received base fee of $1.7 million. The payment structure would allow up to 

72.5 percent, about $3 million, of the award-fee pool for good performance, leaving 

only about $1 million to motivate performance that exceeds expectations.

Vague Evaluation and Award-Fee Criteria Make It Difficult for Monitors 

to Appropriately Rate Contractor Performance

Clear evaluation criteria are critical to ensuring award fees are commensurate with 

contractor performance. Without clearly defined metrics and outcomes, 

 19 The base fee is an amount of money (from 0–3 percent of the estimated cost of the contract) fixed at the inception of 

the contract, which is paid to the contractor for its performance. 20 The Department of Defense has also issued a policy memorandum to improve the design and strengthen controls 

over use of CPAF contracts. 21 For this contract, we did not document any instances where the contractor was paid award fees for poor performance. 
10

performance ratings are open to subjective interpretation and can result in 

unsupported contractor performance evaluations and awards. Accordingly, OMB 

guidance calls for CPAF contracts to establish specific performance objectives 

prior to contract award, such as delivering products and services on time, within 

cost goals, and of a stated level of quality. OMB guidance also states that awards 

must be tied to demonstrated results, as opposed to effort, in meeting or exceeding 

specified performance standards. Guidance from NASA and the Departments of 

the Air Force, Army, and Navy similarly indicates that using measurable criteria to 

evaluate contractor performance is preferred and warns that using broad evaluation 

criteria can result in monitors being unable to provide meaningful comments to 

support ratings.

None of the evaluation plans for the 24 DOT contracts we reviewed had clear and 

measurable criteria to evaluate contractor performance. For example, the plan for 

FHWA’s Adaptive Control Software contract includes vague phrases such as 

“quality and timeliness of deliverables;” “quality of planning;” “effectiveness of 

cost and business management;” and “timeliness and quality of financial reports, 

processing of contract modifications, and compliance with contract clauses” as 

standards to measure technical performance, schedule management, and cost 

management.

For 23 contracts, the adjectival rating22 descriptions in the performance evaluation 

plans were vague and/or inconsistent and did not clearly define the basis for 

assigning such a rating, making it difficult for monitors to determine the 

appropriate rating of the contractor’s performance. For example, Volpe’s TRIPS 

contract,23

 22 Adjectival ratings describe what constitutes each level of performance within each performance category and provide 

assistance in establishing evaluation criteria. 

which provides for a broad range of information technology support 

services, uses phrases such as “above standard,” “highly effective results,” and 

“timely manner” as standards for a rating of very good. Discussions with eight 

performance monitors revealed that each had a different interpretation on how to 

apply these ratings to contractor performance. One performance monitor 

interpreted a very good rating as the contractor performing only minor rework,

while another interpreted the rating as the contractor performing “above and 

beyond meeting the requirements.” Interpretations of an excellent rating also 

varied. For example, one performance monitor stated that excellent equated to 

having one error on a task, while another stated that it equated to having three 

errors on a task. Inconsistent interpretations of adjectival rating descriptions 

significantly increase the risk of the Government overpaying or unfairly 

distributing award fees.

23 Report Number FI-2008-070, “Interim Report on Award-Fee Criteria for the Transportation Information Project 

Support Contract,” dated August 14, 2008.
11

For 21 contracts, Operating Administrations simply required the contractor to meet 

basic contract requirements. For example, in May 2008, we reported that FAA’s 

National Airway Systems contract required the contractor to assign qualified 

personnel to accomplish the work—a standard expectation, which normally does 

not merit an award.

24

DOT'S MANAGEMENT OF CPAF CONTRACTS FACES MANY 

CHALLENGES

 Guidance from the Departments of the Army and the Air 

Force states that award-fee criteria should focus on the most important aspects of 

the procurement that will motivate the contractor to perform in an exceptional 

manner.

The Department has not effectively managed its CPAF contracts. DOT lacks 

sufficient training and has failed to ensure adequate separation of duties for 

employees responsible for administering CPAF contracts. At the same time, it is 

unknown whether DOT’s use of CPAF contracts has been appropriate. This is 

largely because Operating Administrations commit to contracts without justifying 

their cost-effectiveness, as required by the FAR and recommended by FAA’s AMS,

and DOT has not determined whether its CPAF contracts have produced better 

outcomes than other contract types. Finally, inactive funds on completed CPAF 

contracts are not always deobligated in a timely manner, leaving funds idle when 

they could be used for other purposes. Together, these challenges raise significant 

concerns about the appropriateness and equity of award-fee payments. 

Inadequate Training on the Use of CPAF Contracts Has Resulted in 

Errors That Make it Difficult To Manage CPAF Contracts

DOT does not provide adequate training on the use of CPAF contracts. The 

Department of the Air Force recommends that such training provide a clear 

understanding of the award-fee process; performance evaluation plans; roles and 

responsibilities; documentation requirements; and evaluation techniques, including 

gathering information related to specific criteria, techniques to be used, and 

frequency of observations. Based on our reviews of evaluation documents and 

interviews with some performance monitors, we concluded that this type of training 

for CPAF contracts is not currently in place. For example, performance monitors 

were unaware of requirements to provide documentation to support their ratings 

and provisions to make certain modifications to performance evaluation plans. 

Training is also critical given that contracting actions change hands quickly as staff 

leave or are reassigned, and contracting personnel have become less familiar with 

contracts assigned to them. 

 24 Report Number FI-2008-054, “Interim Report on Award-Fee Criteria for the National Airway Systems Contract,” 

dated May 28, 2008.
12

The need for training is especially apparent at FAA. FAA issued an Award-Fee 

Contracting Guide in September 2007, which mirrors NASA's Award-Fee 

Contracting Guide. The guide states that using outcome-based factors is preferred 

because they are better indicators of performance. However, we found that some 

FAA contracting and program officials were unaware of FAA’s Award-Fee 

Contracting Guide, and the contract actions we reviewed did not always 

demonstrate use of award-fee criteria outlined in the guide. In February 2008, we 

reported that the award-fee criteria for FAA’s follow-on National Airspace System 

Implementation Support (NISC) II contract were vague and not linked to 

acquisition outcomes.25

Overlapping Award-Fee Responsibilities Create Additional Risks

 

To minimize the risk of fraud, waste, and abuse in Federal contracting, OMB 

Circular A-123 requires that key responsibilities in authorizing, processing, 

recording, and reviewing official agency transactions be separated among 

individuals performing these duties. The Departments of the Air Force and Army 

have guidance that underscores OMB’s circular. Specifically, their guidance states 

that it is especially important for all personnel to understand the overall evaluation 

process and their specific roles and responsibilities within their agency to evaluate 

the contractor's performance. FAA’s award-fee guide similarly indicates that a 

three-level organizational structure should generally be employed using separate 

individuals for performance monitor, PEB, and FDO duties.

However, on half of the DOT Operating Administrations' contracts we reviewed,

personnel simultaneously fulfilled multiple key roles in the award-fee process, such 

as performance monitor, voting member on PEB, and FDO. For example, on two 

MARAD contracts for logistics support, the performance evaluation plans 

designated employees to act as performance monitors as well as members on the 

PEB. For both contracts, the PEB Chairperson was also a performance monitor. In 

other words, performance monitors are reviewing their own ratings. Allowing 

personnel to simultaneously carry out both performance monitor and PEB 

responsibilities exacerbates the risks inherent to CPAF contracts because the PEB 

is expected to provide an objective assessment of the contractor’s overall 

performance based on performance monitors’ evaluations, contractors' selfevaluations, and any other information available in order to recommend the earned 

award-fee amount.

 25 Report Number FI-2008-027, “Interim Report on Award-Fee Criteria for the National Airspace System 

Implementation Support II Contract and Bridge Contract,” February 27, 2008. 
13

DOT’s CPAF Contracts Are Entered Into Without Sufficient Knowledge 

About Their Appropriateness

While CPAF contracts can provide incentives to spur innovation and reduce costs, 

they require greater effort and more resources than other contract types to monitor 

and document contractor performance. Before committing to this contract type, the 

FAR26 requires, and FAA’s AMS recommends, that agencies justify the costeffectiveness of a CPAF contract. OMB reinforced this requirement by directing 

contracting officers to conduct and document risk and cost-benefit analyses when 

determining whether to use CPAF contracts.27

None of the 24 contracts we reviewed provided justification on the costeffectiveness of selecting a CPAF contract. For example, in May 2005, FHWA 

awarded an approximately $21 million contract—which includes both CPAF and 

cost-plus-fixed-fee line items—without justification. According to FHWA 

officials, they lacked the resources to adequately evaluate contractor 

performance—and consequently did not pay an award fee—raising questions as to 

whether the CPAF portion of the contract was appropriate to begin with.

 NASA and the Departments of the 

Army, Air Force, and Navy similarly recommend justifying the use of these 

contracts. Specifically, they require their agencies to conduct a cost-benefit 

analysis to ensure that the benefits gained through a CPAF contract outweigh the 

additional costs of overseeing and administering the contract.

In September 2007, FAA issued an award-fee guide calling for a consideration of 

the costs and benefits of using CPAF contracts because of the cost and

administrative burden involved. In May 2008, we reported that FAA’s National 

Airway Systems contract—awarded a few months before the new guidance was 

issued—had not evaluated the administrative costs to justify its use of a CPAF

contract.28

 26 As of October 14, 2009, the FAR explicitly requires agencies to perform and document a risk and cost-benefit 

analysis to justify any additional administrative effort and cost required to monitor and evaluate performance (FAR 

16.401). Prior to this revision, the FAR limited use of CPAF contracts to where the contract amount, performance 

period, and expected benefits were sufficient to warrant the additional administrative effort and cost involved (FAR 

16.405-2(c)(2), as of October 1, 2009). The FAR also required that the contracting office contract file include 

acquisition planning information (FAR 4.803); and an acquisition plan must include a discussion of contract-type 

selection (FAR 7.105).

 In response to our audit and recommendations, FAA determined that 

the cost and time required to oversee, monitor, and document the award-fee process 

outweighed the potential benefits of the contract and therefore, changed the 

contract to a cost-plus-fixed-fee contract. However, FAA did not justify the costs 

for a CPAF contract awarded after the guidance was issued. Specifically, in 

February 2008, FAA awarded a $234 million follow-on bridge contract to its NISC

II contract without justifying its cost-effectiveness. According to FAA contracting 

27 Office of Management and Budget, Appropriate Use of Incentive Contracts, Memorandum for Chief Acquisition 

Officers and Senior Procurement Executives, December 4, 2007. 28 Report Number FI-2008-054, “Interim Report on Award-Fee Criteria for the National Airway Systems Contract,” 

dated May 28, 2008.
14

and program officials, it was too late in the evaluation process to change the 

contract type.

Contracting officials cited three reasons for not justifying their use of CPAF 

contracts:

• They were unaware of FAR and FAA requirements to provide justification.

• The FAR and FAA did not specifically require a cost-benefit analysis.

• Individuals who made the decision to use a CPAF contract are no longer with 

the responsible contracting office. 

In addition to Operating Administrations not justifying their use of CPAF contracts, 

DOT has not conducted analyses to determine whether its CPAF contracts actually 

produce better outcomes than other contract types might have. Without such 

analyses, DOT cannot ensure that its CPAF contracts are the most beneficial to the 

Government.

Inactive Funds on Completed CPAF Contracts Run the Risk of Not 

Being Deobligated

Obligations29

This example by itself does not indicate a systemic problem but may suggest that 

other CPAF contracts can run the same risk of not deobligating inactive funds, 

warranting Operating Administrations to better manage this process. 

that are no longer needed or exceed estimated needs should be 

deobligated and made available to fund other projects. The timely deobligation of 

funds could result in real time savings to DOT and can also be used to fund other 

DOT priorities. However, about $4.6 million in obligations on one contract we 

reviewed—FAA’s University of Oklahoma contract for air traffic controller 

training—remained outstanding after the contract ended in July 2006. Specifically, 

work was completed on the contract, yet unexpended balances, including award 

fees, were not released. Further, FAA awarded a follow-on contract for the same 

services in August 2006. We notified FAA about this issue in February and 

September 2008, and FAA acknowledged it had not deobligated the funds. Soon 

after our second notification, FAA made several transactions to deobligate all but

approximately $42,000, which was needed to close out the contract. 

 29 An obligation represents a liability that is created when an agency enters into a binding legal agreement, such as a 

CPAF contract. 
15

CONCLUSION

When award fees are tied to performance, CPAF contracts can encourage 

contractors to reduce costs, stay on schedule, and achieve acquisition outcomes, 

mitigating risk to the Government. However, based on the contracts reviewed, 

there is almost no assurance that the significant award fees paid to contractors are 

commensurate with actual performance. Further, DOT and FAA’s current 

practices do not establish a rigorous process for effective design, implementation, 

and payment of award fees. As a result, these award fee practices provide little 

incentive for contractors to meet minimum contract requirements, much less exceed 

them. Until DOT and FAA take action to ensure contracting officials effectively 

design and implement CPAF contracts, the Department will continue to put 

taxpayer dollars at risk. 

AGENCY ACTIONS

FAA and Volpe provided written comments on our 2008 interim reports that 

describe the agencies' vague and/or inconsistent adjectival rating descriptions, 

performance evaluation plans that do not include measurable criteria to adequately 

evaluate contractor performance, and lack of justification on the cost effectiveness 

of selecting a CPAF contract. In their comments, both FAA and Volpe concurred 

with all recommendations made in those reports and to date, have completed all 

corrective actions. 

RECOMMENDATIONS

We recommend that the Senior Procurement Executive:

1. Update or expand the TAR guidance to:

a. Develop specific award-fee criteria for assessing contractor performance by 

providing more measurable and outcome-based criteria linked to 

acquisition outcomes.

b. Define adjectival ratings so there will be a clear basis for assessing 

performance and ratings consistent with the grading table.

c. Develop award-fee payment structures that 1) incentivize excellent 

contractor performance and 2) prohibit contractors from receiving award 

fees (when a base fee is included) for simply meeting contract requirements 

or for performance that is judged to be unsatisfactory. 

d. Establish clear division of responsibility for the evaluation team (FDO, 

PEB, performance monitors) and prohibit the same official from 

performing multiple roles.
16

e. Require performance monitors to document the basis for performance 

ratings or scores given and include specific examples of strengths and 

weaknesses.

f. Conduct a cost-benefit analysis in choosing a CPAF contract and document 

how the benefits will offset the additional cost associated with 

administering such a contract.

2. Deobligate funds from CPAF contracts that have ended or from completed 

rating periods with unused award fees. 

3. Train contracting and program office personnel on designing and administering 

CPAF contracts consistent with revised guidance. 

4. Develop performance measures to evaluate the effectiveness of award fees as a 

tool for improving contractor performance and achieving desired program 

outcomes.

We recommend that the Vice President of Acquisition and Business Services, 

FAA:

5. Establish a process for monitoring implementation of FAA’s Acquisition 

Management System and Award-Fee Contracting Guide.

6. Train contracting and program office personnel on designing and administering 

CPAF contracts, emphasizing future prevention of the types of deficiencies 

noted in this report.

7. Deobligate about $4.6 million in obligations on the University of Oklahoma 

contract for air traffic controller training (DTFA02-01-D-03699). 

8. Deobligate funds from CPAF contracts that have ended or from completed 

rating periods with unused award fees. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

We provided a draft of our report to OST and FAA, with separate 

recommendations to each. In a consolidated response from OST, FAA concurred 

with our recommendations targeted for FAA. OST concurred with two of our 

recommendations for OST and partially concurred with the other two—

recommendations 1 and 4. We acknowledge that the Department has reduced its 

use of CPAF contracts considerably since our assessment, and we encourage 

continued careful use of these types as they present significant cost risk to the 
17

government and taxpayers. The agency's response and our sustained position with 

regard to our recommendations are detailed below.

For recommendation 1, OST stated that rather than modify the TAR, it will 

develop a CPAF Guidebook incorporating planning, implementation, and 

administration of CPAF contracts based on guidance available from best practice 

agencies. According to OST, the guidebook, along with training, will meet the 

intent of our recommendation—to ensure Operating Administrations obtain 

detailed guidance on how to design and administer CPAF contracts. Because OST 

does not plan to implement its guidebook before July 2011, we are asking the 

Acting Deputy Assistant Secretary for Administration to ensure acquisition 

officials involved with the administration of CPAF contracts are aware of the new 

FAR 16.4 requirements for award-fee contracts. 

For recommendation 4, OST stated that its reduction in the use of CPAF contracts 

and the absence of a control group makes it difficult to determine CPAF

effectiveness based on performance measures. The intent of our recommendation 

was to ensure DOT complies with the FAR, which now requires agencies to 

include performance measures to evaluate if award fees are an effective tool for 

improving contractor performance and achieving desired program outcomes (FAR 

16.401(f)). Because OST's response does not provide assurance that OST will 

implement this FAR requirement, we are asking the Acting Deputy Assistant 

Secretary for Administration to provide us more details on the specific actions 

OST will take to implement the recommendation—such as describing whether 

OST or Operating Administrations will develop performance measures and 

confirming whether the requirement will be incorporated in the guidebook—as 

well as a timeframe for implementation.

Despite concurring with many of our recommendations, OST raised several 

concerns with our findings. First, OST notes that our draft report overstated 

FAR’s requirement to complete a cost-benefit analysis before selecting a CPAF 

contract. We found that a cost-benefit analysis was not performed for any of the 

24 CPAF contracts we reviewed and, therefore, concluded that Operating

Administrations have committed to CPAF contracts without justifying their cost 

effectiveness. OST believes that our conclusion calls for an evaluation of full 

costs and benefits of CPAFs versus other alternatives. However, our report does 

not call for such an evaluation. Instead, it recommends that OST contracting 

officials complete a cost-benefit analysis to determine whether use of a CPAF 

contract justifies the added costs to administer and monitor the contract

effectively. 

Second, OST disagreed with our statement that Operating Administrations allowed 

large award-fee payments for contractors who perform satisfactorily because the 
18

FAR currently states that up to 50 percent of the award-fee pool can be earned for 

satisfactory performance. However, we found that Operating Administrations

allowed contractors to earn more than 50 percent of the available award-fee pool

for satisfactory performance. Specifically, in 9 of the 10 contracts we reviewed 

that include a base fee, Operating Administrations also allowed contractors to earn 

award fees over 50 percent and up to 75 percent of the available award-fee pool 

for satisfactory performance. The FAR states that a CPAF contract "is a costreimbursement contract that provides for a fee consisting of (1) a base amount 

fixed at inception of the contract, if applicable...and (2) an award amount that the 

contractor may earn in whole or in part during performance and that is sufficient 

to provide motivation for excellence in the areas of cost, schedule, and technical 

performance." Best practices used throughout the Federal Government 

recommend that contracts with a base fee—a fixed amount that the contractor 

earns for satisfactory performance—should not provide an award fee for 

performance that is deemed satisfactory since this would essentially reward the 

contractor twice for satisfactory performance. 

OST also questioned our finding that $14 million of the award fees for CPAF 

contracts we reviewed lacked adequate support to determine whether assigned 

ratings and resulting awards were justified. Accordingly, OST did not agree with 

our estimated $140.6 million in unsupported award fees. Our extrapolation is 

based on the results of our review of 22 contracts, which identified that 17 

contracts lacked adequate documentation to support performance monitors' 

ratings. Without detailed performance monitors' reports and examples, the 

Department is forced to rely on contractors' self-assessments and high-level 

assessments to recommend award fees, which could result in overstated award 

fees. Without sufficient documentation from the performance monitors, we could 

not determine whether the high fees awarded were justified. We estimated the 

magnitude of the unsupported payments for all contracts in the universe with 90 

percent confidence30 to determine the impact of the unavailable or inadequate 

documentation.

Finally, OST commented that our draft report does not recognize that the TRIPS 

contract rating panel provided detail to substantiate their ratings. While we 

reviewed panel rating reports, we focused on the lack of rating support from their 

performance monitors, who are responsible for observing contractor performance,

documenting results, and justifying their conclusions. We found performance 

monitors simply selected a rating, such as excellent or satisfactory, without 

explaining the reason or providing examples, or provided comments that were too 

general to demonstrate whether the contractor complied with the criteria. Given 

that members of the contract rating panel subsequently review the performance 

 30 Relative precision of the estimate is + 46.3 percent.
19

monitors' evaluations for dozens of task orders performed during any period, it is 

critical that evaluations be as specific and detailed as possible.

It should be noted that during our review, we identified critical conditions on 

specific CPAF contracts, which we presented to the Department in four interim 

reports between February and October 2008. We worked with contracting and 

program officials who concurred with our findings and implemented corrective 

actions to ensure that pending awards for new CPAF contracts were designed to 

encourage contractors to perform efficiently and effectively.

DOT's current CPAF contracts and contracts with significant CPAF provisions are 

valued at approximately $5.4 billion. Considering the significance of these 

contracts, we will closely monitor OST's actions implementing our 

recommendations. 

ACTIONS REQUIRED 

In accordance with Department of Transportation Order 8000.1C, we request that 

you provide a response within 30 days to this report that clearly indicates how you 

will resolve Recommendations 1 and 4. You may provide alternative courses of 

action that meet the intent of Recommendations 1 and 4, and indicate the specific 

actions planned and the target dates for completion. 

We appreciate the courtesies and cooperation of DOT representatives during this 

audit. If you have any questions concerning this report, please call me at 

(202) 366-1427 or Terry Letko, Acting Assistant Inspector General for Acquisition 

and Procurement Audits, at (202) 366-2001.

cc: Assistant Secretary for Administration

 Federal Aviation Administrator

 Associate Administrator, Regions and

Center Operations, FAA

 Vice President of Acquisition and

Business Services, FAA

 Martin Gertel, M-1

 Anthony Williams, ABU-1
20

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

We conducted this audit in accordance with generally accepted government 

auditing standards.31 Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

We conducted this audit between June 2007 and May 2010. We reviewed Federal 

Acquisition Regulations (FAR), Transportation Acquisition Regulations (TAR), 

and guidance from other Federal agencies (Departments of the Army, Navy, and 

Air Force; Environmental Protection Agency; and the National Aeronautics and 

Space Administration) to identify practices that we considered most beneficial in 

helping ensure effective use of award fees. 

In addition, we reviewed FAA’s Acquisition Management System (AMS), which 

establishes acquisition policies and procedures for FAA. FAA adheres to its AMS 

Guidance in place of the TAR. We also reviewed FAA’s Award-Fee Contracting 

Guide issued in September 2007. 

In addressing our objectives, we performed the following steps for the contracts we 

reviewed:

• Obtained a copy of the contract and other documentation pertaining to the 

award-fee process. 

• Interviewed the contracting and program officials for each contract.

• Performed a detailed review of a minimum of two rating periods for each 

contract.

• Held meetings with contracting and program officials throughout the audit 

regarding our analysis of contracts and DOT's process for managing them. 

CPAF contracts are used by 7 of the 13 Operating Administrations that make up 

DOT. As of December 31, 2006, DOT had 41 open CPAF contracts with a 

potential maximum value of approximately $3.4 billion, including about 

$171 million in available award fees. 

From that universe of open CPAF contracts, we reviewed a randomly selected 

sample of 21 CPAF contracts with a potential maximum value of about 

$2.5 billion, including about $144 million estimated as the available award-fee 

 31 The audit completion date was delayed due to the issuance of four interim reports on individual CPAF contracts. See 

exhibit B.
21

Exhibit A. Scope and Methodology

pool.32 We also reviewed three follow-on contracts33

Originally, we selected a statistical sample of 30 out of a universe of 44 CPAF 

contracts. We reviewed the sampled contracts and found that three were not CPAF 

contracts. Due to this finding, we verified with Operating Administrations that all 

remaining 41 contracts in the universe were CPAF contracts. Based on 

management's decision, we reviewed the first 21 contracts in our sample. From 

these 21 sampled contracts, we subsampled 46 of 213 rating periods (22 percent) 

using a fixed-interval method. Only 1 contract had documentation to support 

performance awards, 3 contracts had not paid any performance awards, and the 

remaining 17 contracts did not have sufficient documentation to support 

performance awards. Because 3 contracts had not paid any award fees, we

reviewed the ratings for 40 rating periods. Ultimately, out of the $14.3 million paid 

on the 21 contracts during the 40 rating periods we reviewed, the amount of 

unsupported awards totaled $13.9 million (97.1 percent). Based on the results of 

our sample, we estimate with 90 percent confidence

in addition to those randomly 

selected, which totaled approximately $572 million, including about $26 million in 

available award fees. The total number of CPAF contracts reviewed was 24 (see 

table 2). 

34 that approximately 

$140.6 million was paid in award fees as of December 31, 2007, without proper 

justification, thus identified as unsupported costs. 

In addition, due to significant and ongoing deficiencies found in the 21 contracts 

randomly selected, we also reviewed three follow-on contracts related to three 

contracts in our random sample. For two of the follow-on contracts, we found that 

rating periods were not yet completed. For the remaining one follow-on contract, 

we selected and reviewed 2 rating periods and found documentation to support 

performance awards. The amount paid and supported on these three follow-on 

contracts totaled $738,117.

 32 Under a CPAF contract, a pool of money is negotiated in advance, and periodic assessments are made by the 

Government to determine how much of the award-fee pool will be earned based on contractor performance and 

attainment of the program goals and objectives. 33 A new contract that calls for the same supplies and services as a previous contract. 34 Relative precision of the estimate is ± 46.3 percent. 
22

Exhibit A. Scope and Methodology

Table 2. DOT Operating Administrations’ CPAF Contracts 

Reviewed

Operating Administration Number of CPAF 

Contracts Reviewed

Federal Aviation Administration (FAA) 7

Federal Highway Administration (FHWA) 7

Federal Railroad Administration (FRA) 1

Maritime Administration (MARAD) 3

Office of the Secretary Administration (OST) 1

Pipeline and Hazardous Material Safety 

Administration (PHMSA)

1

Research and Innovative Technology 

Administration (RITA)

4

Total CPAF Contracts Reviewed 24
23

Exhibit B. Interim Reports

EXHIBIT B. INTERIM REPORTS

OIG Report Number FI-2008-027, “Interim Report on Award-Fee Criteria for 

National Airspace System Implementation Support II Contract and Bridge 

Contract,” February 27, 2008. 

Our report on the National Airspace System Implementation Support II contract 

(NISC II) demonstrated that FAA did not structure and implement the ongoing 

NISC II CPAF contract in a way that effectively motivated the contractor to 

improve performance and achieve acquisition outcomes—defined in terms of 

program costs, schedule, and performance. Additionally, FAA contracting officials 

did not justify the cost effectiveness of selecting a CPAF contract by evaluating 

administrative costs versus expected benefits to the Government. FAA contracting 

and program officials are implementing actions to meet the intent of our 

recommendations by clearly identifying measurable award-fee criteria for assessing 

contractor performance and linking the criteria to acquisition outcomes. 

Implementing the planned corrective actions will put approximately $18 million in 

expected award fees for the bridge contract to better use by ensuring that FAA’s 

contract objectives are being met. We also recommend FAA acquisition officials 

reevaluate the use of CPAF contracts for future NISC procurements. 

OIG Report Number FI-2008-054, “Interim Report on Award-Fee Criteria for 

the National Airway Systems Contract,” May 28, 2008. 

Our report on FAA’s National Airway Systems contract demonstrated that 

contracting officials did not justify the cost effectiveness of selecting a CPAF 

contract by evaluating administrative costs versus expected benefits to the 

Government. Without this evaluation, the Aeronautical Center had no assurance 

that a CPAF contract was appropriate. Additionally, the performance evaluation 

plan did not include measurable criteria needed to adequately evaluate contractor 

performance. Further, a portion of the award-fee criteria required the contractor to 

merely comply with basic contractual requirements. The performance evaluation 

plan allowed award-fee payments up to 72.5 percent of the award-fee pool for 

average or below results. The problems cited in this report existed, in part, because 

Aeronautical Center personnel did not have detailed guidance on how to structure 

performance evaluation plans to incentivize contractors. FAA contracting and 

program officials agreed to select another contract type more suitable for obtaining 

engineering and technical support and revise Aeronautical Center guidance. 

Implementing the planned corrective actions will put approximately $199 million 

in remaining contract funds to better use.
24

Exhibit B. Interim Reports

OIG Report Number FI- 2008-070, “Interim Report on Award-Fee Criteria 

for the Transportation Information Project Support Contract,” 

August 14, 2008. 

Our report on the Volpe National Transportation Systems Center’s Transportation 

Information Project Support (TRIPS) contract demonstrated that the performance 

evaluation plan did not include measurable criteria needed to adequately evaluate 

contractor performance. Further, descriptions defining adjectival ratings were 

vague and inconsistent and did not clearly define the basis for rating performance. 

This resulted in performance monitors arbitrarily determining which ratings they 

believed best reflected how well the contractor performed. Additionally, 

contracting officials did not justify the cost effectiveness of selecting a CPAF 

contract by evaluating administrative costs versus expected benefits to the 

Government. Without this evaluation, Volpe had no assurance that a CPAF contract 

was appropriate. Senior Volpe officials are implementing actions to meet the intent 

of our recommendations by clearly identifying measurable award-fee criteria for 

assessing contractor performance. Implementing the planned corrective actions 

will put approximately $4 million in expected award fees to better use.

OIG Report Number FI-2009-002, “Interim Report on Award-Fee Criteria for 

the System Engineering and Technical Assistance II Contract,” 

October 7, 2008.

Our report on FAA’s System Engineering and Technical Assistance II contract 

demonstrated that the performance evaluation plan did not include measurable

criteria needed to adequately evaluate contractor performance. Further, descriptions 

defining adjectival ratings were vague and did not clearly define the basis for rating 

performance, and performance evaluators were not required to document the 

rationale for the performance ratings. This allows for unsupported personal 

opinions for judging contractor performance. Additionally, contracting officials 

did not justify the cost effectiveness of selecting a CPAF contract by evaluating 

administrative costs versus expected benefits to the Government. Without this 

evaluation, FAA had no assurance that a CPAF contract was appropriate. Senior 

FAA contracting and program officials are implementing actions to meet the intent 

of our recommendations. Implementing the planned corrective actions will put 

approximately $8 million in expected award fees to better use. 
25

Exhibit C. Major Contributors to This Report

EXHIBIT C. MAJOR CONTRIBUTORS TO THIS REPORT 

 Terrence Letko Program Director

Name Title

 Dory Dillard-Christian Project Manager

 Chris Minovich Senior Auditor

 Stacie Seaborne Senior Analyst

 Jelilat Ojodu Auditor

 Narja Hylton Auditor

 Petra Swartzlander Statistician

Krista Kietrys Writer-Editor
26

Appendix. Agency Comments

APPENDIX. AGENCY COMMENTS

Memorandum 

U.S. Department of 

Transportation 

Office of the Secretary

of Transportation

Subject:

ACTION: Management Response to OIG Draft Report, 

“Improvements in Cost-Plus-Award-Fee Processes Are 

Needed To Ensure Millions Paid In Fees Are Justified”

Date: June 17, 2010

From: Linda J. Washington

Assistant Secretary for Administration 

Reply to

Attn. of:

To: Mark H. Zabarsky

Assistant Inspector General for 

 Acquisition and Procurement Audits

The OIG draft report overstates the issues associated with the use of Cost Plus Award Fee 

(CPAF) contracts at DOT and relies upon arguments that do not always provide complete 

substantiation, resulting in an unduly critical review of these contracts, and their limited 

implementation at the Department. With less than 59 CPAF contracts let thus far in fiscal 

year 2010, CPAF contract use has declined considerably over the last few years, and 

represents less than 1 percent of DOT’s contracting activity. As described in the Federal 

Acquisition Regulations (FAR) CPAF contracts are useful vehicles when it is not feasible or 

effective to devise predetermined, objective incentive targets applicable to cost, schedule, or 

technical performance. Within DOT, useful applications of CPAF include obtaining 

engineering or information technology services, which do not always lend themselves well to 

quantitative performance metrics. 

The OIG draft report makes a number of assertions that are not well supported. These 

assertions form a basis for several of the primary concerns expressed in the draft report. For 

example, the draft report states that it is unknown whether CPAF use has been appropriate 

because Operating Administrations commit to CPAF contracts without justifying their “cost 

effectiveness” as required by the FAR. However, the FAR does not require a demonstration 

that CPAF will be “cost effective” in order to justify its use. Rather, the FAR at 

16.401(e)(1)(iii) requires only that “any additional administrative effort and cost required to 

monitor and evaluate performance are justified by the expected benefits.” This narrow 

consideration of performance monitoring cost compared to the benefits associated with 

CPAF contracts does not equate to a requirement for an overall cost effectiveness analysis as 

indicated in the OIG draft report. Further the report indicates that Operating Administrations 

“large award fee payments” for contractors who perform satisfactorily are mainly the result 
27

Appendix. Agency Comments

of a lack of detailed guidance and training on how to design and administer CPAF contracts. 

While the Department acknowledges the overall need to enhance guidance and training to 

more strongly link performance objectives to adjectival ratings for CPAF contracts, Table 

16-1 currently in the FAR provides up to 50 percent of the award fee pool can be earned for 

satisfactory performance. As a result, such awards can be in compliance with FAR guidance 

and should not be assumed to be inappropriate or due to lack of guidance. The OIG draft 

report should also clarify its treatment of “base fees” compared to “award fees,” and the 

standards and analytical approach applied to each, as these are not clear in the version we 

reviewed. Finally, the report is also critical of ratings which lacked support offering brief 

statements, such as, “there were no schedule issues,” to demonstrate insufficient review of 

contractor performance. However, these statements are not representative of the full extent 

of performance evaluation documentation available, particularly with regard to several of the 

contracts cited in the report. 

The Department does not concur with the OIG draft report’s assertion that $14 million in 

award fees for the contracts reviewed, or its extrapolation to $140.6 million in award fees 

across the Department, were “without appropriate justification,” and therefore unsupported. 

While the Department recognizes that CPAF implementation may not have been consistent 

across all organizations, we do not concur with the extent or amount of these findings. To 

the contrary, the Department’s implementation of CPAF in some organizations reduced costs 

compared to available alternative contract types for these services, such as Cost Plus Fixed 

Fee (CPFF). Had the Department used CPFF in lieu of CPAF, it could have cost an 

additional $1.4 million for the contracts included in the draft report’s table 1, because CPAF 

affords enhanced potential for management evaluation and consideration of contractor 

performance in determining fees. Under CPFF, the Department would have been required to 

pay this amount based only on a contractor’s best efforts, rather than any assessment of 

results. For the RITA/Volpe Transportation Information Project Support (TRIPS) contract 

cited in the draft report, the OIG report shows that RITA/Volpe reduced costs by about 15 

percent of what the contract could have cost using CPFF. 

While we have disagreements with aspects of the OIG draft report findings, we recognize 

that implementation of CPAF could be improved and made more consistent across the 

Department with enhanced guidance and training. Steps have already been taken to improve 

CPAF implementation, through measures including FHWA’s 2008 CPAF training for 164 

Contracting Officer Technical Representative’s (COTR’s). Additional actions will be taken 

to improve our use of CPAF contracts, including providing improved guidance and further 

training, as discussed below in response to the draft report’s recommendations.

FAR Defined Adjectival Subjective Ratings for CPAF Contracts

Currently, the FAR at Subpart 16.401 specifically directs agencies to utilize the adjectival 

rating and associated description shown in table 16-1. This table includes adjectival ratings 

of excellent, very good, good, etc., along with associated operational definitions. The FAR 

allows, but does not require agencies to supplement these rating descriptions as long as the 

method used to determine the adjectival rating is documented in the award-fee plan and 
28

Appendix. Agency Comments

linked to performance objectives. Although management offered examples of detailed 

evaluations, they are not recognized in the OIG draft report. For example, RITA/Volpe 

officials on the TRIPS contract rating panel provided detail to substantiate their ratings. 

According to RITA/Volpe officials, the rating reports for the TRIPS contract have run from 

15 to 20 pages for each evaluation period of the contract. Nonetheless, the OIG draft report 

offers none of this detail, instead inferring on page 3 that the sole support for performance 

was “there were no schedule issues.” This depiction of the support for the TRIPS contract 

performance evaluation is incomplete and inaccurate. Similarly, on page 6 of the report, OIG 

states that support for 285 of 310 “superior” ratings on a MARAD contract included 

comments such as “most pleased with the progress and quality or work to date” and “the 

contractor has overcome obstacles and made it work.” Here again, the report relies on two 

summary statements and does not reflect the level of effort or detail by MARAD’s contract 

evaluators as part of the award fee determination. 

Draft Report Overstates FAR Cost Benefit Analysis Requirement

While the FAR required agencies to document their consideration of the potential for 

additional costs associated with overseeing CPAF contracts, as described in 16.401(e)(1)(iii), 

it did not require a “justification of cost effectiveness,” as asserted in the draft report. 

Specifically the FAR calls for, “any additional administrative effort and cost required to 

monitor and evaluate performance are justified by the expected benefits as documented by a 

risk and cost benefit analysis.” This is not equivalent to a full cost effectiveness 

determination, which would require a far more comprehensive evaluation of full costs, and 

benefits of CPAF versus other alternatives. As a result, we do not concur with the draft 

report’s finding that, “it is unknown whether DOT’s use of CPAF contracts has been 

appropriate....because operating administrations commit to these contracts without justifying 

their cost effectiveness.” We believe that this finding is likely based on an overinterpretation of the FAR’s requirement for a more limited consideration of performance 

evaluation costs as part of the justification process for use of this contract type.

OST to Enhance CPAF Guidance and Training

The Department recognizes that improvements can be made in the utilization of CPAF 

contracts. The Office of the Senior Procurement Executive (SPE) will develop a DOT CPAF 

Guidebook incorporating planning, implementation and administration of CPAF contracts, 

based on best practice agencies identified in the OIG report. Once the guidebook has been 

completed the SPE will incorporate these processes for CPAF contracts into a training 

program to support its contracting and program personnel. This will include annual sessions 

highlighting best practice CPAF award and administration, and related OIG findings detailed 

in this report. 
29

Appendix. Agency Comments

RECOMMENDATIONS AND RESPONSES

The OIG draft report offers recommendations to both the SPE within OST and FAA. 

Responses for both sets of recommendations are included in this response, starting with those 

pertaining to OST.

Recommendation 1: Update or expand the TAR guidance to: 

a. Develop specific award-fee criteria for assessing contractor performance by providing 

more measurable and outcome-based criteria linked to acquisition outcomes. 

b. Define adjectival ratings so there will be a clear basis for assessing performance and 

ratings consistent with the grading table. 

c. Develop award-fee payment structures that 1) incentivize excellent contractor 

performance and 2) prohibit contractors from receiving award fees (when a base fee is 

included) for simply meeting contract requirements or for performance that is judged to be 

unsatisfactory. 

d. Establish clear division of responsibility for the evaluation team (FDO, PEB, 

performance monitors) and prohibit the same official from performing multiple roles. 

e. Require performance monitors to document the basis for performance ratings or scores 

given and include specific examples of strengths and weaknesses.

f. Conduct a cost-benefit analysis in choosing a CPAF contract and document how the 

benefits will offset the additional cost associated with administering such a contract. 

Response: Concur in part. While the SPE will be taking the actions discussed above to 

enhance guidance available to contracting officials regarding the use and administration of 

CPAF contracts, and reinforcing that guidance with training, we do not see the need to 

modify the TAR, as FAR Subpart 16.4 provides ample direction for establishing and 

administering CPAF contracts. Instead, the SPE plans to implement the intent of this 

recommendation through alternative actions. Specifically, the SPE will develop a DOT 

CPAF Guidebook incorporating planning, implementation and administration of CPAF 

contracts, based on guidance available from best practice agencies. We believe a guidebook 

tied to appropriate training will provide a more useful tool than a TAR update. Upon 

completion of the guidebook the SPE will seek to provide appropriate training to contracting 

and program personnel involved in the use of this type of contracting vehicle or to those 

organizations that may continue to make use of CPAF type contracts. This training will 

highlight proper CPAF award and administration. We anticipate completing these actions by 

July 1, 2011.

Recommendation 2: Deobligate funds from CPAF contracts that have ended or from 

completed rating periods with unused award fees. 
30

Appendix. Agency Comments

Response: Concur. DOT will continue conducting reviews of ended and current CPAF 

contracts, and deobligate unused funds where legally acceptable, practicable and appropriate. 

These actions will be conducted continuously.

Recommendation 3: Train contracting and program office personnel on designing and 

administering CPAF contracts consistent with revised guidance. 

Response: Concur. The SPE will provide appropriate CPAF training using the new DOT 

CPAF guidebook discussed earlier in this response. We anticipate being prepared to initiate 

such training by July 1, 2011.

Recommendation 4: Develop performance measures to evaluate the effectiveness of award 

fees as a tool for improving contractor performance and achieving desired program 

outcomes. 

Response: Concur in part. Use of CPAF contracts has declined considerably through 2010, 

to a small fractional percentage of DOT contracting. While the Department will continue to 

monitor the use of CPAF contracts, it is difficult, in the absence of a control group, to 

determine the effectiveness based on performance measures for these contracts, as we will 

not know what would have been if we had used a different incentive contract type. 

Nonetheless, during the course of completing the guidance, we will assess the potential for 

identifying and implementing performance measures as recommended. These actions will be 

completed by July 1, 2011.

OIG RECOMMENDATIONS TO FAA AND RESPONSES 

Recommendation 5: Establish a process for monitoring implementation of FAA’s 

Acquisition Management System and Award-Fee Contracting Guide. 

FAA Response: Concur. FAA will monitor the implementation of the Acquisition 

Management System (AMS) and associated guidance through its National Acquisition 

Evaluation Program (NAEP). This monitoring will include random reviews of FAA’s 

planned and awarded CPAF contracts. This action has already been completed and 

incorporated into FY2010 NAEP reviews.

Recommendation 6: Train contracting and program office personnel on designing and 

administering CPAF contracts, emphasizing future prevention of the types of deficiencies 

noted in this report. 

FAA Response: Concur. FAA will incorporate specific requirements and processes for 

CPAF contracts into the training program supporting its contracting and program personnel. 

This will include sessions at its Acquisition Training Conference to highlight proper CPAF 

award and administration, and related OIG findings detailed in this report. 

FAA anticipates incorporating this training by September 30, 2010.

Recommendation 7: Deobligate about $4.6 million in obligations on the University of 

Oklahoma contract for air traffic controller training (DTFA02-01-D-03699). 
31

Appendix. Agency Comments

FAA Response: Concur. As detailed in this report, FAA has already deobligated all but 

approximately $42,000, retained for closing costs, on contract DTFA02-01-D-03699 with the 

University of Oklahoma. This action has been completed.

Recommendation 8: Deobligate funds from CPAF contracts that have ended or from 

completed rating periods with unused award fees. 

FAA Response: Concur. FAA will conduct a review of ended and current CPAF contracts, 

and deobligate unused funds where needed. FAA anticipates completing this activity by 

September 30, 2010.