DEFENSE 

CONTRACTING

DOD Needs Better 

Information on 

Incentive Outcomes

Report to the Chairman 

Committee on Armed Services 

House of Representatives

July 2017

GAO-17-291

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-291, a report to the 

Chairman, Committee on Armed Services, 

House of Representatives

July 2017

DEFENSE CONTRACTING

DOD Needs Better Information on Incentive 

Outcomes

What GAO Found

Since 2010, the Department of Defense (DOD) has made changes to its 

regulations, policies, and guidance and taken other steps to improve its use of 

incentive contracts. DOD has promoted greater use of objective incentives—

which measure contractor performance toward predetermined targets using a 

formula—through incentive fee contracts, partly to better motivate cost control. 

These changes are reflected in DOD’s increased use of incentive fee contracts 

and decreased use of award fee contracts, which involve fees paid based on a 

more subjective evaluation of contractor performance and have not always been 

linked to acquisition outcomes (see figure).

Department of Defense Obligations for Incentive Contracts, Fiscal Years 2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.

DOD expects to achieve cost objectives on 15 of the 21 incentive fee contract 

actions that GAO reviewed and for which costs could be assessed. GAO could 

not assess cost performance on five additional selected incentive fee contracts

because comparable cost estimates were not available. Across the 21 incentive 

fee contract actions, estimated costs for the incentivized portions were about 5

percent below target costs. Schedule and technical performance incentives

mostly resulted in good outcomes. In two cases, however, although the 

contractor met specific schedule and technical performance goals, overall 

outcomes were either unsatisfactory or not yet determined. In the nine award fee 

contracts GAO reviewed, consistent with prior GAO recommendations, DOD did 

not allow unearned fees to be earned in a subsequent period, and GAO did not 

find evidence of award fees paid for unsatisfactory performance. Federal 

regulations require DOD to collect and evaluate information on incentives. In

2015, DOD stopped its previous effort to manually collect data twice a year on 

incentives valued at more than $50 million, which was burdensome and collected 

information that DOD did not use, according to DOD officials. GAO’s review of 

current DOD systems found that they provide some useful data but do not allow 

DOD to determine how well incentives are achieving desired cost, schedule, and 

performance outcomes. Without such information, DOD may be disadvantaged in 

establishing incentive arrangements that achieve intended results.

View GAO-17-291. For more information, 

contact Timothy J. DiNapoli at (202) 512-4841 

or DinapoliT@gao.gov.

Why GAO Did This Study

In fiscal year 2015, DOD obligated 

$274 billion on contracts for products 

and services, a portion of which was 

for contracts that used incentive and 

award fee provisions—or incentive 

contracts—intended to improve cost, 

schedule, and technical performance 

outcomes. Work by GAO and others 

has shown that such contracts, when 

not well managed, can lead to 

unnecessary costs shouldered by the 

American taxpayer. Beginning in 2010, 

DOD made regulatory and policy 

changes related to incentives.

GAO was asked to review DOD’s use 

of incentives. This report (1) identifies 

steps DOD has taken to improve its 

use of incentive contracts since 2010, 

and (2) assesses the extent to which

selected DOD incentive contracts

achieved desired acquisition 

outcomes. 

To conduct this work, GAO reviewed 

relevant federal and DOD guidance; 

analyzed DOD obligations and new 

contract award data for fiscal years 

2005 through 2015, before and after 

regulatory and policy changes; and 

analyzed a nongeneralizable sample of 

26 contracts and task orders that 

contained incentives and 9 contract

actions providing for award fees that 

were awarded between fiscal years 

2011 and 2015 and reported as 

completed by the end of fiscal year 

2015 to assess contract outcomes. 

What GAO Recommends

DOD should identify the type of 

information on incentives needed and

collect and analyze relevant data to 

assess outcomes. DOD agreed to do 

so and stated it will take actions in

fiscal year 2018 to address GAO’s 

recommendation.
Page i GAO-17-291 Defense Contracting

Letter 1

Background 4

DOD Has Changed Regulations, Policies, and Practices to 

Improve Its Use of Incentive Contracts, in Particular by 

Emphasizing Use of Objective Incentives 10

DOD Expects to Achieve Cost Objectives on Selected Contracts, 

but Lacks Full Information on Outcomes for Incentive Contracts 17

Conclusions 33

Recommendation for Executive Action 34

Agency Comments 34

Appendix I: Objectives, Scope, and Methodology 36

Appendix II: Trends in Obligations for Incentive Contracts by DOD Component from 

Fiscal Years 2005 through 2015 40

Appendix III: Comments from the Department of Defense 42

Appendix IV: GAO Contact and Staff Acknowledgments 44

Tables

Table 1: Department of Defense Incentive Contracts and Orders 

GAO Reviewed 3

Table 2: Appropriate Use and Arrangements for Incentive 

Contracts 7

Table 3: Cost Performance for Incentive Fee Contract Actions 

GAO Reviewed 18

Table 4: Terms and Outcomes of Selected Fixed-Price Incentive 

(FPI) and Cost-Plus-Incentive-Fee (CPIF) Contracts 

Containing Incentives Targeting Schedule or Technical 

Performance 22

Table 5: Completed Cost-Plus-Award-Fee (CPAF) and FixedPrice-Award-Fee (FPAF) Contract Actions for Fiscal

Years 2011 through 2015 27

Contents
Page ii GAO-17-291 Defense Contracting

Table 6: DOD Systems and Processes that Collect Information on 

Incentive and Award Fees, and Factors Limiting Outcome 

Analysis 30

Table 7: Department of Defense Incentive Contracts and Orders 

GAO Reviewed 38

Figures

Figure 1: Hypothetical Example of a Basic Profit Adjustment for a 

Fixed-Price Incentive Contract 5

Figure 2: Department of Defense Obligations for Incentive 

Contracts, Fiscal Years 2005 through 2015 15

Figure 3: Department of Defense Obligations for Incentive 

Contracts by Contract Type, Fiscal Years 2005 through 

2015 16

Figure 4: Obligations for Incentive Fee Contracts by DOD 

Component, Fiscal Years 2005 through 2015 40

Figure 5: Obligations for Award Fee Contracts by DOD 

Component, Fiscal Years 2005 through 2015 41
Page iii GAO-17-291 Defense Contracting

Abbreviations

CADE Cost Assessment Data Enterprise

CBAR Contract Business Analysis Repository

CPAF cost-plus-award-fee

CPARS Contractor Performance Assessment Reporting System

CPIF cost-plus-incentive-fee

DAU Defense Acquisition University

DFARS Defense Federal Acquisition Regulation Supplement

DOD Department of Defense

DPAP Defense Procurement and Acquisition Policy

FAR Federal Acquisition Regulation

FFP firm-fixed-price

FPAF fixed-price-award-fee

FPI fixed-price incentive

FPDS-NG Federal Procurement Data System-Next Generation

OMB Office of Management and Budget

PAC-3 Patriot Advanced Capability-3

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Page 1 GAO-17-291 Defense Contracting

441 G St. N.W.

Washington, DC 20548

July 11, 2017

The Honorable William M. “Mac” Thornberry

Chairman

Committee on Armed Services

House of Representatives

Dear Mr. Chairman,

In fiscal year 2015, the Department of Defense (DOD) obligated 

$274 billion on contracts for products and services. DOD obligated about 

18 percent of those dollars on contracts that included incentive or award 

fee provisions. Such contracts, broadly referred to as incentive contracts, 

provide defense contractors the opportunity to earn fees or profits based 

on their performance. DOD has looked to incentive contracting as one of 

the ways it can promote desired acquisition outcomes, such as keeping 

costs low, delivering a product or service on time, or achieving certain 

technical results. When structured correctly, incentive contracts can more 

closely align contractor motivations with the government’s desired 

outcomes. Prior work by GAO and others, however, has shown that if not 

well managed, incentive contracts can lead to unnecessary costs 

shouldered by the American taxpayer. For example, in 2005, we 

estimated that DOD paid out $8 billion in award fees that were not linked 

to acquisition outcomes.1 In 2009, we estimated that DOD could save 

over $450 million by limiting second chances at unearned fees.2

Beginning in 2010, DOD made regulatory and policy changes aimed at 

improving its use of incentive contracts.

You asked us to review DOD’s use of incentive contracts. This report (1) 

identifies steps DOD has taken to improve its use of incentive contracts 

since 2010, and (2) assesses the extent to which selected DOD incentive 

contracts achieved desired acquisition outcomes.

 1

GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees 

Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005). 

2

GAO, Federal Contracting: Guidance on Award Fees Has Led to Better Practices but Is 

Not Consistently Applied, GAO-09-630 (Washington, D.C.: May 29, 2009).

Letter
Page 2 GAO-17-291 Defense Contracting

To identify the steps DOD has taken to improve its use of incentive 

contracts since 2010, we reviewed relevant legislation and provisions 

within the Federal Acquisition Regulation (FAR) and memoranda issued 

by the Office of Management and Budget (OMB). We also identified and 

reviewed changes to DOD regulations, policies, and guidance regarding 

the use of incentive contracts. To identify changes in DOD’s use of these 

contract types over time that may have corresponded with regulatory and 

policy changes, we analyzed data from the Federal Procurement Data 

System-Next Generation (FPDS-NG) on obligations by contract type for 

fiscal years 2005 through 2015. We reported our findings in constant 

fiscal year 2015 dollars, adjusted for inflation using the fiscal year gross 

domestic product price index. To assess the reliability of the FPDS-NG 

data, we conducted electronic testing of the data and traced data from a 

selection of contracts to contract sources to verify their accuracy. We 

determined that the data were sufficiently reliable for the purposes of 

analyzing and reporting general trends in DOD’s obligations for incentive 

contracts from fiscal years 2005 through 2015. We also interviewed DOD, 

military department, and Defense Acquisition University (DAU) officials 

about efforts to improve the use of incentive contracts.

To determine the extent to which incentive provisions in selected DOD 

contracts achieved desired cost, schedule, and technical performance 

outcomes, we assessed a nongeneralizable sample, drawn from FPDSNG data, of incentive contracts and orders that DOD awarded between 

fiscal years 2011 and 2015 and that were reported as completed by the 

end of fiscal year 2015. We chose these timeframes so as to select 

awards that (1) were made after the regulatory and policy changes which 

started in 2010, and (2) had completed performance by the time of our 

review. These parameters yielded 38 contracts and more than 4,200 

orders. We initially selected all 38 contracts and a subset of 15 orders 

that (1) included different incentive types under the same base contract, 

(2) were used to purchase similar products and services, and (3) reflected 

a range of dollar values. These parameters yielded an initial sample of 53 

contract actions (contracts and orders). Eighteen of the 53 actions were 

dropped from our sample either because the contracts were miscoded in 

FPDS-NG and were not incentive contracts based on our review of 

contract documents (6), were terminated before performance began (1), 

or were actually not yet complete (11). Consequently, we reviewed a total 

of 35 contracts and orders representing incentive contract types (see 

table 1). Because we used a nongeneralizable sample of contracts and 

orders, results from this sample cannot be used to make inferences about 

all incentive contracts and orders that DOD awarded.
Page 3 GAO-17-291 Defense Contracting

Table 1: Department of Defense Incentive Contracts and Orders GAO Reviewed

Incentive Fees Award Fees Both Total

Contracts 12 6 2 20

Orders 11 3 1 15

Total 23 9 3 35

Source: GAO analysis of Federal Procurement Data System-Next Generation data and information from contract documents. | 

GAO-17-291

In total, we reviewed 5 contract actions from the Air Force, 7 from the 

Army, and 23 from the Navy. For each selected contract and order, we 

collected relevant documentation, such as the initial contract or order, 

modifications, statements of work, determination and findings 

memoranda, award fee plans, and performance evaluations. We 

interviewed contracting officials and obtained their written input to clarify 

and collect additional information as needed. To supplement our 

understanding of how incentive provisions helped achieve acquisition 

outcomes, we interviewed two contractors about the effectiveness of 

incentive provisions in motivating performance toward desired outcomes. 

To identify contractors to interview, we focused on a sub-selection of 

contracts with multiple incentives to obtain perspectives on how the 

incentives interacted with respect to the contractors’ performance. We 

also reviewed documents and interviewed DOD officials about relevant 

data systems and processes used to collect and analyze contract and 

program data, such as the Contract Business Analysis Repository 

(CBAR) and peer reviews, to understand how these systems may provide 

some insight into DOD’s use of incentive contracts. Appendix I contains 

more detail on our objectives, scope, and methodology.

The performance audit upon which this report is based was conducted 

from January 2016 to May 2017 in accordance with generally accepted 

government auditing standards. 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.

DOD deemed that certain information in the draft report related to 

contract costs and performance was sensitive and must be protected 

from public disclosure. We subsequently worked with DOD from May

2017 to July 2017 to revise our presentation of this information and 

prepare this report for public release.
Page 4 GAO-17-291 Defense Contracting

According to the FAR, a wide selection of contract types is available to 

the government and contractors to allow flexibility in acquiring a variety of 

products and services.3 Contract types vary according to the degree and 

timing of the contractor’s responsibility for the costs of performance and 

by the amount and nature of the profit incentive offered to the contractor 

for meeting or exceeding specified goals. Contract types are grouped into 

two broad categories: fixed-price or cost-reimbursement contracts. Within 

these categories, the specific types range from firm-fixed-price (FFP), in 

which the contractor has full responsibility for the costs of performance 

and the resulting profit or loss, to cost-plus-fixed-fee (CPFF), in which the 

contractor has minimal responsibility for the costs of performance and the 

fee is a fixed dollar amount, established as a percentage of the estimated 

target cost at the start of the contract. In between these are incentive 

contracts, in which the contractor’s responsibility for costs and the profit 

or fee incentives offered are tailored to performance uncertainties.

The FAR also notes that incentive contracts are appropriate when a firmfixed-price contract is not, and the required items can be acquired at 

lower costs and possibly with improved delivery or technical performance 

by tying fee or profit to the contractor’s performance. Incentive and award 

fee provisions can be used together in the same contract, but each uses 

a different approach with respect to how performance is assessed and 

how fees or profits are determined.4

• Incentive fees—For contracts with incentive fees or profits, the 

amount of fee or profit payable is related to the contractor’s 

performance.5 Incentive fees or profits generally focus on cost control, 

 3

FAR 16.101. 

4

Products and services can be listed separately within a contract. These separate listings, 

called line items, may be either separately priced or not separately priced. Contracts with 

multiple line items may use a different contract type for each line item.

5

In federal contracting, the terms “profit” and “fee” refer to the amount of money paid to 

the contractor above and beyond either a fixed price or a contractor’s reimbursable costs. 

The term “profit” is associated with fixed-price contracts, and the term “fee” is generally 

associated with cost-reimbursable contracts. For the purposes of this report, “incentive fee 

contracts” refer to cost-plus-incentive-fee (CPIF) and fixed-price incentive (FPI) contracts, 

discussed below. 

Background

Contract Types
Page 5 GAO-17-291 Defense Contracting

though they may be used to motivate performance toward specific 

delivery (e.g., schedule) targets or technical goals. Incentive fees or 

profits involve an objective evaluation by the government through a 

process that is generally less administratively burdensome than award 

fee evaluations. The government usually applies a fee- or profitdetermination formula that is specified in the contract to evaluate 

performance at the end of the contract or at program milestones. The 

formula may include a target cost, a target profit or fee, a ceiling price, 

and a profit- or fee-adjustment formula, sometimes referred to as a 

share ratio for fixed-price incentive (FPI) contracts (see figure 1).6

Figure 1: Hypothetical Example of a Basic Profit Adjustment for a Fixed-Price Incentive Contract

 6

For the purposes of this report, we use the term “share ratio” to refer to the profit 

adjustment formula for FPI contracts. 
Page 6 GAO-17-291 Defense Contracting

In the hypothetical example above, if the contractor incurred $100 in 

costs, the contractor would receive $10 in profit, and the government 

would pay the target price of $110. If the contractor kept costs under 

the $100 target cost, it would split cost savings equally with the 

government and receive a larger profit; if the contractor exceeded the 

cost target, it would share the additional costs with the government up 

to the ceiling price but earn a smaller profit. At ceiling, the contractor 

earns no profit, and the contractor is responsible for any costs 

incurred above the ceiling price.

A cost-plus-incentive-fee (CPIF) contract reimburses the contractor for 

its allowable costs, but still uses a formula of total allowable costs to 

target costs to determine fee and includes a target fee instead of a 

target profit. A CPIF contract also has a minimum fee—the lowest fee 

the contractor may receive when total allowable costs exceed target 

costs—and maximum fee—the highest fee the contractor may earn 

when total allowable costs are less than target costs, and, unlike an 

FPI contract, there is no ceiling price.

• Award fees—Award fees typically emphasize multiple aspects of 

contractor performance in areas that are more subjectively assessed, 

such as the contractor’s responsiveness, technical ingenuity, or cost 

management. From the government’s perspective, development and 

administration of award fee contracts often involve substantially more 

effort over the life of a contract than incentive fee contracts, requiring 

government officials, through an award fee evaluation board, to 

conduct periodic evaluations of the contractor’s performance against 

specified criteria and to make recommendations on the amount of fee 

to be paid. Criteria are specified in an award fee plan, which 

contracting officials may revise from one evaluation period to another 

to redirect contractor emphasis. Following the award fee evaluation, a 

fee-determining official makes the final decision about the amount of 

fee paid to the contractor.

Table 2 identifies the range of incentive contract types and their 

appropriate use based on acquisition regulations.
Page 7 GAO-17-291 Defense Contracting

Table 2: Appropriate Use and Arrangements for Incentive Contracts

Contract Type Appropriate for use when... Arrangement

Fixed-price 

incentive (FPI)

• Firm-fixed-price is not suitable.

• Placing partial responsibility for cost on 

contractor will incentivize effective cost control 

and performance.

• Contract costs and performance requirements 

are reasonably certain. 

• Cost expectations are set at contract inception.

These expectations include a ceiling price—the 

maximum amount the government may pay as part 

of the incentive structure, excluding other contract 

clauses—and a profit adjustment formula, or a 

share ratio, which in conjunction with the target 

profit and price ceiling, establishes how the 

government and contractor will share responsibility 

for cost increases or decreases compared to an 

agreed-upon target cost.

• Contractor’s profit depends on whether final costs 

exceed cost expectations.

Fixed-price-awardfee (FPAF)

• Firm-fixed-price is not suitable.

• Government wishes to motivate the contractor 

and cannot use other incentives because 

contractor performance cannot be measured 

objectively.

• Fixed-price, including normal profit, is paid for 

satisfactory performance.

• Award fee is paid in addition, based on a more 

subjective evaluation of performance.

Cost-plusincentive-fee 

(CPIF)

• Requirements are not sufficiently defined or 

costs cannot be estimated with sufficient 

accuracy to use a fixed-price contract.

• Target cost—the pre-established cost of the 

contracted products or services—and a fee 

adjustment formula can be negotiated and are 

likely to motivate the contractor to manage 

effectively.

• Fee is initially negotiated and later adjusted by 

formula, based on the relationship of total allowable 

costs to total target costs.

• Target cost, target fee, minimum and maximum 

fees, and fee adjustment formula are specified at 

contract inception. After performance, amount of 

fee paid is determined in accordance with the 

formula.

• Contractor assumes the risk that it may be paid 

only for allowable costs and the minimum fee, and 

government assumes the risk that it may pay 

minimum fee and allowable costs beyond target 

amounts, if costs increase sufficiently. 

Cost-plus-awardfee (CPAF)

• Requirements are not sufficiently defined or 

costs cannot be estimated with sufficient 

accuracy to use a fixed-price contract.

• Government cannot establish predetermined 

objective incentive fee targets.

• Award fee sufficient to motivate excellent 

contractor performance can be established.

• Base amount, which may be zero, is fixed at 

contract inception.

• Award amount is separate and determined by 

judgmental evaluation of the contractor’s 

performance.

• Government assumes the risk that the cost of 

performance may increase over the contract term.

Source: GAO summary of Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement information. | GAO-17-291
Page 8 GAO-17-291 Defense Contracting

We have previously identified issues with the use of incentive and award 

fees that called into question whether they were used effectively to 

achieve their intended purpose. In our December 2005 review of incentive 

and award fee contracts, we found that award fees were generally not 

linked to acquisition outcomes, and that DOD had paid an estimated $8 

billion in award fees regardless of outcomes.7 In addition, we estimated 

that in 52 percent of the award fee contracts, DOD moved unearned 

award fees from one evaluation period to a subsequent period—a 

practice referred to as “rollover”—which provides contractors at least a 

second chance to earn fees after failing to perform well enough to earn 

them initially. We also found that DOD had not compiled data, conducted 

analyses, or developed performance measures to evaluate the 

effectiveness of incentive and award fees. We recommended that DOD 

apply more outcome-based award fee criteria, pay award fees only for 

above satisfactory performance, issue guidance on the appropriate use of 

rollover, develop a mechanism for capturing incentive and award fee data 

within existing data systems, and develop performance measures to 

evaluate the effectiveness of incentive and award fees at improving 

contractor performance and achieving desired outcomes. DOD concurred 

with two of these recommendations, and partially concurred with our 

recommendations to only pay award fees for above satisfactory 

performance, collect incentive and award fee data, and develop 

performance measures to evaluate the effectiveness of incentive and 

award fees. DOD implemented all but one of these recommendations—

paying award fees only for above satisfactory performance—though a 

provision was later added to the FAR prohibiting payment of award fees 

for below satisfactory performance.8

In our May 2009 review of 50 DOD contracts containing award fees, we 

found that DOD had made progress toward minimizing payments of 

award fees for unsatisfactory performance, limiting overpayment for 

satisfactory performance, and reducing the number of programs that used 

rollover.9 DOD, however, still struggled to use data collected on award fee 

contracts to evaluate their effectiveness. We did not make new 

recommendations in these areas.

 7

GAO-06-66. We reviewed a probability sample of 93 incentive and award fee contracts, 

which included 66 contracts with award fee provisions.

8

FAR 16.401(e)(2). 

9

GAO-09-630. 

Prior Work
Page 9 GAO-17-291 Defense Contracting

Most recently, in a March 2017 report on selected FPI contracts awarded 

by the Navy for new ship construction, we found the Navy often structured 

the contracts such that it absorbed more cost risk than DOD’s regulation 

suggests, indicating it may not achieve the expected benefits of using the 

FPI contract type.10 For example, we found that 8 of 11 ships delivered 

under the contracts reviewed experienced cost growth. We recommended 

that DOD conduct a portfolio-wide assessment of the Navy’s use of 

additional incentives on FPI contracts across shipbuilding programs. DOD 

concurred with our recommendation.

In 2007, OMB issued government-wide guidance highlighting preferred 

practices for incentive contracting and directing agencies to review and 

update their acquisition policies.11 In 2009, the FAR was revised to 

implement legislative provisions and OMB’s guidance on the appropriate 

use of incentive contracts.12 These changes addressed some of the 

issues that we identified in 2005 and 2009 relative to the use of award 

fees. The FAR now

• prohibits rollover of unearned award fees from one evaluation period 

to another;

• requires award fees to be linked to cost, schedule, and technical 

performance acquisition objectives;

• restricts payment of award fees in instances of unsatisfactory 

contractor performance; and

• requires agencies to collect relevant data on incentive and award fee 

payments and evaluate the effectiveness of these contract types in 

achieving desired outcomes.13

 10GAO, Navy Shipbuilding: Need to Document Rationale for the Use of Fixed-Price 

Incentive Contracts and Study Effectiveness of Added Incentives, GAO-17-211 

(Washington, D.C.: Mar. 1, 2017).

11Office of Management and Budget, Office of Federal Procurement Policy, Appropriate 

Use of Incentive Contracts, OMB Memorandum (Washington, D.C.: Dec. 4, 2007). 

12John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-

364, § 814; and the Duncan Hunter National Defense Authorization Act for Fiscal Year 

2009, Pub. L. No. 110-417, § 867. 

13FAR 16.401(e)(4), 16.401(e)(2), and 16.401(f). 

Government-wide 

Changes
Page 10 GAO-17-291 Defense Contracting

Since 2010, DOD has taken steps to improve its use of incentive 

contracts—often beyond what is required by the FAR—by revising the 

Defense Federal Acquisition Regulation Supplement (DFARS), instituting 

its Better Buying Power initiative, and developing new guidance and 

training courses. In particular, DOD has emphasized the use of objective 

incentives through FPI and CPIF contracts rather than award fees 

whenever possible, in part to better motivate contractors to control costs. 

These efforts are reflected in DOD’s reported use of incentive contracts 

since 2010, which indicate a substantial growth in obligations for incentive 

fee contracts and a corresponding decrease in obligations for award fee 

contracts.

DOD made changes to the DFARS and its accompanying Procedures, 

Guidance, and Information in recent years intended to support 

appropriate use of incentive contracts.14 For example, DOD made the 

following updates to the DFARS in 2011:

• Directed contracting officers to utilize objective criteria—associated 

with incentive fee contracts—to the maximum extent possible for 

measuring contract performance.15 DOD noted concerns that award 

fee contracts have a limited ability to motivate contractors to control 

costs, and that there had been instances in which award fee 

payments were not consistent with outcomes.

• Directed contracting officers to give particular consideration to FPI 

contracts, especially for acquisitions moving from development to 

production or in contracts for which previous FFP contract costs had 

varied by more than 4 percent from negotiated costs.16 By looking at 

historical pricing and contract performance data, DOD officials stated 

they determined that in some FFP contracts, actual costs have come 

in noticeably lower than negotiated costs (e.g., at 4 percent or more), 

 14The Procedures, Guidance, and Information is a companion resource to the DFARS with 

information that does not meet the criteria for inclusion in the DFARS. It contains 

mandatory and non-mandatory internal DOD procedures, guidance, and supplemental 

information. 

15DFARS 216.401-71.

16DFARS PGI 216.403-1(1)(ii)(B).

DOD Has Changed 

Regulations, Policies, 

and Practices to 

Improve Its Use of 

Incentive Contracts, 

in Particular by

Emphasizing Use of 

Objective Incentives

DOD Has Updated 

Regulations, Policy, and 

Guidance
Page 11 GAO-17-291 Defense Contracting

indicating that costs are not stable or that the government may not 

have negotiated a good deal when it awarded the contract. 

• Directed contracting officers to include a contract clause prohibiting 

the payment of award fees when a contractor’s performance is rated 

below satisfactory, as required by the FAR, which emphasizes that 

the amount of award fee paid should correspond with the contractor’s 

performance.17

DOD released memoranda between 2010 and 2015 through its Better 

Buying Power initiative, which focused, in part, on the use of incentive 

contracts.18 The Better Buying Power memoranda established a 

preference for FPI contracts and advised contracting officers to increase 

the use of this contract type, when appropriate, such as early in 

production and in single-source production where year-over-year price 

improvement can be rewarded.19 DOD acknowledged that some officials 

interpreted the first memorandum to mean that FPI contracts should be 

used to the exclusion of other contract types. As a result, subsequent 

memoranda advised officials to consider the full range of contract types 

and employ the appropriate type, while giving particular consideration to 

FPI and CPIF contracts. In addition, Better Buying Power called to limit 

the use of award fee contracts for services, noting that services 

acquisitions should be predisposed to FFP, CPFF, or CPIF. Better Buying 

Power also instructed the military departments to provide a justification of 

contract type for proposed contracts over $100 million for major 

programs.

 17DFARS 216.406(e)(2) and 252.216-7005; FAR 16.401(e)(2). 

18Department of Defense, Office of the Under Secretary of Defense for Acquisition, 

Technology and Logistics, Implementation Directive for Better Buying Power 3.0 –

Achieving Dominant Capabilities through Technical Excellence and Innovation

(Washington, D.C.: Apr. 9, 2015); Implementation Directive for Better Buying Power 2.0 –

Achieving Greater Efficiency and Productivity in Defense Spending (Washington, D.C.: 

Apr. 24, 2013); Implementation Directive for Better Buying Power – Obtaining Greater 

Efficiency and Productivity in Defense Spending (Washington, D.C.: Nov. 3, 2010); Better 

Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense 

Spending (Washington, D.C.: Sept. 14, 2010); and Better Buying Power – Mandate for 

Restoring Affordability and Productivity in Defense Spending (Washington, D.C.: June 28, 

2010).

19Specifically, Better Buying Power called for increased use of FPI (firm target) contracts 

with a 120 percent ceiling price and a 50-50 share ratio for underruns and overruns as the 

point of departure for negotiating contracts. 
Page 12 GAO-17-291 Defense Contracting

Better Buying Power also called for new DOD guidance on selecting 

contract types and employing incentive contracts. Subsequently, in April 

2016, Defense Procurement and Acquisition Policy (DPAP) released 

Guidance on Using Incentive and Other Contract Types.

20 This guidance 

provides direction on selecting contract types, structuring appropriate 

incentive arrangements, and negotiating target costs and share ratios 

with contractors. It explains that, when appropriately structured, incentive 

contracts can allow the government to share in cost savings, focus the 

contractor on the areas that are important to the government, and provide 

the government with valuable data on actual costs incurred. It also 

reinforces some key updates to DFARS, such as emphasizing that 

objective criteria must be used whenever possible to measure contract 

performance.

DOD’s DAU is developing two new continuous learning courses to

reinforce concepts reflected in the April 2016 guidance. According to 

DAU, all contracting personnel involved in using incentive arrangements 

will be encouraged to take these courses, though they are not required for 

Defense Acquisition Workforce Improvement Act certification, a process 

DOD uses to determine that acquisition officials meet certain standards. 

One course, Understanding Incentive and Other Contract Types, is 

currently available and provides training on how to align contract types 

and incentives with acquisition outcomes. The second course is expected 

to be available in August 2017 to provide training on appropriate use of 

advanced incentive concepts, such as quantifying cost, schedule, and 

performance risks and incorporating that information into decisions on 

contract incentives. DAU also provides other courses with elements 

addressing aspects of incentive contracting. Program officials—who can 

be involved in selecting contract types and structuring incentives, 

according to a senior DPAP official—also undergo some training on 

contract types and incentives through DAU training courses.

Further, to inform selection of contract type, contract negotiations, and 

projections of program and contract costs, DPAP and the Director of 

Defense Pricing have encouraged collaboration among contracting 

officials, program officials, and cost analysts to collect and share cost 

information with one another. DOD has also required contracting officers 

to share information through CBAR—which captures information to assist 

 20Department of Defense, Office of the Under Secretary of Defense for Acquisition, 

Technology and Logistics, Guidance on Using Incentive and Other Contract Types

(Washington, D.C.: Apr. 1, 2016). 
Page 13 GAO-17-291 Defense Contracting

contracting officers in preparing for negotiations with contractors, such as 

contractor business systems status and compliance with cost accounting 

standards. Contracting officials use CBAR to upload and share contract 

negotiation documents, which, according to DOD, can help contracting 

officials benefit from others’ experiences, particularly when negotiating 

with the same contractor. 21

Finally, DOD has used independent management reviews, or peer 

reviews, to advise contracting officers on selecting the appropriate 

contract type and structuring and negotiating contract incentives, among 

other topics. The Director of Defense Pricing and DPAP lead peer 

reviews to ensure that certain high-dollar acquisitions are carried out in 

accordance with applicable laws, regulations, and policies. According to 

senior DOD and military department officials, peer reviews provide an 

opportunity for DPAP leadership to share knowledge about key 

contracting decisions. For example, one peer review advised the 

contracting officer to consider whether increasing the available fee under 

a CPIF contract would reduce costs to the government by incentivizing 

greater cost control from the contractor.

DOD’s focus on incentive contracts is evident in many major defense 

acquisition program contracts. Based on information provided by DOD, as 

of January 2017 the department is using incentive contracts—either FPI 

or CPIF—on 65 of 78 major defense acquisition programs. The Army’s 

Patriot Advanced Capability-3 (PAC-3) program—which provides mobile 

defense against short-range ballistic missiles and other threats—offers an 

example of DOD’s use of FPI contracts in particular. According to DOD, 

recent contracts for PAC-3 reflect the department’s consideration of an 

FPI contract type for programs that previously used FFP contracts in 

which actual costs varied significantly from negotiated costs. Through an 

analysis of actual costs on prior production contracts for the PAC-3 

program, DOD determined that the prime contractor was underrunning 

negotiated costs—that is, actual costs were lower—in these contracts in 

amounts ranging from 8 to 15 percent, triggering consideration of FPI 

type based on defense regulations.22 Consequently, after reviewing 

historical pricing data and applying lessons learned, Army contracting 

officials stated they were able to negotiate FPI contracts for missile 

 21Contract negotiation documents are required to be uploaded to CBAR for sole-source 

negotiated actions above $25 million. 

22DFARS PGI 216.403-1(1)(ii)(B). 
Page 14 GAO-17-291 Defense Contracting

production over fiscal years 2014 through 2016 that were a total of $860 

million lower than the contractor’s initial proposals. Army officials stated

that they plan to use cost information gathered through these contracts to 

determine the appropriate contract type and inform negotiations for future 

production contracts. Because these contracts are ongoing, however, 

actual costs and other outcomes have not yet been determined, though 

current costs for the fiscal year 2014 contract indicate it may result in a 

cost overrun, in which actual costs exceed target costs.
Page 15 GAO-17-291 Defense Contracting

Our analysis of data from FPDS-NG found that obligations for incentive 

contracts ranged from about 13 to 22 percent of DOD’s total annual 

contract obligations from fiscal year 2005 through fiscal year 2015. In 

fiscal year 2015, incentive contracts accounted for nearly 18 percent of 

DOD’s total annual contract obligations. Consistent with DOD’s emphasis 

on using incentive fee contracts and decreasing the use of award fee 

contracts, our analysis of DOD’s reported contract obligations from fiscal 

years 2005 through 2015 shows a shift toward using incentive fee 

contracts (see figure 2).23

Figure 2: Department of Defense Obligations for Incentive Contracts, Fiscal Years 

2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.

 23Appendix II describes the trends in obligations for incentive contracts by the military 

departments and other DOD components. 

Data on Obligations for 

Incentive Contracts Are 

Largely Consistent with 

Changes in Policy
Page 16 GAO-17-291 Defense Contracting

More specifically, our analysis found that the changes were largely driven 

by increased obligations for FPI contracts, and decreased obligations for 

CPAF contracts (see figure 3).

Figure 3: Department of Defense Obligations for Incentive Contracts by Contract 

Type, Fiscal Years 2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.
Page 17 GAO-17-291 Defense Contracting

Among specific products and services for which incentive contracts were 

used, we found the mix varied by contract type.24 Specifically:

• FPI contracts were mostly used to purchase products. In fiscal year 

2015, three product categories accounted for almost 90 percent of FPI 

obligations: aircraft, ships/submarines, and land vehicles; weapons 

and ammunition; and sustainment supplies and equipment.

• CPIF contracts were used for a mix of products and services: aircraft, 

ships/submarines, and land vehicles; research and development; 

equipment related services; weapons and ammunition; and 

knowledge based services—such as engineering, program 

management, and education and training—accounted for roughly 

three quarters of CPIF obligations in fiscal year 2015.

• Award fee contracts were mostly used for services, including facility 

related; transportation; and equipment related services.

DOD expects to achieve positive cost outcomes—with contractors’

estimated costs coming in lower than target costs—for most of the 21 

selected incentive fee contract actions we were able to measure. Overall, 

the estimated costs for the incentivized portions of these selected 

contract actions were about $30 million—or about 5 percent—below 

target costs. Among the contract actions we reviewed, schedule and 

technical performance incentives were included in multiple-incentive 

contracts. Officials reported good outcomes overall for the contracts with 

multiple incentives that we reviewed, but we could not isolate the effects 

of any particular schedule or technical performance incentive. The nine 

award fee actions in our sample, which were mainly used to procure 

services, did not allow for rollover and payments for unsatisfactory 

performance—both of which were issues we found in our prior work. DOD 

collects some information on incentive contracts, but it generally has not 

assessed the extent to which particular contract types or incentive 

arrangements have achieved cost, schedule, or technical performance 

goals.

 24We analyzed by DOD portfolio groups the use of incentive contracts to purchase 

products and services from fiscal years 2005 through 2015 using FPDS-NG data. DOD 

organizes its spending for services and supplies and equipment using a classification that 

maps to FPDS Product and Service Codes. Thousands of product and service codes are 

classified into 16 portfolio groups—9 for services and 7 for supplies and equipment. If a 

contract involves more than one code, it is entered into FPDS-NG under the code that 

represents most of the contract value. 

DOD Expects to 

Achieve Cost 

Objectives on 

Selected Contracts, 

but Lacks Full 

Information on 

Outcomes for 

Incentive Contracts
Page 18 GAO-17-291 Defense Contracting

DOD expects contractors to underrun cost targets for incentive fee or 

profit provisions in 15 of the 21 cases for which we could compare target 

and estimated costs.25 Overall, these contract actions were expected to 

underrun target costs on the incentivized portions of the contracts by 

about 5 percent, amounting to $30 million in expected savings shared 

between the government and contractors on the 21 contract actions. 

These 21 contracts had a total value of about $957 million. The contract 

actions that were expected to underrun target costs represented 

procurements of both goods and services, and were a mixture of FPI and 

CPIF actions (see table 3).

Table 3: Cost Performance for Incentive Fee Contract Actions GAO Reviewed 

Military 

Department

Contract/

Incentive Type

Product or Service 

Procured per Federal 

Procurement Data 

System – Next 

Generation

Included 

schedule/

technical 

incentive 

or award 

fee?

Share 

Ratio or Fee

Adjustment 

Formula 

(Government 

Portion/

Contractor Portion)

Percentage 

of Total 

Action Value 

That Was 

Incentivizeda

Cost Performance on 

Incentivized Portionb,c

Products

Air Force Cost-plus–

incentive-fee 

(CPIF)

Communication Security 

Equipment

No 70/30 88 8.9 percent underrun

Army CPIF Miscellaneous Weapons No 70/30 89 7.6 percent underrun

Navy CPIF Training Aids No 50/50 91 4.8 percent underrun

Navy Fixed-price 

incentive (FPI)

Guided Missiles No Overrun 50/50, 

underrun 40/60c 34 4.2 percent underrun

Air Force CPIF Radar Equipment, 

Airborne

No 60/40 91 1.9 percent underrun

Air Force FPI Guided Missile Systems No Overrun 50/50, 

underrun 25/75c 5 3.0 percent overrun

Air Force FPI Unmanned Aircraft No 70/30 81 5.4 percent overrun

 25We reviewed 26 contract actions—14 contracts and 12 orders—containing provisions for 

incentive fee or profit. These included 23 actions with only incentive fee or profit 

provisions, and 3 actions that also used award fees. We could not compare costs for 5 of 

the 26 actions for various reasons. Although performance was complete on the contracts 

where we compared cost, in general, officials told us that costs were not yet final because 

close-out was still in process. We have previously reported on the challenges in closing 

out contracts—see GAO, Defense Contracting: DOD Initiative to Address Audit Backlog 

Shows Promise, but Additional Management Attention Needed to Close Aging Contracts, 

GAO-13-131 (Washington, D.C.: Dec. 18, 2012).

Estimated Costs Were 

Below Target for Most of 

the Incentive Fee Contract 

Actions That We Could 

Measure
Page 19 GAO-17-291 Defense Contracting

Military 

Department

Contract/

Incentive Type

Product or Service 

Procured per Federal 

Procurement Data 

System – Next 

Generation

Included 

schedule/

technical 

incentive 

or award 

fee?

Share 

Ratio or Fee

Adjustment 

Formula 

(Government 

Portion/

Contractor Portion)

Percentage 

of Total 

Action Value 

That Was 

Incentivizeda

Cost Performance on 

Incentivized Portionb,c

Services

Navy CPIF/Cost-plusaward-fee 

(CPAF)

Ship Repair Yes See noted 100 10.2 percent underrune

Navy CPIF Installation of Ship 

Equipment

Yes 50/50 96 7.7 percent underrun

Air Force CPIF/CPAF R&D: Defense System –

Aircraft

Yes 75/25 87 6.5 percent underrun

Army CPIF Modification of Guided 

Missiles

No Overrun 70/30, 

underrun 50/50c 73 6.0 percent underrun

Navy CPIF Modification of Training 

Aids

Yes 70/30 on some items, 

90/10 on other items

92 5.8 percent underrun

Navy FPI Post-Deployment 

Software Support

Yes Overrun 30/70, 

Underrun, 50/50c 71 5.1 percent underrun

Navy CPIF Installation of Ship 

Equipment

Yes 50/50 96 1.0 percent underrun

Navy FPI Installation of Ship 

Equipment

Yes 50/50 73 0.9 percent underrun

Navy CPIF Installation of Ship 

Equipment

Yes 50/50 96 0.1 percent underrun

Navy FPI Installation of Ship 

Equipment

Yes 50/50 61 At target cost

Navy CPIF Installation of Ship 

Equipment

Yes 50/50 96 0.1 percent overrun

Navy FPI Installation of Ship 

Equipment

Yes 50/50 95 0.1 percent overrun

Navy CPIF/CPAF Ship Repair Yes See noted 100 0.2 percent overrune

Navy FPI Installation of Ship 

Equipment

Yes 50/50 95 2.0 percent overrun

Source: GAO analysis of DOD contract information. | GAO-17-291

a

Where an action contained both incentive fee or profit provisions and award fee provisions, the 

percentage listed here reflects only contract line items that contained the incentive fee or profit 

provisions.

b

Although performance was complete, in general officials told us that costs were not yet final because 

close-out was still in process. In these cases, we used cost estimates submitted to us by contracting 

officials to assess cost performance.

c

Underrun refers to actual costs that are lower than target costs; overrun refers to actual costs 

exceeding target costs.

d

Contract states that if the cost falls within the range of 10 percent below to 6 percent above the 

target cost then the contractor receives the full 4 percent fee. Fifty cents is removed for every dollar 

outside of that range (below or above).
Page 20 GAO-17-291 Defense Contracting

e

For these contracts, pricing had only been evaluated for certain line items at the time of award, 

therefore we only included those line items in our analysis. 

In two cases, contracting officials raised potential benefits of using an FPI 

contract that extended beyond underrunning target costs in a single 

contract by using knowledge of cost efficiencies to decrease prices from 

one production lot to the next. For example, contracting officials for one 

Air Force missile program determined that an engine produced by a 

subcontractor was a cost driver, but had little insight into the actual costs 

for this component. The Air Force created a separately-priced FPI line 

item with unit pricing for the engines. Using an FPI contract type required 

the contractor to provide cost data, a requirement that was to be 

incorporated in turn into the prime contractor’s FPI agreement with its 

subcontractor. Officials reported that through this arrangement, they 

obtained insight into subcontractor costs and were able to obtain cost 

savings in subsequent lots of more than $104,000 per engine.

We were unable to compare actual or estimated costs and target costs for 

5 of the 26 FPI or CPIF actions in our sample due to various factors.26

Specifically:

• In three cases, contracts were terminated before performance was 

complete. Upon termination, the government and contactor negotiated 

a final settlement which accounted for factors in addition to cost, and 

the original target costs—which were based on the assumption of 

completed performance—were no longer relevant.

• In another case, officials explained that requests for adjustments and 

other actions had not been finally settled for this order, so the actual 

costs will likely change further. Because these adjustments and 

actions had yet to be settled, we did not compare the target costs and 

current estimates for actual costs.

• In one additional case, contract records did not differentiate between 

target costs and actual costs, and so we were unable to compare the 

two.

 26As noted above, we reviewed a total of 26 contract actions with incentive fee or profit 

provisions, 3 of which also included award fee provisions. 
Page 21 GAO-17-291 Defense Contracting

Contracting officials reported generally positive cost, schedule, technical 

performance, and overall outcomes for those contract actions containing 

schedule and technical performance incentives. Fifteen of the 26 FPI or 

CPIF contracts in our review used schedule or technical performance 

incentives along with cost incentives, and therefore were multipleincentive contracts.27 Three of the 15 contracts used a combination of 

incentive fees or profits and award fees. For 13 of the 15 contracts we 

reviewed with schedule or technical performance incentives, contracting 

officials reported that overall outcomes were positive. In two cases, 

although the contractor met specific schedule and technical performance 

goals, overall outcomes were either unsatisfactory or were yet to be 

determined (see table 4).

 27The FAR requires all multiple-incentive contracts to include a cost incentive or constraint 

that prevents rewarding a contractor for superior technical performance or delivery results 

when the costs of those results outweigh their value to the government. FAR 16.402-4. 

Although acquisition regulations discuss incentives in terms of cost, performance, and 

delivery, for the purposes of our analysis, we categorized incentives according to their 

intended outcomes. Therefore, we defined cost incentives to be those targeting costrelated outcomes, technical performance incentives as those targeting quality-related 

outcomes, and schedule incentives as those targeting schedule-related outcomes—

including making deliveries, providing services, and meeting milestones in accordance 

with the timeframes laid out in the contract.

DOD Reported Positive 

Outcomes for Most 

Incentive Fee Contracts 

We Reviewed Containing 

Schedule and Technical 

Performance Incentives
Page 22 GAO-17-291 Defense Contracting

Table 4: Terms and Outcomes of Selected Fixed-Price Incentive (FPI) and Cost-Plus-Incentive-Fee (CPIF) Contracts 

Containing Incentives Targeting Schedule or Technical Performance

Military Department/ 

Contract Type

Cost Incentive 

Terms

Schedule Incentive Termsa Technical Performance 

Incentive Terms Outcomes

Navy / CPIF/CPAFb,c Target fee:

4 percent of 

target cost.

Incentive fee:

None.

Award fee:b

Up to 4 percent depending 

on contractor’s rating on 

management and other 

performance factors.

Cost: 10.2 percent underrun.

Schedule: Schedule 

performance rated very good.

Technical performance: 

Contractor performed at high 

levels.

Overall: Official reported 

contractor received high ratings 

overall.

Navy / CPIF Target fee:

4.4 percent of 

target cost.

Incentive fee:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive fee:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 7.7 percent underrun.

Schedule: Dates met.

Technical performance:

Performance standards met.

Overall: Officials satisfied with 

outcome. 

Air Force / CPIF/CPAF Target fee:

5.0 percent of 

target cost.

Incentive fee:

Total schedule incentive is 2 

percent of target cost.

30 percent for first milestone

70 percent for second milestone

Award fee:

5.5 percent based on 

technical performance and 

program management 

criteria at the contract level 

(i.e., across multiple 

orders).

Cost: 6.5 percent underrun.

Schedule: Second milestone 

missed and contractor did not 

earn associated fee, but officials 

indicated overall schedule goals 

achieved.

Technical performance: 

Performance outcomes 

achieved.

Overall: Officials reported 

desired overall outcomes 

achieved.

Navy / CPIF Target fee:

8 percent of 

target cost.

Incentive fee:

Reward or penalty by item.

For example, for one design 

review:

For delivery 15 or more calendar 

days prior to review, fee = 

$10,000 reward (0.08 percent of 

target cost).

For delivery 14 to 10 calendar 

days prior to review, no reward or 

penalty.

For delivery 9 or fewer calendar 

days prior to review, penalty 

=$15,000 (0.12 percent of target 

cost).

Incentive fee:

None.

Cost: 5.8 percent underrun.

Schedule: Schedule risk 

reduced on multiple items.

Technical performance: Officials 

did not comment on specific 

technical performance-related 

outcome.

Overall: Officials identified 

positive outcomes, including 

reduced program schedule risk, 

availability of highest quality 

design, and minimal cost 

overruns.
Page 23 GAO-17-291 Defense Contracting

Military Department/ 

Contract Type

Cost Incentive 

Terms

Schedule Incentive Termsa Technical Performance 

Incentive Terms Outcomes

Navy / FPI Target profit:

10 percent of 

target cost.

Incentive profit:

Monthly maintenance release 

timeliness and quality (timely 

delivery of quality software 

releases). 20 percent of total 

incentive fee pool.

Incentive profit:

1. System availability: 30 

percent of total incentive 

fee pool.d

2. Deployed software 

quality (reduction in 

software defects). Thirty 

percent of total incentive 

fee pool.

3. Compliance with 

information assurance 

(timely processing and 

remediation of system 

security issues that could 

compromise systems or 

result in revocation of 

information assurance 

accreditation). Twenty 

percent of total incentive 

fee pool.

Cost: 5.1 percent underrun.

Schedule: Software released on 

timely basis.

Technical performance: Minor 

performance degradations, such 

as reduced system availability 

while performing maintenance 

activities, contributed to 

approximately a $65,000 

decrease in incentive payment.e

Overall: Officials satisfied with 

outcome.

Navy / CPIF Target fee:

4.1 percent of 

target cost.

Incentive fee:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive fee:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 1.0 percent underrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.

Navy / FPI Target profit:

7.0 percent of 

target cost.

Incentive profit:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive profit:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 0.9 percent underrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.

Navy / CPIF Target fee:

4.4 percent of 

target cost.

Incentive fee:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive fee:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 0.1 percent underrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.

Navy / FPI Target profit:

7.0 percent of 

target cost.

Incentive profit:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive profit:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 0.0 percent underrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.
Page 24 GAO-17-291 Defense Contracting

Military Department/ 

Contract Type

Cost Incentive 

Terms

Schedule Incentive Termsa Technical Performance 

Incentive Terms Outcomes

Navy / CPIF Target fee:

4.4 percent of 

target cost.

Incentive fee:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive fee:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 0.1 percent overrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.

Navy / FPI Target profit:

5.7 percent of 

target cost.

Incentive profit:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet schedule 

criteria.

Incentive profit:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 0.1 percent overrun.

Schedule: Dates met.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.

Navy / CPIF/CPAFb,c Target fee:

4 percent of 

target cost. 

Incentive fee:

None.

Award fee:b

Up to 4 percent depending 

on contractor’s rating on 

management and other 

performance factors.

Cost: 0.2 percent overrun.

Schedule: Contractor met all 

availability milestones on time.

Technical performance: 

Contractor performed at high 

levels.

Overall: Official reported 

desired outcomes achieved 

overall.

Navy / FPI Target profit:

5.7 percent of 

target cost.

Incentive profit:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet specific 

dates.

Incentive profit:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: 2.0 percent overrun.

Schedule: Installation 

accomplished without delaying 

deployment.

Technical performance: 

Performance standards met.

Overall: Officials satisfied with 

outcome.
Page 25 GAO-17-291 Defense Contracting

Military Department/ 

Contract Type

Cost Incentive 

Terms

Schedule Incentive Termsa Technical Performance 

Incentive Terms Outcomes

Navy / FPI Target profit:

8 percent of 

target cost.

Incentive profit:

Total schedule incentive is 3 

percent of target cost.

0.5 percent for first schedule 

target

2.5 percent for second schedule 

target

Incentive profit:

3 percent dependent on 

number of failures during 

reliability testing.

Cost: Not able to evaluate cost 

outcome because performance 

ended early; total cost was 

$98.5 million when contract 

ended.

Schedule: Contractor met one 

of two schedule incentives; 

received a $479,203 incentive 

for holding initial design review 

on time.

Technical performance: Despite 

fixed-price contract type, Navy 

agreed to partially terminate 

contract and waived its right to 

complete performance after 

contractor was unable to 

perform; specific performance 

incentive not earned.

Overall: Navy did not receive 

desired system.

Navy / FPI Target profit:

5.7 percent of 

target cost.

Incentive profit:

Up to 100 percent of cost 

incentive payment could be lost if 

contractor did not meet specific 

dates.

Incentive profit:

Up to 100 percent of cost 

incentive payment could 

be lost if contractor did not 

meet performance criteria.

Cost: Not yet determined due to 

unresolved contractor requests 

for equitable adjustment.

Schedule: Completed on time.

Technical performance: 

Performance standards met.

Overall: Not yet determined.

Source: GAO analysis of DOD contract information. | GAO-17-291

a

Acquisition regulations discuss incentives in terms of cost, performance, and delivery. For the 

purposes of our analysis, however, we categorized incentives according to their intended outcomes. 

Therefore, we defined cost incentives to be those targeting cost-related outcomes, technical 

performance incentives as those targeting quality-related outcomes, and schedule incentives as 

those targeting schedule-related outcomes—including making deliveries, providing services, and 

meeting milestones in accordance with the timeframes laid out in the contract.

b

Officials for this contract classified this as an incentive fee. Based on our analysis, we consider it to 

be an award fee.

c

For these contracts, pricing had only been evaluated for certain line items at the time of award, 

therefore we only included those line items in our analysis.

d

For this line item, the contractor was first assessed on performance against the cost incentive, which 

determined the total incentive pool. The contractor’s weighted performance on schedule and technical 

incentives, expressed as a percentage, was then applied to the total incentive pool to determine the 

final fee.

e

Across the three quarters for which the contractor was rated in this area, it received an average 

performance score of 38 out of 100 percent, which contributed to an overall performance score of 76 

percent. 
Page 26 GAO-17-291 Defense Contracting

DOD’s April 2016 guidance, issued after the contracts we reviewed were 

awarded, advises contracting officials to carefully consider the use of 

multiple incentives that may compete with one another. In most cases, 

acquisition planning documents we reviewed indicated that contracting 

officials used multiple incentives in contracts with the goal of encouraging 

the contractor to achieve specific cost, schedule, or technical

performance targets, while ensuring that achieving one outcome did not 

come at the expense of others. The DOD guidance notes that the 

contractor will aim to maximize the profits or fees it earns, and 

consequently make trade-offs that may not be consistent with how the 

government views the relative importance of the various incentives. For 

contracts with multiple incentives that we reviewed, it was unclear how 

these incentives interacted, and we could not isolate the effects of any 

particular schedule or technical performance incentive. Representatives 

of the two contractors with whom we spoke indicated that they did not 

have a precise method for making trade-offs among incentives, and could 

not tell us how the presence of any particular incentive may have 

interacted with other incentives. Representatives of one contractor told us 

that they viewed the technical performance incentives as a chance to 

“make up” what they “lost” on the cost incentives. In other words, if they 

did not receive all possible profits or fees from cost incentives, they could 

still aim to earn profits or fees from technical performance incentives. 

Representatives from the other contractor told us that the schedule 

incentive fee was not a primary factor motivating them to maintain 

schedule. The amount of potential schedule incentive was less than half 

of the potential cost incentive and technical performance award fees, so 

the schedule incentive was likely less effective than these other 

incentives.

Nine of the 35 contract actions we reviewed contained only award fee 

provisions. All nine of these contract actions were to procure services, 

such as providing support for testing, data collection, and 

experimentation; weapons testing; and operation of military base 

childcare facilities. Of the nine contract actions, three were FPAF actions, 

and six were CPAF actions (see table 5). These contract actions 

contained a mix of incentives targeting cost, schedule, and technical 

performance. For the eight actions we could assess, contractors earned 

90 percent of potential award fees overall. Award fees earned on the 

eight actions for which we had data totaled $16.1 million between fiscal 

years 2011 and 2015.

Award Fee Contracts 

Reviewed Were Used for 

Services and Prior Issues 

Were Generally Addressed
Page 27 GAO-17-291 Defense Contracting

Table 5: Completed Cost-Plus-Award-Fee (CPAF) and Fixed-Price-Award-Fee (FPAF) Contract Actions for Fiscal Years 2011 

through 2015

Military Department / 

Contract Type

Award Fee Based on Reported Award Fee 

Portion of Total Action 

Value (percentage)

Percentage of 

Award Fee 

Earneda

Cost Schedule Technical Performance

Army / CPAF Yes No Yes 4 97

Army / CPAF Yes Yes Yes 2 92

Army / CPAF Yes Yes Yes —b —b

Navy / FPAF Yes Yes Yes 8 77

Navy / CPAF Yes Yes Yes 6 77

Navy / CPAF Yes Yes Yes 10 77

Navy / CPAF Yes No Yes 4 91

Navy / FPAF No No Yes 10 100

Navy / FPAF No No Yes 5 74

Source: GAO analysis of DOD contract information. | GAO-17-291

a

Award fee earned may have been based on any combination of cost, schedule, and technical 

performance criteria.

b

Due to incomplete records, we could not determine the contract’s total value or the amount or 

percentage of fee earned.

In cases where multiple types of outcomes (e.g., cost, schedule, and 

technical performance) were targeted, it was sometimes not possible to 

determine the amount of fee awarded based on a particular outcome. For 

example, schedule was a subpart of one of several categories for the 

award fee, while award fee memoranda reported only a single overall 

category score. Therefore, in those cases, it was not possible to 

determine from the award fee documentation what portion of the fee 

award was meant to correspond specifically to schedule performance.

The contract actions we reviewed generally addressed some issues we 

had previously identified in relation to award fees, and reflected changes 

made to federal acquisition regulations in 2009. For example, we found 

that all of the nine contract actions contained provisions prohibiting 

rollover. Most of the award fee plans for these actions specifically 

prohibited paying award fees for unsatisfactory performance and we 

found no evidence of fees earned for unsatisfactory performance.
Page 28 GAO-17-291 Defense Contracting

DOD guidance says award fees should be tied to acquisition outcomes to 

the maximum extent possible.28 We reviewed the criteria contained in the 

award fee plans for our sample contract actions and found them to 

contain a mix of outcome-based criteria and process-based criteria. For 

example, three award fee plans covering five contract actions contained 

criteria related to meeting schedule deadlines, which we consider to be 

related to outcomes. One award fee plan contained criteria related to 

management, such as proactivity and responsiveness to problems, which 

we consider to be related to process. In the nine contracts we reviewed, 

we also found examples of award fees based on both outcome- and 

process-based criteria. For example, one contract, valued at $78 million 

for management and operation of transportation services on an Army 

installation, specified that 25 percent of the award fee would be based on 

technical performance criteria. Under these criteria, points were assigned 

on the basis of quality and timeliness assessments, which we consider to 

be outcome-based, as well as reporting, which we consider to be 

process-based. Similarly, a $16 million Army contract for installation 

support services based 75 percent of its award fee on a “Performance of 

Work” criterion, which contained several sub-criteria including “Quality”

and “Efficiency/Timeliness,” both of which contained a mix of outcomeand process- based criteria. Even where award fee plan criteria were 

outcome-based, we could not assess whether the outcomes cited were 

identified by DOD as positive outcomes for the acquisition of services. As 

we have previously reported, DOD has struggled to define and track 

desired outcomes for services contracts, which differ from products in 

several aspects and can pose challenges to establishing measurable and 

performance-based outcomes.29

 28 Department of Defense, Guidance on Using Incentive and Other Contract Types. 

29GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition 

Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 2006); and Defense Acquisitions: 

Goals and Associated Metrics Needed to Assess Progress in Improving Service 

Acquisition, GAO-13-634 (Washington, D.C.: June 27, 2013).
Page 29 GAO-17-291 Defense Contracting

DOD has not consistently assessed how the selection of a particular 

contract type or incentive arrangement has promoted the achievement of 

cost, schedule, or technical performance goals. A fiscal year 2007 

legislative provision directed DOD to collect and evaluate relevant data on 

incentive and award fee payments on a regular basis to determine the 

effectiveness of incentives for improving contractor performance and 

achieving desired program outcomes, and in 2009, the FAR was updated 

to require this of all agencies.30 As a result, DOD previously required 

military departments and defense agencies to collect data on incentive 

and award fees—such as the amount of fees available on each contract 

and the amount paid to contractors—twice a year for contracts with 

incentive provisions greater than $50 million.31 According to a senior 

DPAP official, the information collected was not being used at the time, as 

DOD saw more value in focusing on efforts prior to contract award than 

analyzing incentive trends. Additionally, DPAP officials noted that the 

effort amounted to a manual data collection exercise during a time of 

reduced staffing levels. DOD rescinded this requirement in April 2015,

explaining in the Federal Register that it could obtain relevant data 

through other sources, including CBAR and peer reviews. Our review 

found, however, that DOD is not using these sources to assess the 

effectiveness of incentive contracts. Further, we found that CBAR, peer 

reviews, and other potential sources DOD identified have limited utility in 

providing information to assess the effectiveness of improving contractor 

performance and achieving desired program outcomes (see table 6).

 30John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-

364, § 814; and FAR 16.401(f). 

31DFARS PGI 216.401-70 [Removed]. 

DOD Conducts Limited 

Data Collection on 

Incentive and Award Fee 

Contracts and Does Not 

Assess Incentive 

Outcomes Across 

Contracts
Page 30 GAO-17-291 Defense Contracting

Table 6: DOD Systems and Processes that Collect Information on Incentive and Award Fees, and Factors Limiting Outcome 

Analysis

System/Process Primary Purpose Types of Information Collected on Incentive and Award 

Fees and Factors Limiting Outcome Analysis

Contract Business Analysis 

Repository (CBAR)

To provide a mechanism for contracting 

officials to share information.

Incentive and Award Fee Information:

Contracting officials are required to use CBAR to upload 

and share contract negotiation documents—such as Price 

Negotiation Memoranda—which can include information on 

incentive and award fees.

Limiting Factors:

Focuses on pre-award activities, according to DOD officials; 

therefore it does not contain information on contracts during 

the performance period or at completion, such as actual 

costs or fees paid.

May not identify incentive line items if they are not the 

majority contract type—contract type is labeled based on 

the majority contract type, according to DOD officials.

Does not allow users to review summary data across 

contracts, according to DOD officials.

Post-Award Peer Reviews To review service acquisitions valued at 

$1 billion or more and focus on (1) the 

adequacy of competition, (2) an 

assessment of actual contract 

performance, and (3) the adequacy of 

government surveillance of contractor 

performance.

Incentive and Award Fee Information:

Reviews may address the structure of incentive and award 

fees, such as the size of the incentive or award fee pool 

and the criteria for determining payments, in order to 

determine how the contract is structured to motivate the 

desired performance, according to a senior Defense 

Procurement and Acquisition Policy (DPAP) official.

Limiting Factors:

Carried out during contract performance and do not collect 

specific data on incentive outcomes—such as performance 

on cost, schedule, or technical performance incentives—

according to a senior DPAP official.

Conducted for a subset of contracts.
Page 31 GAO-17-291 Defense Contracting

System/Process Primary Purpose Types of Information Collected on Incentive and Award 

Fees and Factors Limiting Outcome Analysis

Cost Assessment Data 

Enterprise (CADE)a To provide comprehensive data availability for decision-making, 

management, and oversight of DOD 

acquisition programs. Integrates data 

from multiple sources, including 

sources of actual cost data on major 

defense contracts. 

Incentive and Award Fee Information:

Collects and analyzes cost information on individual 

programs and contracts, including contract type in some 

cases, according to DOD officials. DOD has used 

information in CADE to identify variances between actual 

and negotiated costs on firm-fixed-price contracts for a 

major weapons program, which informed decisions to use 

fixed-price incentive type for subsequent contracts.

Limiting Factors:

CADE does not contain data on specific incentive structures 

within contracts and has limited information on schedule 

and technical performance outcomes, according to DOD 

officials.

Generally limited to data for major programs (acquisition 

category I major defense acquisition programs and major 

automated information systems) with contracts valued at 

over $50 million.b

Contractor Performance 

Assessment Reporting System 

(CPARS)

To collect information on contractor 

performance primarily used in 

subsequent source selection decisions.

Incentive and Award Fee Information:

CPARS guidance advises assessing officials to consider 

performance on incentives when determining a contractor’s 

ratings.

Limiting Factors:

Does not consistently collect information on incentive 

outcomes. For example, among the selected reports we 

reviewed, most did not discuss specific incentive outcomes.

Not intended for analysis of incentive and award fee 

outcomes across contracts, according to a senior DPAP 

official.

Source: GAO analysis of DOD documentation and interviews with DOD officials. | GAO-17-291

a

CADE is an Office of the Secretary of Defense Cost Assessment and Program Evaluation initiative.

b

This is largely driven by the programs for which Cost and Software Data Reporting is required, one 

of CADE’s primary data sources. Programs with contracts valued between $20 million and $50 million 

have the option to provide these reports.

These systems have distinct purposes and are not specifically intended to 

provide information for DOD to analyze how well it is achieving incentive 

outcomes, though some have the potential to provide insight into 

outcomes. For example, DOD officials said they used Cost and Software 

Data Reporting and earned value management data—which are 

maintained in the CADE system— to evaluate the effectiveness of factors 

that motivate contractor performance in its 2014 annual report on 
Page 32 GAO-17-291 Defense Contracting

performance of the defense acquisition system.32 Among the contracts 

that DOD reviewed, it found that those with incentive fees or profits 

typically experienced lower cost growth than other contract types. This 

analysis, however, used total contract costs (including non-incentivized 

portions), according to senior DOD officials. DOD has not conducted this 

analysis in subsequent annual reports. DOD has also aggregated 

feedback from past peer reviews—including reviews focused on 

incentives—and identified lessons learned and best practices for 

structuring incentives.

DOD’s efforts to better manage its acquisition of services, which 

accounted for more than half of the $274 billion in total DOD contract 

obligations in fiscal year 2015, could also help assess the merits of using 

incentives for various portfolios of services. As part of these efforts, DOD 

has identified senior officials within DOD to serve as functional domain 

experts responsible for specific portfolios of services. DOD’s January 

2016 services acquisition instruction tasked these experts, among other 

responsibilities, to

• identify and share portfolio group best practices and employ lessons 

learned to improve the acquisition and management of services 

across their respective categories, and

• develop appropriate metrics to track cost and performance of 

contracted services within the portfolio group to leverage best 

practices, reduce redundant business arrangements, identify trends, 

and develop year-to-year comparisons to improve the efficiency and 

effectiveness of contracted services.

We have ongoing work to assess how DOD and the military departments 

are implementing aspects of DOD’s services acquisition instruction. As 

we noted in our February 2017 high-risk update, however, DOD does not 

have an action plan that would enable it to assess progress toward 

achieving its goals for improving service acquisitions, and its efforts to 

develop goals and associated metrics unique to each category of service 

it acquires are in the early stages of development.33

 32Department of Defense, Under Secretary of Defense, Acquisition, Technology and 

Logistics, Performance of the Defense Acquisition System, 2014 Annual Report

(Washington, D.C.: June 13, 2014).

33GAO, High-Risk Series: Progress on Many High-Risk Areas, While Substantial Efforts 

Needed on Others, GAO-17-317 (Washington, D.C.: Feb. 15, 2017).
Page 33 GAO-17-291 Defense Contracting

As previously noted, the FAR requires agencies to collect and evaluate 

relevant data on incentive and award fee payments on a regular basis to 

determine the effectiveness of incentives for improving contractor 

performance and achieving desired program outcomes.34 Since DOD 

removed the requirement from its own regulations in April 2015, it has not 

identified a new approach to collect the required information beyond using 

CBAR and peer reviews, which we found do not allow DOD to assess 

incentive outcomes as currently used. It may not be necessary to collect 

data on each individual contract, but rather identify what best meets the 

department’s needs for assessing performance outcomes and collect 

data accordingly. Without assessing how incentives have contributed to 

intended outcomes, contracting officers may be at a disadvantage in 

establishing appropriate incentives for the requirements they work to fulfill 

through contracts.

The government should be vigilant about getting the best value for its 

dollar, and incentive and award fees can be effective tools for motivating 

contractors and achieving desired outcomes for DOD acquisitions, if 

appropriately applied. Over the past decade, DOD’s guidance and 

training has emphasized the use of objective incentives, which is reflected 

in a noticeable shift toward incentive fee contracts and away from the 

more subjective award fee contracts. As some of our prior work has 

found, however, incentives do not always lead to better outcomes. Given 

the emphasis on cost incentives, it is important that DOD determine 

whether and under what circumstances the use of these incentives is 

achieving intended cost objectives. Federal acquisition regulations require 

DOD to collect and analyze information on the use of incentives. 

However, it may not be necessary for DOD to embark on a broad, manual 

data collection effort similar to what has been tried in the past. Rather, 

DOD could focus its effort on specific areas of interest or risk to the 

department. For example, given the widespread use of incentive 

contracts on major weapon systems, DOD could continue to focus its 

analyses on the factors that facilitate or hinder the achievement of cost 

objectives or consider expanding the collection of information on lower 

dollar weapon systems. Alternatively, DOD could focus more on 

identifying what types of incentives prove useful for the different services 

DOD acquires as part of its efforts to manage portfolios of services 

acquisitions. Such efforts should not preclude DOD from continuing to 

 34FAR 16.401(f). 

Conclusions
Page 34 GAO-17-291 Defense Contracting

assess other approaches to motivate contractor performance, such as the 

use of technical and schedule incentives. Prioritizing the area or areas 

DOD intends to focus on would enable the department to determine how 

best to collect that information and, in turn, use it to identify opportunities 

to improve the use of incentive contracts.

We recommend that the Under Secretary of Defense for Acquisition, 

Technology and Logistics identify the specific types of information that 

would best meet the department’s needs and, based on that 

determination, collect and analyze relevant data after contract 

performance is sufficiently complete to determine the extent to which 

contracts with incentives achieved their desired outcomes.

We provided a draft of this product to DOD for comment. In its comments, 

reproduced in appendix III, DOD concurred and indicated it will establish 

a process for identifying specific types of information to collect and 

assess the data after the completion of contract closeout to determine the 

extent to which incentives achieved their desired outcomes. DOD stated it 

will complete this process by the second quarter of fiscal year 2018. DOD 

also provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional 

committees and the Secretary of Defense; the Under Secretary of 

Defense for Acquisition, Technology, and Logistics; the Secretaries of the 

Air Force, Army, and Navy; the President, Defense Acquisition University; 

and the Director, Office of Management and Budget. In addition, the 

report is available at no charge on the GAO website at 

http://www.gao.gov. 

Recommendation for 

Executive Action

Agency Comments 
Page 35 GAO-17-291 Defense Contracting

If you or your staff have any questions about this report, please contact 

me at (202) 512-4841 or DiNapoliT@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in Appendix IV.

Sincerely yours,

Timothy J. DiNapoli

Director, Acquisition and Sourcing Management
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-17-291 Defense Contracting

The objectives of this review were to (1) identify steps the Department of 

Defense (DOD) has taken to improve its use of incentive contracts since 

2010, and (2) assess the extent to which selected DOD incentive 

contracts achieved desired acquisition outcomes.

To identify the steps DOD has taken to improve its use of incentive 

contracts since 2010, we reviewed relevant legislation and provisions 

within the Federal Acquisition Regulation (FAR); memoranda issued by 

the Office of Management and Budget (OMB); and identified and 

reviewed changes to DOD regulations, policies, and guidance regarding 

the use of incentive contracts. To identify changes in DOD’s use of these 

contract types over time that may have corresponded with regulatory and 

policy changes, we analyzed data from the Federal Procurement Data 

System-Next Generation (FPDS-NG) on obligations by contract type for 

fiscal years 2005 through 2015.1 We reported our findings in constant 

fiscal year 2015 dollars, adjusted for inflation using the fiscal year gross 

domestic product price index. To assess the reliability of the FPDS-NG 

data, we conducted electronic testing of the data. We also reviewed a 

selection of 53 contracts in FPDS-NG and, in reviewing contract 

documents, found that eleven percent was incorrectly coded as being 

incentive contracts.2 We assessed these entries and found that they 

represented a range of contract award dates and products and services, 

and generally aligned with the distribution across military departments of 

contract actions in our sample. We determined that the miscoded 

contracts had minimal potential for impacting our analysis and that the 

data were sufficiently reliable to report general trends in DOD’s 

obligations for incentive contract actions. In addition, for a sub-selection 

of the 53 contracts and orders, we traced selected data fields to contract 

file documents to verify their accuracy.3 We also interviewed DOD, 

military department, and DAU officials about efforts to improve the use of 

incentive contracts.

 1

Contracting officials label a contract as one type in FPDS-NG, but the contract may 

include multiple line items with different contract types. For example, a contract labeled 

fixed-price incentive may contain firm-fixed-price or cost-plus-fixed-fee elements. 

2

These contracts were included in our data selection from FPDS-NG to establish an initial 

sample of 53 contracts for our second objective, discussed below. 

3

This sub-selection included the 35 contracts and orders in our final sample for our 

second objective.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-17-291 Defense Contracting

To determine the extent to which incentive provisions in selected DOD 

contracts achieved desired outcomes in cost, schedule, and technical 

performance, we assessed a nongeneralizable sample, drawn from 

FPDS-NG data, of incentive contracts and orders that DOD awarded 

between fiscal years 2011 and 2015 and that were reported as completed 

by the end of fiscal year 2015. We chose these timeframes so as to select 

awards that were made after regulatory and policy changes starting in 

2010 and had completed performance by the time of our review. Because 

of these parameters, certain types of contract actions were inherently 

excluded from our analysis, including those that exceeded a performance 

period of 5 years, such as longer term satellite and shipbuilding 

contracts.4

For our contract selection, we excluded contracts with values below the 

$150,000 simplified acquisition threshold, indefinite delivery contracts, 

and blanket purchase agreements.5 We initially selected all 38 contracts 

that met these criteria. Out of more than 4,200 orders, we selected a 

subset of 15 that (1) included different incentive types under the same 

base contract, (2) were used to purchase similar products and services, 

and (3) reflected a range of dollar values. These parameters yielded an 

initial sample of 53 contract actions (contracts and orders). Eighteen of 

the 53 actions were dropped from our sample either because the 

contracts were miscoded in FPDS-NG and were not incentive contracts 

based on our review of contract documents (6), were terminated before 

performance began (1), or were actually not yet complete (11). 

Consequently, we reviewed a total of 35 contracts and orders 

representing fixed-price incentive (FPI), fixed-price-award-fee (FPAF), 

cost-plus-incentive-fee (CPIF), and cost-plus-award-fee (CPAF) contract 

types (see table 7). Because we used a nongeneralizable sample of 

contracts and orders, results from this sample cannot be used to make 

inferences about all incentive contracts and orders that DOD awarded.

 4

We recently completed reviews of incentives used for DOD and civil satellite programs 

(see GAO, Satellite Acquisitions: Agencies May Recover a Limited Portion of Contract 

Value When Satellites Fail, GAO-17-490 (Washington, D.C.: June 9, 2017)) and of fixedprice incentive contracts for shipbuilding (see GAO, Navy Shipbuilding: Need to Document 

Rationale for the Use of Fixed-Price Incentive Contracts and Study Effectiveness of Added 

Incentives, GAO-17-211 (Washington, D.C.: Mar. 1, 2017)). 

5

We also excluded entries that appeared to be consolidated reports of multiple smaller

purchases. 
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-17-291 Defense Contracting

Table 7: Department of Defense Incentive Contracts and Orders GAO Reviewed

Incentive Fees Award Fees Both Total

Contracts 12 6 2 20

Orders 11 3 1 15

Total 23 9 3 35

Source: GAO analysis of Federal Procurement Data System-Next Generation data and information from contract documents. | 

GAO-17-291

In total, we reviewed 5 contract actions from the Air Force, 7 from the 

Army, and 23 from the Navy. For each selected contract and order, we 

collected relevant documentation, such as the initial contract or order, 

modifications, statements of work, determination and findings 

memoranda, award fee plans, and performance evaluations. We 

interviewed contracting officials and obtained their written input to clarify 

and collect additional information as needed.

To determine cost performance on CPIF and FPI contracts and orders, 

we compared actual or estimated costs to target costs listed in the 

conformed contracts or applicable contract modifications specifically for 

incentivized line items. For contracts where actual costs were not yet 

finally settled, we obtained the best available current estimate from 

contractor cost reports and similar sources. For contracts with multiple 

line items with incentives, we compared the total target costs to total 

actual or estimated costs. Within these types of contracts, if the contractor 

performed one line item at a cost overrun but another at a cost underrun, 

only the net results would be reflected in our findings. For contracts and 

orders with schedule and technical performance incentives, we identified 

schedule and technical performance goals and outcomes using the 

contracting office responses and contract documents.

6 We obtained total 

action values from the conformed contracts. For contracts and orders 

containing award fees, we calculated the amount of award fees earned 

based on data provided by the contracting offices, including total action 

values and total potential award fee amounts, and corresponding contract 

documentation. We examined award fee plans to identify provisions 

 6

Acquisition regulations discuss incentives in terms of cost, technical performance, and 

delivery. For the purposes of our analysis, however, we categorized incentives according 

to their intended outcomes. Therefore, we defined cost incentives to be those targeting 

cost-related outcomes, technical performance incentives as those targeting quality-related 

outcomes, and schedule incentives as those targeting schedule-related outcomes—

including making deliveries, providing services, and meeting milestones in accordance 

with the timeframes laid out in the contract. 
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-17-291 Defense Contracting

related to rollover and criteria for award, and we examined award fee 

board memos and other documents to understand how award fee 

amounts were determined.

To supplement our understanding of how incentive provisions helped 

achieve acquisition outcomes, we interviewed two contractors about the 

effectiveness of incentive provisions in motivating performance toward 

desired outcomes. To identify contractors to interview, we focused on a 

sub-selection of contracts containing multiple incentives to obtain 

perspectives on how the incentives interacted with respect to the 

contractors’ performance. The information obtained from interviews with 

the two contractors cannot be generalized to all contractors; however, the 

interviews provide important insights on the experiences of contractors.

We also reviewed documents and interviewed DOD officials about 

relevant data systems and processes used to collect and analyze contract 

and program data, including the Contract Business Analysis Repository, 

the Cost Assessment Data Enterprise, the Contractor Performance 

Assessment Reporting System (CPARS), and peer reviews, to 

understand how these systems may provide some insight into DOD’s use 

of incentive contracts. Specifically, we reviewed 13 CPARS reports from 

contracts in our sample, selected for a distribution among the military 

departments and various contract types. We also reviewed a 

nongeneralizable selection of 30 peer review summaries from fiscal years 

2014 and 2015 to develop an understanding of how peer reviews were 

used to provide guidance on key contracting decisions.

The performance audit upon which this report is based was conducted 

from January 2016 to May 2017 in accordance with generally accepted 

government auditing standards. 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.

DOD deemed that certain information in the draft report related to 

contract costs and performance was sensitive and must be protected 

from public disclosure. We subsequently worked with DOD from May 

2017 to July 2017 to revise our presentation of this information and 

prepare this report for public release.
Appendix II: Trends in Obligations for 

Incentive Contracts by DOD Component from 

Fiscal Years 2005 through 2015

Page 40 GAO-17-291 Defense Contracting

We analyzed data from the Federal Procurement Data System-Next 

Generation on incentive contract obligations by Department of Defense 

(DOD) component: Air Force, Army, Navy, and all other DOD. We found 

that, similar to DOD, the three military departments increased their 

obligations for incentive fee contracts overall from fiscal years 2005 

through 2015.1 The only notable anomaly we found was that other DOD 

components obligated fewer dollars for incentive fee contracts over the 

period we reviewed (see figure 4).

Figure 4: Obligations for Incentive Fee Contracts by DOD Component, Fiscal Years 

2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.

 1

For the purposes of this report, “incentive fee contracts” refers to cost-plus-incentive-fee 

and fixed-price incentive contracts.

Appendix II: Trends in Obligations for 

Incentive Contracts by DOD Component 

from Fiscal Years 2005 through 2015
Appendix II: Trends in Obligations for 

Incentive Contracts by DOD Component from 

Fiscal Years 2005 through 2015

Page 41 GAO-17-291 Defense Contracting

We also found that each of the military departments as well as other DOD 

components had decreased their obligations for award fee contracts from 

fiscal years 2005 through 2015 (see figure 5).

Figure 5: Obligations for Award Fee Contracts by DOD Component, Fiscal Years 

2005 through 2015

Note: Dollars were adjusted for inflation using the fiscal year gross domestic product price index.
Appendix III: Comments from the Department 

of Defense

Page 42 GAO-17-291 Defense Contracting

Appendix III: Comments from the 

Department of Defense
Appendix III: Comments from the Department 

of Defense

Page 43 GAO-17-291 Defense Contracting
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 44 GAO-17-291 Defense Contracting

Timothy J. DiNapoli, (202) 512-4841 or DiNapoliT@gao.gov

In addition to the contact name above, the following staff members made 

key contributions to this report: Janet McKelvey (Assistant Director), Pete 

Anderson, MacKenzie Cooper, Brenna Derritt, Alexandra Dew Silva, 

Lorraine Ettaro, Kurt Gurka, Julia Kennon, Liam O’Laughlin, Carol 

Petersen, Raffaele (Ralph) Roffo, Ann Marie Udale, and Robin Wilson.

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100551)
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 45 GAO-17-291 Defense Contracting

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