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53–118 PDF 2010

S. Hrg. 111–436 

ELIMINATING WASTEFUL CONTRACTOR BONUSES 

HEARING 

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

AUGUST 3, 2009 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

MICHAEL F. BENNET, Colorado 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY 

THOMAS R. CARPER, Delaware, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK L. PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

ROLAND W. BURRIS, Illinois 

JOHN MCCAIN, Arizona 

TOM COBURN, Oklahoma 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

JOHN KILVINGTON, Staff Director 

VELVET JOHNSON, Professional Staff Member 

BRYAN PARKER, Staff Director and General Counsel to the Minority 

DEIRDRE G. ARMSTRONG, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Carper ................................................................................................. 1 

Senator Burris .................................................................................................. 3 

Senator Coburn ................................................................................................. 4 

Senator McCaskill ............................................................................................ 17 

Prepared statements: 

Senator Carper ................................................................................................. 43 

Senator McCain ................................................................................................ 45 

WITNESSES 

MONDAY, AUGUST 3, 2009 

Hon. Jeffrey D. Zients, Deputy Director for Management, Office of Management and Budget .................................................................................................. 6 

John Hutton, Director, Acquisition and sourcing Management, U.S. Government Accountability Office .................................................................................. 8 

Shay D. Assad, Acting Deputy Under Secretary of Defense for Acquisition 

and Technology, U.S. Department of Defense ................................................... 23 

William P. McNally, Assistant Administrator for Procurement, and Deputy 

Chief Acquisition Officer, National Aeronautics and Space Administration .. 25 

Richard K. Gunderson, Acting Chief Procurement Officer, U.S. Department 

of Homeland Security .......................................................................................... 26 

Edward R. Simpson, Director, Office of Procurement and Assistance Management, U.S. Department of Energy ...................................................................... 28 

Alan Chvotkin, Executive Vice President and Counsel, Professional Services 

Council .................................................................................................................. 30 

ALPHABETICAL LIST OF WITNESSES

Assad, Shay D.: 

Testimony .......................................................................................................... 23 

Prepared statement .......................................................................................... 63 

Chvotkin, Alan: 

Testimony .......................................................................................................... 30 

Prepared statement .......................................................................................... 87 

Gunderson, Richard K.: 

Testimony .......................................................................................................... 26 

Prepared statement .......................................................................................... 75 

Hutton, John: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 53 

McNally, William P.: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 71 

Simpson, Edward R.: 

Testimony .......................................................................................................... 28 

Prepared statement .......................................................................................... 79 

Zients, Hon. Jeffrey D.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 47 

Page

IV 

APPENDIX 

List submitted by Senator Coburn ......................................................................... 93 

Questions and Answers for the Record from: 

Mr. Assad .......................................................................................................... 96 

Mr. McNally ...................................................................................................... 120 

Mr. Gunderson .................................................................................................. 133 

Mr. Simpson ...................................................................................................... 144 

(1) 

ELIMINATING WASTEFUL CONTRACTOR 

BONUSES 

MONDAY, AUGUST 3, 2009 

U.S. SENATE, SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 3:03 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 

Chairman of the Subcommittee, presiding. 

Present: Senators Carper, McCaskill, Burris, and Coburn. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. The hearing will come to order. 

Welcome Mr. Zients and Mr. Hutton. We are glad that you are 

here and thankful that you both are in your jobs. There is plenty 

of work to do, and I hope that you will talk about some of that 

work here today. 

We are going to be joined by several of my colleagues. I think 

Senator McCain is on the Senate floor. I am told by his staff he 

might be talking about the President’s nominee to the Supreme 

Court as we speak. But I know this hearing will get a lot more attention than anything that is going to be said over on the Senate 

floor this afternoon—well, maybe it will. We will see. 

But what we are going to talk about today is real important, and 

I am delighted that this panel is here and delighted that our second panel has joined us, too. We look forward to your testimonies, 

and we look forward to having a chance to go back and forth and 

kick around some ideas with each of you. 

I think it was about a year ago that Senator Coburn, I believe 

it was Senator Sanders, and I asked the Government Accountability Office to examine whether agencies were giving away what 

is known as ‘‘award fees’’ to contractors and whether or not contractors really deserved them in many instances. 

In the private sector, those payments would probably be called 

‘‘bonuses.’’ They are intended to help incentivize contractors to deliver exceptional performance. In essence, the award fee might be 

described as extra profit that the contractor may earn if they save 

our government money and deliver a superior product. 

The practice of aligning performance to profit is not a new concept, as we know. It can lead to excellent results if used approVerDate Nov 24 2008 12:31 May 25, 2010 Jkt 053118 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 P:\DOCS\53118.TXT SAFFAIRS PsN: PAT
2 

priately. However, several recent controversies in the financial sector have shown that rewards and incentives that are not properly 

aligned with outcomes can sometimes lead to failure, with dramatic 

and adverse consequences. 

Unfortunately, government agencies have made some of the same 

mistakes that private firms we hear about in the news have made 

over the years, and much to my disappointment, it seems that a 

number of agencies—not all, but a number of agencies continue to 

struggle in figuring out how to manage award fees appropriately. 

I might add that some who were not doing such a very good job 

not that long ago have, I think, taken steps to maybe show the way 

for the rest of our agencies. 

In fact, the GAO has told us that agencies, some agencies, continue to hand out hundreds of millions of dollars to contractors for 

reasons that just do not make a whole lot of sense. 

In one interview I am told GAO conducted as part of its analysis, 

an Air Force official reportedly said that a contractor would have 

to do a ‘‘pretty bad job’’ just to receive 85 percent of the potential 

bonus, meaning, I assume, that a plain bad job might warrant 100 

percent of a bonus. In another case, at this time at the Department 

of Homeland Security, a contractor was cited for ‘‘egregious behavior’’ and still received an award fee. 

Even when agencies do hold contractors’ feet to the fire, they 

often give them second and sometimes third chances to try and 

earn profit despite repeated shortcomings. This practice, known as 

‘‘rollover,’’ is meant to be used in limited situations when contractors are not able to deliver for reasons outside of their control. Unfortunately, rollover sometimes seems to have become a rule instead of the exception—not always, but in too many instances. 

What is even more troubling to me is that senior management 

does not appear to be examining the results of award fees to see 

if they are incentivizing contractors to actually perform well. Instead, agencies continue to hand out millions, in some cases billions, of dollars in bonuses, assuming that they are getting the best 

result for American taxpayers. 

For instance, GAO reported that the Department of Defense inappropriately paid $8 billion in award fees in 2005 alone. Only recently, 4 years later, have they started to analyze whether award 

fees are actually leading to improved performance. 

This situation has caused many of us to question how, during a 

time when households around our country are tightening their 

budgets, Federal agencies continue to award extra profit to companies as if it is expected and not earned. It is as if one went to a 

restaurant as a customer, and your waiter or waitress forgot your 

order, they spilled your food on you, and charged you for items you 

did not even ask for. Most of us would not give that person a very 

big tip, maybe none at all. But some agencies continue to give contractors who perform just as poorly pretty much everything they 

could want. 

Let me just pause and try to be clear. I am a strong believer that 

appropriate incentives, including bonuses, can lead to better performance. But I worry that, at the end of the day, agencies are not 

aligning contractor profitability in too many cases with performVerDate Nov 24 2008 12:31 May 25, 2010 Jkt 053118 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 P:\DOCS\53118.TXT SAFFAIRS PsN: PAT
3 

ance. And in those cases when a contractor does fail to deliver, 

there need to be consequences. 

Agencies cannot keep giving contractors a second bite at the 

apple. We just cannot afford to give contractors money and get too 

little in return. That said, I do believe that there may be some possible solutions that are currently being discussed and others that 

we may want to pursue. 

For example, after GAO had exposed the fact that the Department of Defense contractors were continually given multiple opportunities to earn award fees, the use of this practice dropped dramatically. This has led to an estimated $450 million in savings in 

eight programs in which the rollover practice was once used. Perhaps this should be expanded to other agencies. 

I personally do not see the logic of using award fees to 

incentivize contractors when we do not know whether or not they 

work. I got the sense that agencies are using this type of contracting because in some cases they do not know exactly what they 

want out of the contractors let alone know how that performance 

should be delivered. So instead of taking the time to lay out objective cost schedules and specific performance measures, agencies 

may be using wasteful bonuses as a crutch. 

In closing, I am looking forward to hearing what our witnesses 

have to say about the ongoing efforts to get the issue under control 

and to explore some other possible solutions that will help to rein 

in wasteful contractor incentives. 

If Senator McCain was here, I would recognize him for his opening statement. He will be joining us shortly. And we have been 

joined by Senator Burris and Senator Coburn. Before you got here, 

Senator Coburn, I was talking about how you, Senator Sanders, 

and I were among the people who said these award fees are troublesome, and we asked GAO to do something about it. And I very 

much appreciate your leadership on this and a whole lot of other 

issues. 

Senator Burris got here just a little bit ahead of you. I am going 

to go ahead and yield to him, and then we will yield to Senator 

Coburn. But we are delighted that you are both here. Senator 

Burris, you are always good to come, and I am grateful for that. 

Thank you. 

OPENING STATEMENT OF SENATOR BURRIS 

Senator BURRIS. Thank you, Mr. Chairman. I would like to commend you, Mr. Chairman, for holding this hearing today. The importance of this issue cannot be overstated, especially in these economically challenging times. It is more important than ever that 

we end wasteful spending associated with Federal contracting; 

moreover, we need to fully embrace transparent practices that will 

assure taxpayers that their money is being put to good use. 

I look forward to hearing more about the use of the award fee 

contracts and the steps the GAO and the Office of Management 

and Budget are taking to ensure that this practice does not lend 

itself to wasteful spending. 

We need to ensure that Federal contractors receive payment only 

for the projects that they are hired to complete. We cannot continue 

4 

to use taxpayers’ dollars to pay for work that does not meet the 

contract requirements. 

So I will have a few questions during the question and answer 

session, and thank you very much, Mr. Chairman. I appreciate it. 

Senator CARPER. You bet. Thank you. It is not your birthday 

today, is it? 

Senator BURRIS. Yes, today is my birthday. 

Senator COBURN. Happy birthday. 

Senator CARPER. Happy birthday. 

Senator BURRIS. August 3. I will not tell you that I am X years 

old. 

Senator CARPER. Around here, at your age they still think you 

are a teenager. 

Senator COBURN. You are young. [Laughter.] 

Senator BURRIS. I am 72 today. 

Senator CARPER. You are still a teenager. Plenty of rowing time. 

Well, happy birthday. Delighted to share this day with you. 

Senator Coburn is probably as much as anybody I know, a member of the Senate who focuses on waste, fraud, and abuse, and I 

am delighted that he is partnering on a number of those initiatives. 

Senator Coburn. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Mr. Chairman, thank you so much for holding 

the hearing, and I thank GAO for their report. 

Americans think we do not get it up here. I am going to enter 

into the record a list of bonus payments that were paid under 

CPAF across almost every agency, but let me just highlight a few. Medicare and Medicaid paid out more than $312 million last year 

for quality care bonuses to nursing homes that provided below-average care and had significant past health and safety violations. The Department of Defense paid $8 billion in unwarranted bonuses to contractors for weapons programs that had severe cost 

overruns, performance problems, and delays between 1999 and 

2004. 

NASA paid Boeing a bonus of $425 million for work on the Space 

Station that ran 8 years late, cost twice what was expected, and 

Boeing estimates an additional $76 million in overruns by the time 

the contract is completed. Yet we paid $425 million in bonuses. 

The Department of Commerce selected Northrop Grumman in 

2002 to build a $6.5 billion satellite system supposedly to save the 

American people $1.6 billion. It was supposed to be launched in 

2008. It has not happened. The project’s budget has doubled to 

$13.1 billion, and Northrop’s performance has been deemed unsatisfactory, yet from 2002 to 2005, we gave them $123 million worth 

of bonuses. 

In 2007, Harris Corp. developed a handheld device to collect data 

for the 2010 census that failed to work properly and was $198 million over budget. In spite of that, we gave them $14.2 million in 

bonuses. 

The Federal National Mortgage Association, a sponsored mortgage enterprise better known as Fannie Mae, suffered $59 billion 

in losses last year and requested $15 billion in taxpayer assistance, 

yet it plans to pay $4.4 million in bonuses to its top executives. 

5 

1The list provided by Senator Coburn appears in the Appendix on page 162. 

In 2006, more than $3.8 million in bonuses were paid out to senior officials at the Department of Veterans Affairs, months after a 

$1 billion shortfall threatened to imperil the care of thousands of 

injured veterans returning from combat in Iraq and Afghanistan. 

In 2006, the Department of Treasury abandoned a $14.7 million 

computer project intended to detect terrorist money laundering. 

The failed project was 65 percent over its original budget, but the 

vendor, EDS, was awarded $638,000 in bonuses. 

The repair and restart of a Tennessee Valley Authority Nuclear 

reactor cost $90 million more than the Federal utility budget was, 

but TVA paid the primary contractors on the project—Bechtel 

Power and Stone and Webster—an extra $42 million in bonuses 

and other fees. 

I will just add the rest of them to the record, if I may, Mr. Chairman.1

Senator CARPER. Without objection, they will be added. 

Senator COBURN. I look forward to your testimony. I know that 

OMB is aware of these problems. I have a lot of confidence in OMB 

that they will get it right. 

Senator CARPER. Thanks, Dr. Coburn. 

One of the things Dr. Coburn and I have talked about for any 

number of times is the idea that we have OMB—part of OMB’s job 

is to manage and to manage effectively in a cost-effective way. Part 

of the job of GAO is to help us to make sure as a watchdog that 

agencies are doing their jobs, doing it in a cost-effective way. 

Part of our job is to provide oversight, and we like to in this 

Committee, and this Subcommittee especially—which Dr. Coburn 

has chaired from time to time, and I get to chair it now for a little 

while. But one of the things we try to do is to work with OMB, to 

work with GAO, to work with the Inspectors General, as 

misspending, inappropriate spending is identified, wasteful spending is identified, for us to put a spotlight on that. And what we try 

to do is to spotlight bad behavior, and we like to spotlight good behavior, in an effort to hold up to other agencies those agencies that 

are doing the right thing, behaving appropriately, and set themselves out as an example. 

So here today I think we will have the opportunity to hold some 

folks up, to say we appreciate what you are doing, and to maybe 

say to some others, let us see what you can learn from those that 

we hold up. 

Our first witness today will be the Hon. Jeffrey Zients, the Deputy Secretary for Management and the government’s first ever 

Chief Performance Officer. We are delighted that he has taken on 

this responsibility. It seems like, what, about a month ago that you 

were confirmed and assumed this responsibility. But we are happy 

to have you on board. 

Mr. Zients comes to government with an impressive resume, having worked for over 20 years as a management consultant and entrepreneur. He also co-founded the Urban Alliance Foundation, a 

nonprofit that helps economically disadvantaged young people obtain year-round internships and job training. 

6 

1The prepared statement of Mr. Zients appears in the Appendix on page 47. 

And our second witness on this panel, no stranger here, is John 

Hutton, and he is the sourcing manager for the Government Accountability Office. Mr. Hutton, I am told, began his career in GAO 

in—this says 1878. Could it have been then? [Laughter.] 

Maybe it is a typo—1978. He has led reviews on topics ranging 

from reconstruction in Iraq and Afghanistan, places we all have 

been, to U.S. efforts to combat the AIDS virus. 

Again, our thanks to both of you for your work and for your stewardship, and I am going to call on Mr. Zients to lead us off and 

then Mr. Hutton to follow. Your entire statements will be made 

part of the record. Feel free to summarize as you wish. Thanks. 

TESTIMONY OF HON. JEFFREY D. ZIENTS,1 DEPUTY DIRECTOR 

FOR MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET 

Mr. ZIENTS. Thank you, Chairman Carper, Senator Coburn, and 

Senator Burris. I appreciate the opportunity to appear before you 

today to discuss award-fee contracting along with strategies for 

eliminating waste and maximizing the value achieved from these 

contracts. I have prepared a full statement for the record and, with 

your permission, would like to insert into the record and highlight 

a few key points. 

Senator CARPER. You have our permission. 

Mr. ZIENTS. Thank you. 

As you mentioned, I was confirmed last month as the Deputy Director for Management at OMB and Chief Performance Officer of 

the Federal Government. It is my responsibility to help lead efforts 

to improve government performance—in other words, to make sure 

that taxpayer dollars are being used effectively and efficiently, a 

task that is critical in any Administration but is especially critical 

during these difficult economic times. I believe that a sound acquisition system can play an important role in driving down costs and 

increasing the value the taxpayers get for their dollars. 

As demonstrated by the President’s March 4 memorandum on 

government contracting, the Administration is committed to creating an environment that can support such a system, which is currently used for more than $500 billion in annual spending. 

Last week, OMB issued an initial set of guidance to help agencies improve the effectiveness of their acquisition practices and the 

results achieved from their contracts. These efforts are designed to 

save the taxpayers at least $40 billion a year. 

The President’s memorandum identifies an agency’s selection of 

contract type as a key area in need of immediate and increased attention to achieve better results from our contractors. The selection 

of an award-fee contract can be an effective way to both achieve 

strong performance from a contractor and mitigate the government’s risk in circumstances where requirements may be difficult 

to define and to measure objectively. 

To get the benefits of an award-fee contract, agencies must focus 

on three areas: 

First, fees must be linked to cost, timeliness, and quality of the 

contractor’s performance. 

7 

Second, the amount of fee an agency pays must be commensurate 

with the level of demonstrated performance. 

And, third, an agency must not pay an award fee when contractor performance is unsatisfactory. 

OMB’s Office of Federal Procurement Policy laid out these basic 

tenets of award-fee contracting in a 2007 policy memorandum. Unfortunately, agencies have not consistently achieved good results 

from their award-fee contracts, in part because these tenets have 

not yet been incorporated into the Federal Acquisition Regulation 

(FAR). As a result, OMB is taking two steps to significantly improve government-wide implementation of award-fee contracting. 

First, we are working with the FAR Council to expand the existing FAR rules. The new rules will require that an agency effectively determine that an award-fee contract is the appropriate contract type for the agency’s requirements and circumstances. The 

new rules will also provide evaluation standards to help agencies 

differentiate between levels of performance and the corresponding 

percentage of available award fees that could be earned. Equally 

important, the rules will prohibit award fees for contractor performance that is judged to be unsatisfactory. Finally, the rules will 

provide clear guidance on the use of rollover. 

Second, we will bring more agency management attention to bear 

on award-fee contracting activities in coordination with the five 

agencies that represent at least 95 percent of the total dollars 

spent on award-fee contracts. Most of those agencies are represented in your second panel. 

One area where we will increase management attention is on 

monitoring of internal practices and data collection. We will work 

with the agencies to put appropriate mechanisms in place to determine if award fees have been made in accordance with their approved award-fee plan. We will further work with agencies to compare award-fee determinations to the agency’s evaluation of the 

contractor’s overall performance. This cross-check will help managers ensure that fee determinations track with performance evaluations and that contractor performance is being evaluated by the 

agency in a consistent manner. 

Finally, we will look at how current data collection on award-fee 

contracts can be improved. One option we are considering is the 

centralized collection of award-fee determinations into the same 

system that serves as the central repository for contractor performance information. This consolidation would have the added benefit 

of providing an additional source of analysis for agencies to consider in future source selections. 

In addition, we will focus management attention on training the 

acquisition workforce, which is central to achieving good results 

from award-fee contracts. For this reason, it is critical that the rollout of our new guidance be supplemented with tailored training 

that reinforces the skills that are essential to achieving cost-effective quality performance under award-fee contracts. 

In summary, we have begun an aggressive effort to address welldocumented weaknesses with award-fee contracts and to create an 

environment that enables continual improvement. Ultimately, 

these reforms will lead to a government that is using its funds 

wisely and with care and delivering for the American people. 

8 

1The prepared statement of Mr. Hutton appears in the Appendix on page 53. 

I appreciate the Subcommittee’s leadership on this subject and 

welcome the opportunity to work with you as we improve our use 

of award-fee contracting and strengthen the overall acquisition system. 

Senator CARPER. Good. Thanks, Mr. Zients. 

We are going to have questions. When we get to questions, Mr. 

Hutton, I will telegraph this picture: I am going to be asking you 

to comment on the steps that Mr. Zients just outlined. But you are 

recognized to make your statement now, and your full statement 

will be made a part of the record. Thank you again. 

TESTIMONY OF JOHN HUTTON,1 DIRECTOR, ACQUISITION AND 

SOURCING MANAGEMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. HUTTON. Thank you, Mr. Chairman and Members of the 

Subcommittee. I am pleased to be here today to discuss our recent 

report on use of award-fee contracts. 

From 2004 through 2008, agencies have spent over $300 billion 

on contracts which include award fees. In 2008, over 95 percent of 

those dollars were spent at five agencies: Department of Energy, 

Departments of Health and Human Services, Defense, Energy, and 

Homeland Security, and NASA. I think that was six, but I repeated 

one. 

In 2007, OMB issued guidance to chief acquisition officers and 

procurement executives that emphasized several actions we had 

recommended in 2005 aimed at improving award-fee practices. My 

statement today is based on our May 29, 2009, report on awardfee contracts, and specifically I would like to discuss how agencies 

are addressing OMB’s award-fee guidance: First, what agencies 

have done to revise or develop policies and practices reflecting that 

guidance; second, the extent agency practices for using award-fee 

contracts are consistent with that guidance; and, third, the extent 

agencies have collected and shared information on award fees to 

help evaluate the effectiveness. 

So what have agencies done? DOD and NASA have revised or 

clarified guidance that supports better use of award fees and are 

generally consistent with the OMB guidance. For example, DOD’s 

guidance now reserves for exceptional circumstances the practice of 

offering contractors a second chance at unearned fees; emphasizes 

the linkage between award fees and desired outcomes; defines the 

level of performance used to evaluate contractors; and prohibits 

payment of award fees for unsatisfactory performance. NASA’s 

guidance now requires a documented cost/benefit analysis to support the use of an award-fee contract. 

Efforts to incorporate OMB guidance into departmental guidance 

at DOE, HHS, and DHS have varied. Although acquisition professionals at each of these agencies told us that they would benefit 

from additional guidance on using award fees, some were unaware 

of the contents of the OMB guidance. 

Are agency practices consistent with the OMB guidance? On the 

one hand, we found that agency practices for using award-fee contracts were not always consistent with the OMB guidance. At HHS, 

9 

for example, a contractor received an award fee based in part on 

process-oriented criteria such as requiring a contractor to have appropriate staffing levels, whereas OMB policy calls for linking fees 

to demonstrated efforts. 

At DOE, one office developed a scoring system without defining 

the terms used, resulting in inconsistent application that could 

allow for payment of as much as 84 percent of an award fee for not 

meetings expectations. 

But, on the other hand, DOD, the agency at which our initial 

work was done in 2005, has in some cases applied its revised guidance and realized some benefits. Of the 50 DOD contracts we reviewed, 40 were for programs included in our 2005 work, and we 

estimate DOD will pay $450 million less in award fees from fiscal 

years 2006 through 2010 on eight of those cases to which the new 

guidance has been applied. In other instances, through adopting 

more discreet criteria, a program was able to better evaluate contractor performance. 

Have agencies collected data evaluating effectiveness and shared 

information about the use of award fees? In most cases, the answer 

is no. Of the five agencies we reviewed, only DOD collects data on 

award-fee contracts, and no agency has developed methods for evaluating the effectiveness of an award fee as a tool for improving contractor performance. 

As for sharing information, other than a Community of Practice 

established by DOD, no formal networks exist for agencies to exchange best practices, lessons learned, or other strategies. Instead, 

information is shared through informal networks, if at all. This 

lack of more formal exchanges has created an atmosphere in which 

agencies do not know whether fees are being used effectively, and 

one in which poor practices go unnoticed and positive practices 

were isolated. 

So what should be done? In our report, we recommended that 

DOE, HHS, and DHS update or develop guidance on using award 

fees which would provide instructions and definitions on developing 

criteria to better link award fees to acquisition outcomes; using 

award fees in combination with incentive fees; determining when 

rolling over unearned fees may be justified; and establishing evaluation factors to motivate contractors towards excellent performance and prohibiting payments of award fees for unsatisfactory performance. 

In addition, we recommended that DOD emphasize consistent 

application of its revised guidance and, where feasible, review contracts awarded before the guidance was in effect to identify additional opportunities for improvement. 

Finally, we also recommended that the five agencies establish an 

interagency work group to identify how best to evaluate the effectiveness of award fees and develop methods for sharing information 

on successful strategies. 

The agencies concurred with our recommendations and noted 

that an existing Federal Acquisition Regulation work group and an 

Interagency Incentive Contracting Work Group could be leveraged 

as mechanisms to implement our recommendations. 

10 

Mr. Chairman, this concludes my oral statement, and I look forward to addressing any questions you or other Members of the 

Committee may have. 

Senator CARPER. Thanks, Mr. Hutton. 

Mr. Zients mentioned near the—well, actually at the beginning 

of his testimony, I think he laid out maybe three major things that 

were promulgated by OMB. I think it was in 2007. 

Mr. ZIENTS. Yes. 

Senator CARPER. And the last one, I believe, was that award fees 

should not be awarded when performance was unsatisfactory. I 

think that was the third point. I do not recall exactly the other two. 

But to go back to the 2007 guidance that OMB provided, and 

then if we fast-forward to what Mr. Zients said here today that 

should be done, is being done, how does it work together as a package in terms of getting us closer to better practice that we would 

all applaud rather than disdain or despair? I just want you to comment on what he laid out, like the road ahead. 

Mr. HUTTON. Sure. Mr. Chairman, I do point out that when OMB 

issued their memorandum back in 2007, I believe, it reflected a lot 

of the key findings in our work that we did at DOD back in December 2005, and it really—— 

Senator CARPER. You didn’t think they were listening. They were 

paying attention. 

Mr. HUTTON. Well, sir, I do point out that DOD actually, once 

that report was issued, quickly modified their guidance. That was 

one positive step taken. You had OMB coming from behind later 

with additional guidance to make it apply to other Federal agencies. 

But Congress itself several times has pushed DOD to clarify 

their guidance, put more detail in their guidance, as well as ask 

that the FAR be amended to incorporate many of the things that 

we pointed out based on our 2005 work. And I think this is clearly 

an example, sir, where you said at the outset, GAO put a spotlight 

on some of the issues on the use of award fees back in 2005, and 

I think this is a clear case where putting a spotlight brought a little heat, and the heat brought some change so far. 

Senator CARPER. Let me just back up a little bit. Do you believe 

that the guidance that OMB now provides is appropriate? Are 

there some aspects of it that—— 

Mr. HUTTON. For DOD’s guidance? 

Senator CARPER. Well, for DOD or really broadly, the guidance 

broadly for the awarding of award fees. 

Mr. HUTTON. I think OMB’s guidance, again, hits many of the 

key things, but what our work has shown, even this most recent 

report, is that the word has not gotten down to everyone throughout all the different agencies. As we have pointed out, some of the 

agencies like HHS and DOE in some cases have not incorporated 

all those attributes of the OMB guidance into their own guidance 

yet. So I think there is further room for improvement. 

But even within an agency—and DOD has taken some steps 

where we have seen some improvement—it is not across the board 

yet, but they certainly were initial steps. 

So you have to ensure that those steps are taken and pushed 

down across the agency down the contracting activities. 

11 

Senator CARPER. So from what I am hearing from you, OMB’s 

guidance is generally pretty good, gotten better over time. Some of 

the agencies, including DOD, maybe NASA, are doing a better job 

of adhering to that guidance and have improved. 

We have the obligation to try to back you up when you point out 

activities that are really undefendable, that you continue to bring 

attention to them, and in some cases to embarrass or shame, in 

other cases to encourage agencies to do the right thing. 

What is the role of the Inspectors General in all this? Do they 

have any role at all in terms of trying to make sure that when 

OMB promulgates this guidance and you are out there as a watchdog, what is the role of the IGs in this, the Inspectors General? 

Mr. HUTTON. Yes, sir. GAO has looked more broadly across government, but some of the IGs have done some studies looking at 

specific contracts where they went in and actually evaluated the 

agency’s use of award-fee contracts. I know the NASA IG issued a 

report not too long ago, and I believe DOD has done so as well. 

So the IGs can play a role where they look at some of these contracts and see to what extent the processes and guidance are being 

executed. 

Senator CARPER. Why do you think some—and this is for either 

of you. Why do you think the Department of Defense has actually 

made rather remarkable improvement, not perfect but a remarkable turnaround, and maybe NASA—and we have several other 

agencies, and I think one of you said in your testimony that 95 percent of these award fees were made by just five agencies, which is 

actually helpful because we do not have to worry about the rest, 

at least not with regard to this concern. But why is it that a big 

agency, a hard-run agency like the Department of Defense has 

made what, I think, most would say is pretty good improvement, 

and we have a couple of other agencies that are part of the problem 

here that have made relatively little? Why is that? 

Mr. HUTTON. Well, if I could speak first, in terms of DOD, I 

think we highlight some key cases where you have seen these improvements being made. But as our report also pointed out, it has 

not gone throughout the organization. But I think leadership and 

embracing the GAO findings is one major step to seeing that 

change is made. 

Senator CARPER. Mr. Zients, any comment on that? 

Mr. ZIENTS. Yes, picking up on that, and then also earlier on the 

OMB guidance. 

Senator CARPER. Please. 

Mr. ZIENTS. My understanding is that incorporating this into the 

FAR and expanding the FAR rules will lead to much greater adoption. So this process which we are almost finished with, so within 

30 to 60 days we should be publishing what most likely will be the 

interim final set of rules, will really ensure that this is front and 

center in all decisions around award fees, and it will be very clear, 

much more granular, if you will, guidance and rules about what 

should and should not be done. 

So I think going forward, now that we have it in the FAR in a 

more detailed fashion, this hopefully will help to mitigate this as 

a problem. 

12 

Senator CARPER. One of you said in your testimony, you talked 

about training of the men and women whose job it is to oversee 

contracts and to make sure we are doing the right thing with respect to acquisition. And I think one of our other witnesses in the 

second panel talked about the lack of training, and the fact that 

some of the folks who are tasked with these responsibilities in their 

agencies are not well prepared, are not trained to do this part of 

their jobs well. 

Would you care to tell us what needs to be done to better ensure 

uniformity of training and preparation of acquisition oversight? 

Mr. ZIENTS. My perspective is that we have a set of workforce 

challenges, writ large here, in terms of—probably in terms of the 

number of people, and certainly in terms of training and capabilities that we really need to focus on. So I think when you talk about 

an area like this where clearly there have been some shortcomings, 

the idea of tailoring training to award-fee contracting, starting with 

is it the appropriate contract type to begin with, all the way 

through what is an appropriate award linked to actual performance, that whole value chain, if you will, is going to be an area that 

we need to target in training and support workforce development 

in. 

So I think it is part of a much larger issue that we have on workforce capabilities and training and number of people, but I think 

given the importance of this problem consistent with the guidance, 

we should be focusing in on some tailored training. 

Senator CARPER. All right. The Department of Health and 

Human Services did not send a witness today to our second panel, 

and I am disappointed with that. But are either of you in a position 

to tell us how they are doing relative to the challenges that they 

face in this regard? 

Mr. HUTTON. Mr. Chairman, our work has shown that HHS is 

one of the agencies that probably has some of the least specific detailed guidance at the various contracting activities, less than perhaps DOD, DHS, or DOE. Pretty much I think they are reliant on 

the FAR, and as the OMB witnesses indicated, the FAR is going 

to be expanded and provide more detail as to how to better utilize 

this type of contracting apparatus. While that is helpful, I think 

HHS should still look at their guidance and the extent to which 

their folks are well grounded in the key principles that we have 

pointed out in our work, as well as OMB has pointed out in their 

memorandum. 

Senator CARPER. I will say this and then pass it on to Dr. Coburn 

and then back to Senator Burris. But my guess is that somebody 

at DOD a couple of years ago, fairly senior at DOD, maybe even 

a Deputy Secretary said, if we are going to run this agency the 

right way, we have got to do something about these award fees. 

And we all have heard of the term ‘‘trickle down,’’ but my guess 

is that much like turning a battleship or an aircraft carrier like 

they have to over at DOD, somebody high up has to say, ‘‘Let us 

get to work on this.’’ And it is important that we have people 

trained to do the day-to-day work on acquisition and contracting, 

but it is also helpful to have people that are in charge of agencies 

to say this is important as well. 

Dr. Coburn. 

13 

Senator COBURN. Thank you, Mr. Chairman. 

Thank you for your testimony. I want to go a little deeper and 

into background really to ask how we got here. If you think about 

what we are using on award fees, it is usually on things that we 

have never done before. If you look at NASA or you look at DOD 

or you look at the case of the Census Bureau trying to buy a 

handheld computer, the hole I see in that is that we have no capital at risk by those people who are bidding these jobs. I would 

think, Mr. Zients, that you would probably agree, given your background, that when you have no capital of your own invested, you 

have no incentive to be under budget or on time. I just wonder, can 

you give me a little history of how we got here to where we are 

now, anything that we want to do new, all the risk is taken by the 

Federal Government, even though the company providing the services is going to handsomely profit from that. 

Why shouldn’t they have risk? Why shouldn’t they have capital 

at risk? 

Mr. ZIENTS. I think, appropriately implemented, these contracts 

actually can achieve what you are discussing in that if unsatisfactory performance is the result and, therefore, there is no award fee, 

that should be a contract that the contractor does not make any 

money from. 

The problem is if you have unsatisfactory performance and you 

are actually paying healthy award fees, then the government is not 

protecting itself. But the structure of the contract could be used to 

protect the government so that if performance is not strong—and, 

again, one would prefer to have objective measures of the performance up front and have incentives as opposed to bonuses, if you 

will. But if that is not feasible given the newness of the work, as 

you described with NASA or DOD, then these fees should not be 

paid when performance is not strong and the contractor should suffer as a result—in essence, having lost the capital opportunity that 

you describe. 

Senator COBURN. Let me go a little further. The President said 

he would like to competitively bid everything, even the things that 

we are trying to do that have not been done yet. What is wrong 

with having a competitive bid on that and then holding the contractor accountable—if they cannot do it, they lose. If they do it, 

they win. We know what the price is up front. What is wrong with 

that? What is wrong with that scenario, where we put some of the 

risk onto those that are going to benefit from having the contract? 

Mr. ZIENTS. I could not agree more on increasing competition. I 

think, where possible, we want fixed-price contracts. There probably are some situations where you cannot do a fixed-price contract 

and you have to do a cost reimbursement contract. In those situations, you want to be able to tie it as best you can to objective 

measures up front. 

If you cannot—and we should be now down to a pretty small subset, I would hope—then award fees could be the right way to incent 

good performance. But then you would absolutely have to tie performance to what percent of the award fee you are paying. 

Senator COBURN. Right. We spend $64 billion a year on IT contracts, and a large percentage of those, 30 percent or so, are totally 

nonperforming. The reason for this is we do not know what we 

14 

want or we change what we want as we start it. I know the CFOs 

are going to be involved with this, and I appreciate the Obama Administration working on this. 

How do we get it to the point on these things we have not done 

where the bureaucracies do not change routinely or regularly the 

requirements so that we are chasing a moving target instead of 

saying, OK, this is it, this is what we are going to get, and then 

after we get this, then we will have another contract for MOD? The 

fact is that what happens on all these IT contracts is we just keep 

changing the goalpost. 

You all have done a wonderful job at looking at the problems 

with the system we have today. I am not sure this system works. 

As Mr. Hutton said, when is rolling over unearned award fees justified? If I was behind it, it never would be. That is like saying my 

dog ate my homework, but I come back tomorrow and get an A 

even though I did not perform the first day. 

I have questions with how we actually are doing this, how we are 

looking at it. I know there are areas where we cannot say we can 

get a fixed-price contract. I understand that, and I agree with setting incentives and parameters and good measurement indicators. 

But I think we need to move towards capital risk. If you look at 

the major contractors for the Federal Government, you go read 

their 10–Ks, they are doing OK. As a matter of fact, they are doing 

more than OK. They are making a ton of money off the taxpayers 

of this country, and they are providing the needed service. I am not 

unhappy that they are making money, but I am unhappy that we 

do not have a system that puts their capital at risk which will 

drive innovation on their part. If they do not have capital at risk, 

it does not. 

So, Mr. Hutton, when is it OK in rolling over unearned award 

fees? Why should they ever be rolled over? 

Mr. HUTTON. Well, sir, I think as the latest guidance and the 

DOD guidance mentions, it would be really exceptional situations, 

and while that is not defined, I think one consideration is if there 

was—the contractor did not have an opportunity to earn a fee because of some event that did not occur at that point in time when 

everyone expected it to, and the award fee was tied to a particular 

event. But that is a decision that—I think a judgment that the government agency might have to make. I am not saying that is the 

best answer or the only way, but it really would be an exceptional 

situation, if in anything. 

Senator COBURN. My problem is that gives the contractor an out, 

and what you want to do is have them come in with a contract saying, ‘‘There is no out for me on this. We have got to perform.’’ It 

is the age-old story on venture capitalists. When a project is not 

going good, do you know what the first thing is they do? They fire 

half the people at the venture capital that they have, and it does 

not matter which half they fire. You know what happens? It either 

gets well very quickly, or they withdraw all the funding. 

I think we have taken an attitude we have done it this way, and 

we should probably take another look at this. Possibly an exception 

that only OMB can approve for rolling over award fees and saying, 

yes, this is something totally unforeseen, this is not a lack of effecVerDate Nov 24 2008 12:31 May 25, 2010 Jkt 053118 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\53118.TXT SAFFAIRS PsN: PAT
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tive innovation on the part of the contractor, not a problem with 

us in terms of purchasing. 

I would like to see those very much limited, and it will change 

behavior. The fact is that right now in the contracting community, 

award fees are pretty easy to get, we ought to go to the incentive 

that you are talking about, Mr. Zients, with clear guidelines so that 

there is no question but the key is how you contract what you are 

asking for in the first place. Mr. Zients. 

Mr. ZIENTS. Yes, I was going to say on rollovers, I think there 

is one of two paths. One is outright ban. If it is not an outright 

ban, then it has to be truly, to your point, an extraordinary event. 

An extraordinary event would need to have a process associated 

with it that verifies—— 

Senator COBURN. We are talking through OMB. 

Mr. ZIENTS. That verifies it is extraordinary. 

Senator COBURN. Right. Thank you, Mr. Chairman. Sorry I went 

over. 

Senator CARPER. No. That is quite all right. 

We have been joined by Senator McCaskill from Missouri. Welcome. We are delighted to see you and thank you for your interest 

and stewardship on these and other issues. 

We have also been joined in the audience by Dr. Jerome Lewis 

from the University of Delaware, who, as it turns out, was one of 

my professors when I was a young MBA student a long time ago. 

So we are delighted he and his wife, Linda, and their daughter, 

who I think just recently graduated from the University of Delaware, are all here. 

With that having been said, now let me recognize Senator Burris 

for his questions. 

Senator BURRIS. Thank you, Mr. Chairman. 

Senator Coburn, just for my information, did you have dates on 

those numbers that you read off? Were those 2005, 2006, or 2007? 

Senator COBURN. Some of them were all the way up to 2007, but 

I think one of them was all the way up to 2008. 

Senator BURRIS. Thank you, Senator. 

Senator COBURN. But we will have them submitted for the 

record. 

Senator BURRIS. OK. Thank you, Senator. 

For Mr. Hutton, what is the biggest concern that GAO came 

away with after their May 2009 report? And what are GAO’s recommendations for turning them around? 

For example, you said in your testimony that GAO has found 

that the agencies did not have a mechanism for evaluating the effectiveness of the award fee as a tool for improving contractor performance and achieving desired outcomes? 

Mr. HUTTON. That is right, sir. That was one of our recommendations that gets at the heart of the issue, if you are using this as 

a vehicle, how do you know that the way you are using it is actually incentivizing the contractor to perform in the direction that 

you would like the contractor to perform. 

But to take it back to the first point about what are our biggest 

concerns, I think in part that we have seen the cost-plus-award-fee 

contracts being used in a way that is not in the best interest of the 

taxpayer. In a number of cases, we found that, one, we talked earVerDate Nov 24 2008 12:31 May 25, 2010 Jkt 053118 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 P:\DOCS\53118.TXT SAFFAIRS PsN: PAT
16 

lier about having unsatisfactory performance and getting nothing 

or something. But we found that even in cases where they perform 

satisfactorily, one could get up to 85, 90 percent of the award fee. 

And in those situations, what is left to really incentivize a contractor’s performance? You are only leaving like 10 percent. That is not 

much of an incentive, I would not think, if you are paying them, 

say, up to 90 percent for satisfactory. 

I think our report points to the weights being applied right now 

across some of the key agencies that tend to have this type of contract the most is one of our biggest concerns. But, also, I think the 

guidance still needs to be improved at the agencies, and I think the 

OMB guidance that reflected a lot of the commentary that we had 

in our 2005 report is really getting at the key things that need to 

be done: 

Do not pay an award fee for unsatisfactory performance. Rollover 

is to be only on an exceptional basis. And, quite frankly, I mentioned earlier a possible scenario. I mean, really what we have 

asked is for the agencies themselves to figure out when it would 

make the most sense because we are a little hard-pressed to find 

examples where it might make sense. 

So I think implementation has been a big issue for us and the 

fact that you are not going to get satisfactory resolution of this 

until some of these other agencies enhance their guidance as well. 

DOD has shown, in some cases where they have, you do see results. 

Senator BURRIS. And that leads me to Mr. Zients. In terms of 

DOD, was it able to make significant improvements after implementing the recommendations made by GAO in 2005? And what is 

the appropriate timeline for other agencies to get on board with 

these practices? And what kind of oversight can we, in Congress, 

provide? Are there circumstances that warrant penalties in reference to this? 

This goes to some of the work I actually have done in the private 

sector, which is to take the best practices of one organization and 

apply them to others. And I think by DOD’s leadership on this, we 

know that change can happen, and it can happen pretty quickly. 

So I think what we need to do—we are benefited here in that 

there are five agencies that represent more than 95 percent of the 

dollars. So by having those five agencies work closely together to 

share best practices, best processes, I believe that we can quickly 

improve this situation. I think DOD and NASA and maybe some 

others have some practices that we need to ensure that we codify 

and teach and implement as soon as possible. 

Senator BURRIS. Do you see what role can we, in Congress, have 

for developing penalties for those other agencies? 

Mr. ZIENTS. I think holding accountable, the way you are today, 

is the right way to do this. And, again, it is a very focused effort. 

It is five agencies that represent more than 95 percent. 

Senator BURRIS. Well, being a former fiscal officer of a State, and 

now, of course, out of the Federal Government, when you do that, 

there are certain penalties that you must pay if you are—I do not 

know whether or not those are Federal rules or not. But having 

dealt with the State contracting arrangement, certainly you cannot 

overspend those line items or, if you do, then you have to do some 

17 

legal transfer of funds. I am just wondering how some of this mechanically takes place with the overspending when we are appropriating those funds for those agencies. 

Mr. ZIENTS. Yes, it is a terrain that I do not know a lot about, 

but I can look into and report back on it. 

Senator BURRIS. OK. I am done, Mr. Chairman. Thank you very 

much. 

Senator CARPER. I think we are fortunate to have a couple of 

members of this panel who have actually been auditors for their 

State, Attorney Generals for their State, and the expertise that you 

bring to the Senate is very much appreciated and valued. Thank 

you. Senator McCaskill, welcome. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you, Senator Carper. 

Mr. Hutton, can you give us some historical perspective about 

how we drove in this ditch in the first place? It is amazing to me 

that there is a sentence in a GAO report that reads as follows: 

‘‘The Department of Defense now prohibits’’—underline ‘‘now prohibits’’—‘‘payment of award fees for unsatisfactory performance.’’ 

Now, where I come from, that would be a head scratcher. How 

did we get to the point that we began paying award fees for unsatisfactory performance? How did that happen? 

Mr. HUTTON. Well, it is difficult to kind of generalize, but one 

thing that we noted just in our recent work is that at some level 

it becomes the way we do business. And I know at one particular 

location a contractor—I think it was an Air Force contract—had 

been getting fees, and one time the government said, ‘‘No, we are 

not going to give you a fee this period, and we are not going to roll 

it over to the next evaluation period,’’ and the contractor came back 

and said, ‘‘Well, you know’’—and kind of very calmly said, ‘‘Can you 

roll it over?’’ And they said, ‘‘No.’’ 

And so I think in part there is a culture change with respect to 

how this particular contract vehicle is being applied. 

Senator MCCASKILL. Well, it is interesting to me—I mean, and 

this culture change would never have happened in the private sector. There never would have been a habit developed over the years 

that we pay for bad performance, we pay a bonus. 

I remember my first encounter with this. It was in the Armed 

Services Committee, and there was a very long hearing where I 

kept like going, ‘‘Huh?’’ It was an amazing revelation to me that 

there had been time after time—and we actually drilled down in 

that hearing, and there was actually a formula they were using. 

And I even tried to get to, well, what decides who this formula is? 

And it became pretty obvious to me that it was just one of these 

regulations that had been put in place that no one was taking seriously. They were going through the motions of doing some kind of 

contract evaluation, but at the end of every evaluation, there was 

the same outcome. 

So it was like this mentality that there is this paperwork we 

have to do, but once we get through the paperwork, we keep doing 

what we always have been doing. 

18 

Are you saying based on the report that you have issued that has 

changed at the Department of Defense or that they have simply 

put more regulations in place? 

Mr. HUTTON. I think they have improved their guidance, and I 

think based on some initial steps and for the contracts we looked 

at, and programs, we did see in some cases the ship, so to speak, 

starting to turn. 

But I must underscore that our work also showed, though, that 

the job is not done, and I think it takes sustained leadership, it 

takes having a qualified and trained workforce in sufficient numbers and making sure that the contracting activities are executed 

as the guidance would suggest. 

Senator MCCASKILL. And one of Mr. Assad’s many challenges is 

that, as your report found out, DOD, in terms of contracting makes 

an octopus look like it does not have very many legs. And all the 

different contracting commands are not in sync. They are not following the same guidelines. They are not observing the same rules 

and conduct based on—I mean, just within the Air Force, you have 

different contracting commands that are not even doing the same 

thing. 

I am curious. In your work, did you find a contract where they 

had denied a performance bonus? 

Mr. HUTTON. An award fee? Yes. 

Senator MCCASKILL. You did. 

Mr. HUTTON. I would probably have to get back for the record for 

some specific examples, but, yes, I do believe we had some where 

a contractor got zero for that particular evaluation. 

Senator MCCASKILL. Well, that is really good news because that 

has been typically a needle in a haystack type of deal, that there 

is actually someone who has been denied. 

As you have prepared for your very challenging job, Mr. Zients, 

are you aware of any contractor who has successfully sued for a 

performance bonus after they have been told no? 

Mr. ZIENTS. It is not something that I have looked into, and so 

I do not know either way. 

Senator MCCASKILL. Are you aware of any, Mr. Hutton? 

Mr. HUTTON. Senator, it is my understanding that the use of 

award fees is a unilateral situation with the government, that the 

government looks to try to incentivize in certain areas. It is a unilateral decision on the government whether they pay them a fee or 

not. And a contractor may come back and maybe say, ‘‘I have some 

more information that might have you think differently about your 

evaluation.’’ But it is a government decision. 

Senator MCCASKILL. Well, would there be something that would 

be too radical about saying that we are not going to do any more 

award fees in government unless it is based on objective criteria? 

Mr. Zients. 

Mr. ZIENTS. My instinct is that there are situations where they 

probably do apply and actually apply when implemented correctly 

to protect the government’s interest. 

Senator MCCASKILL. Can you give me an example where it would 

not be based on objective criteria? 

Mr. ZIENTS. Something that is very research, early stage, focused 

where, if you did a fixed-cost contract, it would, let us call it, 100 

19 

percent; whereas if you focus it this way, you might pay, just to illustrate, 85 percent and put a piece at risk, so that if the contractor underperforms, you end up at 85 percent rather than at 100 

percent. So you actually are protecting the government’s interest. 

If, however, the potential is 20 or 25 percent in my example and 

you routinely pay 20 or 25 percent independent of performance, 

then you have not protected the government’s interest. 

So when applied correctly, by putting some of this at risk, if 

there is unsatisfactory performance or only satisfactory performance, the government should have protected its interest by paying 

less than they would have under a fixed-fee contract. And, again, 

I think you want to minimize the use of these and only apply them 

to situations where you cannot define the objectives up front and 

measure them. And I think we have to be careful because it is 

often easy to say you cannot measure things and then default to 

a contractor of this type. So we need to make sure that these are 

only used in those situations where you truly cannot define objectively up front. 

Senator MCCASKILL. Mr. Hutton. 

Mr. HUTTON. If I could just add to that some of our past work 

has also indicated that you have to go through a thought process, 

a risk assessment as to whether this type of vehicle is going to give 

the government better opportunities to enhance the contractor’s 

performance. But you also have to consider things like administrative costs, or do they outweigh the benefit of using that particular 

type of vehicle. 

We have done some work in Iraq where a cost-plus-award fee 

was used for certain types of contracts, and there was difficulty 

even having the award fee boards meet and be able to discuss 

whether the contractor has performed enough. So you have to kind 

of understand the environment you are working in. You have to do 

a cost/benefit, administrative versus benefits, but also you have to 

have sufficient people that are properly trained and overseeing a 

particular contract if you are going to use this type of vehicle. 

So there are a lot of different things that one must consider, and 

I think that, as the OMB representative has mentioned, what they 

are trying to do is focus on that initial decision point as well and 

bring in a little more rigor as to whether this is the right vehicle 

or not. 

Senator MCCASKILL. Well, and I get if it is fixed costs, we could 

withhold some to make sure we get full performance before we pay 

the full contract. But in the hearing I sat through the day that I 

thought the top of my head was going to pop off my body because 

I was so frustrated and angry at what I heard—— 

Senator CARPER. I would have liked to have been there for that. 

[Laughter.] 

Senator MCCASKILL. It was unbelievable. I mean, it was just unbelievable, this hearing about the contractor’s performance and 

what they had been paid as bonuses. These were cost-plus contracts. So under what circumstances, if it is not a time consideration—because we are getting help on the cost here if it is costplus. Under what circumstances would there be an award? 

Mr. ZIENTS. These are cost contracts that have an award bonus 

component to them. So if the award bonus is not linked to performVerDate Nov 24 2008 12:31 May 25, 2010 Jkt 053118 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 P:\DOCS\53118.TXT SAFFAIRS PsN: PAT
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ance, i.e., we are paying it independent of performance, then we 

should all—— 

Senator MCCASKILL. Kind of dumb. 

Mr. ZIENTS [continuing]. Be very angry. 

Senator MCCASKILL. Yes. 

Mr. ZIENTS. That does not mean that there is no place for these 

types of contracts. I think it is probably more limited use than we 

have today, and then they have to be implemented in a way where 

the award fee is tied to the contractor’s performance, not paid in 

situations where the contractor’s performance is unsatisfactory. 

Senator MCCASKILL. I think the best example—and I am not 

aware, Mr. Chairman; maybe you talked about this. But I know 

that there have been a number of hearings about it. The best example I can think of that should outrage the American public is the 

company that wired the showers that killed our soldiers. They got 

a performance bonus for that contract. They managed to kill American soldiers, and we bonused them up. 

And if there is any day you get discouraged about how important 

your work is, Mr. Zients, that we have to change the way we do 

contracting in this country, on behalf of the public, think about 

that example and it will keep your passion where it needs to be. 

Thank you, Mr. Chairman. 

Senator CARPER. You bet. Thanks so much for joining us and for 

your passion on this. 

Have you all had a chance to look at the testimony from the second panel? 

Mr. HUTTON. No, sir. 

Mr. ZIENTS. Yes. 

Senator CARPER. You probably will not be here for the second 

panel but if you have any comments that you would like to share 

with us with respect to anyone’s testimony, we would welcome 

that. 

Mr. ZIENTS. I would just repeat what I said before, which is that 

it is very focused, five agencies. I think that there are varying degrees of progress overall. And there are, inevitably, some best practices and some worse practices, and we should make sure that we 

take advantage of the fact that it is only five agencies, figure out 

what is working, and make sure that we teach that and spread 

that as quickly as possible, figure out what is not working, and 

teach that and make sure we eliminate that as fast as possible. 

Senator CARPER. All right. In my opening statement, I mentioned 

an Air Force official that said a contractor would have to do ‘‘pretty 

badly,’’ to receive less than 85 percent of the award fee up for 

grabs. Then I think beyond that, one Department of Homeland Security official gave a contractor an award fee despite saying the 

contractor’s actions were egregious and ‘‘wasted taxpayer money.’’ 

My staff tells me that agencies pay contractors, on average, more 

than, I think I said, 85 percent of the award fee, and this suggests 

to me, and maybe to you, that agencies still expect—not all agencies, but some agencies still expect that they will be giving the contractor an award fee in almost every period. The only difference is 

whether contractors get a couple more dollars or not. Are agencies 

using award fees the way they were intended? 

21 

Mr. ZIENTS. No, given that performance is not uniformly at the 

far end of expectations. The 85 percent would correlate with acrossthe-board strong performance, and that is clearly not the case. So 

tying these award-fee percentages more directly to the actual performance is essential. 

Senator CARPER. Why do you all think that this behavior continues to persist at a number of big agencies, big departments? Mr. 

Hutton. 

Mr. HUTTON. Well, our work at DOD clearly put the spotlight on 

DOD back in 2005, and they changed their regulations. I think it 

is a situation, as our work found, that some of the people at the 

agencies had not even seen the OMB guidance that went out in 

2007, so there is definitely an issue there. Is the word getting down 

to the hundreds of contracting activities? So I would say that is a 

major factor. 

But I think the work that we have just done in 2009 has raised 

the issue more broadly, and we indicate that these five agencies 

are 95 percent of the dollars. But I think this type of forum where 

we are discussing these issues, you are going to have another panel 

where the agencies are up here, and I think there is ample opportunity to ask some pretty hard questions about what they are doing 

in response to our recommendations and what kind of efforts they 

have underway to improve the guidance, and then ensure through 

leadership that these new guidelines are executed across the board 

and the government is in a better position. 

Senator CARPER. All right. If you look at the Department of Defense, sometimes we think of the Secretary as a person who basically is making sure that the railroad, if you will, is running on 

time or on schedule. I think the Deputy Secretary is probably more 

responsible for that than the Secretary, and the person who was 

Deputy Secretary of Defense in 2005, I do not believe was the same 

person who was the Deputy in, say, 2007, 2008. And the person 

who is the Deputy today is not the same person who was Deputy 

then—and so what we have in a lot of these senior jobs is a fair 

amount of turnover. Maybe someone is Deputy Secretary, a fairly 

senior position, who is maybe responsible for this area, and he or 

she is gone within a couple of years, and we have somebody new 

coming in. They may not even know of the concerns that have been 

raised. 

So it is the kind of thing I think we have to be unrelenting and 

be very persistent and consistent. 

Mr. ZIENTS. I think that is right. I also think we need to make 

sure we hardwire these changes so that they last through changes 

of leadership. I mean, setting that tone at the top, Chairman Carper, I think is absolutely correct. But once we have change, we 

have to hardwire it in through better information systems, better 

rules through the FAR, and better training and education so that 

as we do have the inevitable churn of senior positions, we do not 

step backwards in any way. 

Senator CARPER. All right. I talked to one of my colleagues the 

other day, and we talked about how over the last 8 years we have 

increased our Nation’s debt by, I think, more than we actually increased it in the first 208 years of our Nation’s history, and we are 

on track this year to run the biggest single-year budget deficit we 

22 

have ever run. And it is just real important for us. Taxpayers expect us to be good stewards of their money, and it is real important 

that we look closely at the kind of behavior we are discussing here 

today. 

OMB cannot do it by themselves. GAO cannot do it by themselves. The IGs cannot do it by themselves. We cannot do it by ourselves. But to the extent that we are working on this together, 

making sure that we have clear guidelines from OMB, making sure 

that we have buy-ins from the agency heads, making sure that we 

have the appropriate training for folks that are managing these 

contracts, making sure that, to the extent that there are best practices from one agency or the other, that we have an opportunity to 

share it among this relatively small group of agencies that together 

collectively award—what?—95 percent of the award fees, and then 

making sure that we are doing our job in terms of oversight, recognize those that are doing a better job, and taking to task those who 

are not. 

The word ‘‘FAR’’ has been mentioned again and again as an acronym in this hearing. It reminds me, Senator Burris, of an old Kenyan saying: ‘‘If you want to go fast, go alone. If you want to go far, 

go together.’’ And we want to go far in terms of making reductions 

in inappropriate award fees, and in order to do that, we are going 

to have to go together. 

We appreciate your presence here. We would just ask you to continue efforts, in some cases to redouble your efforts. Along with everything else that you are doing, this is important work. Thank you 

very much. 

I am going to ask our second panel of witnesses to come to the 

witness stand as soon as Mr. Zients and Mr. Hutton have taken 

their leave. Thank you, gentlemen. 

[Pause.] 

Senator CARPER. Well, we welcome each of our witnesses on our 

second panel. 

Our first introduction is going to be for the Hon. Shay Assad. 

Mr. Assad serves as the Director for Defense Procurement and 

Acquisition Policy at the Department of Defense. Mr. Assad is also 

a Navy veteran. I understand you served aboard a couple of Navy 

destroyers. He was a Naval Academy graduate in 1972. Those are 

great credentials. I say that as an old naval flight officer, Navy 

ROTC, Ohio State, and I was on active duty at the same time that 

you were. We thank you for your service, both your previous service to our country and your current service. 

Our next witness is William McNally, Assistant Administrator 

for Procurement at NASA. Prior to his work with NASA, Mr. 

McNally served a distinguished 26-year-old military career in the 

U.S. Air Force, working much of that time on military procurement 

issues. Have you ever been to Dover Air Force Base? 

Mr. MCNALLY. No, sir. 

Senator CARPER. All right. The best Air Force base in the world, 

as it turns out, at least for the last 10 months. We are very proud 

of our Air Force base. It was the first airlift base to ever receive 

that kind of recognition, the Commander-in-Chief’s Award. 

We thank you very much for your previous service with the Air 

Force and your continued service today. 

23 

1The prepared statement of Mr. Assad appears in the Appendix on page 63. 

Our third witness is Richard Gunderson, Acting Chief Procurement Officer for the Department of Homeland Security. And previously, Mr. Gunderson served, I am told, as Assistant Administrator for Acquisition at the Transportation Security Administration, providing support to one of the largest and most complex acquisition programs in the Department of Homeland Security. 

Thank you for joining us. 

Our fourth witness is Edward Simpson, Director of the Office of 

Procurement and Assistance Management for the Department of 

Energy, and you have been there, I am told, since 1979. Is that 

right? 

Mr. SIMPSON. Yes, sir. 

Senator CARPER. Since 1979, and have been working since that 

time in a variety of contracting and procurement-related positions 

for the agency. 

Our final witness today is Alan Chvotkin, Executive Vice President and Counsel for the Professional Services Council. Prior to his 

current position, Mr. Chvotkin worked as Vice President of Government Services at AT&T. Mr. Chvotkin, welcome. 

Your entire statements will be made part of the record. Please 

try to sum them up in about 5 minutes. If you go a little over, that 

is all right. Thank you all for coming today. 

Senator BURRIS. Mr. Chairman. 

Senator CARPER. Yes, Senator Burris. 

Senator BURRIS. Just for my information, I would like to know 

their longevity, whether or not they are new in their positions or 

how long have they served in their respective positions. 

Senator CARPER. That is a great question, and as you begin your 

comments, if you would just note that, just very briefly, and incorporate that in the beginning of your comments, we would be grateful. Thank you. 

Please proceed, Mr. Assad. 

TESTIMONY OF SHAY D. ASSAD,1 ACTING DEPUTY UNDER SECRETARY OF DEFENSE FOR ACQUISITION AND TECHNOLOGY, 

U.S. DEPARTMENT OF DEFENSE 

Mr. ASSAD. Chairman Carper, Senator Burris, Members of the 

Subcommittee, I have been the Director of Defense Procurement 

since April 2006, so that is when I came on board to DOD, DPAP. 

Chairman Carper, Members of the Subcommittee, my name is 

Shay Assad. I am the Director of Defense, Procurement and Acquisition Policy (DPAP). I am also serving as the Acting Deputy Under 

Secretary of Defense for Acquisition and Technology. I want to 

thank you for the opportunity to appear before you to participate 

in today’s hearing examining whether Federal agencies are effectively using cost-plus-award-fee contracts to successfully incentivize 

contractor performance. The Department recognizes it is important 

to both the warfighters and taxpayers that we effectively motivate 

contractors to deliver systems and services that meet or exceed our 

performance expectations. 

Over the past few years, there has been a real sea change within 

the Department in the way award fee contracts are employed. 

24 

Spurred by the General Accounting Office report published in December 2005, we started making changes in 2006 and 2007 and 

made the necessary improvements to our award fee practices and 

have realized significant savings as a result. We have implemented 

the statutory provisions enacted by the Congress which require, 

first, to link award fees to acquisition outcomes; second, to define 

the circumstances and standards for paying out award fees based 

on contract performance; and, third, to ensure no award fee is paid 

for contractor performance that is less than satisfactory. We must 

align contractor profitability with performance. 

As Secretary Gates has testified earlier this year before the Senate Armed Services Committee, we must write contracts that 

incentivize proper behavior. To the extent we continue to use costplus-award-fee contracts, we are now focused on outcomes and results and not on process. 

One important safeguard is the requirement we established that 

all cost-plus-award-fee contracts must be justified by a determination and finding signed by the head of the contract activity. By elevating the approval to this level, we ensure that senior leadership 

have thoughtfully considered what should be selective use of costplus-award-fee arrangements. 

The Department has incorporated into the acquisition strategy 

approval process and into its peer reviews the requirement for a 

thorough review of incentive arrangements, particularly award-fee 

criteria. In the pre-award time frame, we look to ensure acquisition 

strategies are structured such that objective criteria will be utilized 

whenever possible to measure contract performance. In fact, most 

pre-award peer review teams begin by engaging the program manager to understand the key measures of success to ensure that appropriate incentives are built into the contract. In the post-award 

time frame, our peer review teams look to ensure award and incentive fees paid were consistent with policy. 

The Department is, without doubt, moving away from the use of 

pure award-fee contracts and is seeking instead to use incentive 

contracts that include a mixture of incentive and award fees when 

necessary. 

In our analysis of the 2000 and 2008 award-fee data we have collected, there were only 30 new award-fee contracts issued in 2007 

and 10 in 2008. In contrast, between 2004 and 2006, each year at 

least 65 award-fee contracts were awarded. In those limited cases 

where cost-plus-award-fee contracts are appropriate, where only 

subjective evaluation criteria are possible, or where it is not feasible to have predetermined objective criteria before award, award 

fees must be linked to desired outcomes. 

Again, thank you for the opportunity to address the use of costplus-award-fee contracts. I would be happy to address any questions that you may have. Thank you. 

Senator CARPER. Thanks very much, and when we get to the 

Q&A, I am going to be asking you—you talked about the declining 

awarding of award-fee contracts over the last couple of years, and 

one of the questions I will be asking you is: Is there anything that 

those relatively few contracts awarded in the last couple of years 

have in common? Why are they appropriate and the others were 

not? Thanks. 

25 

1The prepared statement of Mr. McNally appears in the Appendix on page 71. 

Mr. McNally, please proceed. Thank you. 

TESTIMONY OF WILLIAM P. MCNALLY,1 ASSISTANT ADMINISTRATOR FOR PROCUREMENT, AND DEPUTY CHIEF ACQUISITION OFFICER, NATIONAL AERONAUTICS AND SPACE 

ADMINISTRATION 

Mr. MCNALLY. Yes, in answering the question about my time at 

NASA, I came to NASA in October 2005 to be a special procurement adviser for the exploration system that was just starting, and 

in August 2007, I assumed the position I currently have as the Assistant Administrator for Procurement at NASA. 

Thank you for the opportunity to testify before the Subcommittee 

regarding NASA’s use of cost-plus-award-fee contracts to incentivize excellent contractor performance. NASA is unlike civilian 

agencies. Our programs and projects involve space exploration systems, science and aeronautic research, and space operations, and 

they have one thing in common: They are high risk. This is because 

NASA is pushing new boundaries of technology and science. 

There are many challenges involved in managing and performing 

high-risk programs, projects, and missions. They are full of uncertainty and challenges, and they involve high-risk acquisitions. 

NASA utilizes award-fee contracts in many of these high-risk acquisitions. 

NASA uses award-fee contracts when key elements of performance cannot be objectively measured. In this situation, most elements of contractor performance can only be evaluated using subjective criteria. 

To ensure these criteria are measured accurately, the actual 

award fee earned by the contractor is determined by a rigorous 

process. A Performance Evaluation Board, made up of many functional disciplines, is established to evaluate the contractor’s performance. This board submits an evaluation report to the fee-determining official who determines the fee for a particular award-fee 

period. Under NASA procurement policy, a contractor will not be 

paid any award fee or base fee for less than satisfactory overall 

performance. 

NASA’s policy requires an approval process be completed before 

an award-fee contract can be used. A key part of this process is the 

preparation of a cost/risk benefit analysis that compares the additional costs of administering an award-fee contract against the expected benefits. 

NASA’s policy requires that award-fee contracts contain clear, 

unambiguous, and measurable evaluation criteria that are linked 

to the cost, schedule, and technical performance requirements of 

the contract. The linking of award-fee evaluation criteria to acquisition outcomes ensures that the contractor has the incentive to control cost while providing a high-quality supply or service to the government in a timely manner. 

NASA has implemented tracking of award fee as part of its Baseline Performance Review process. This review is an independent, 

monthly assessment of selected NASA programs and projects. It 

updates NASA’s senior leadership about contractors’ performance 

26 

1The prepared statement of Mr. Gunderson appears in the Appendix on page 75. 

as measured against the approved baseline for the acquisitions. As 

part of this review, the award fee ratings on selected programs and 

projects are explained and discussed relative to the contractor’s 

current performance level. This review is done to ensure that there 

is consistency between the performance of the projects and programs with the associated award-fee scores. 

NASA is part of an interagency working group that will be evaluating the effectiveness of award fees as a tool for improving contractor performance and achieving desired outcomes. This working 

group is also developing methods for sharing information on successful incentive strategies. We are actively participating on this 

interagency working group and are looking forward to implementing the eventual recommendations from this group. 

Again, thank you for the opportunity to appear before the Subcommittee today. I would be pleased to respond to any questions 

you may have. 

Senator CARPER. Thanks so much for your testimony and comments. Mr. Gunderson, please proceed. 

TESTIMONY OF RICHARD K. GUNDERSON,1 ACTING CHIEF 

PROCUREMENT OFFICER, U.S. DEPARTMENT OF HOMELAND 

SECURITY 

Mr. GUNDERSON. Chairman Carper, Senator Burris, and Members of the Subcommittee, thank you for the opportunity to appear 

before you to discuss the Department of Homeland Security contracting program and, in particular, its use of award-fee contracts. 

Senator BURRIS. Excuse me, Mr. Gunderson. How long have you 

been there? 

Mr. GUNDERSON. I have been the Acting Chief Procurement Officer since this January, and previous to that, I came to the Department as the Deputy Chief Procurement Officer last May, May 2008. 

So I have been at the Department level now for about 15 months, 

16 months. 

Senator BURRIS. Thank you, sir. 

Mr. GUNDERSON. As the Acting Chief Procurement Officer, I am 

the lead executive responsible for the management, administration, 

and oversight of the Department’s acquisition programs. In that capacity, I oversee and support 10 procurement offices within DHS. 

The mission of my office, in conjunction with the respective contracting offices, has been to provide the needed products and services to meet the DHS Mission, and to do so in a way that represents sound business and demonstrates that we are good stewards of the taxpayers’ money. 

The threats we face are variable, and as a result, the acquisition 

program must be able to adapt and identify a variety of solutions. 

Similarly, the contracting officers must assess each procurement 

requirement and determine the appropriate type of contract. Based 

on various factors, including the complexity of the required product 

or service, the contracting officer selects the contract type that recognizes the performance risk and motivates the contractor to successfully meet the program’s objectives to include cost, schedule, 

performance, or a combination thereof. 

27 

One of my priorities is quality contracting, which is focused on 

making sound business decisions that enable us to accomplish our 

critical mission. The Office of Chief Procurement Officer includes a 

policy and legislation branch, which is responsible for the development and establishment of procurement policy for the operational 

contracting activities. 

The Homeland Security Acquisition Regulation and the Homeland Security Acquisition Manual were published in 2003 and have 

been updated to reflect current statutory regulatory and Office of 

Federal Procurement Policy and DHS mandates. These two documents provide the foundation for procurement policy that is adhered to by each of the 10 contracting organizations. 

My office also participates in Federal procurement policymaking 

through its participation on various committees, include two OFPP 

working groups directly addressing the subject of today’s hearing: 

The Contract Type Working Group and the Incentive Contracting 

Working Group. 

With respect to our policy on award-fee contracts, current HSAR 

and HSAM guidance are effectively consistent with OFPP guidance. This includes an emphasis on criteria related to cost, schedule, and performance, successful performance, and exception-only 

use of rollover. 

Developing and issuing policy is not effective unless the workforce is aware and understands the implementing guidance. We accomplish this through a multi-layer approach, including the Policy 

Working Group, communications through the contracting community, and through discussions with the head of the Contracting Activity Council. 

We utilize the full variety of contract types prescribed in the 

FAR in support of our diverse acquisition program. The preponderance of our awards is firm fixed price. This includes nearly 70 percent of our awards and 50 percent of our dollars. However, not all 

requirements are suited to fixed-price contracts. In those instances 

where it is difficult to determine objective performance measures, 

award-fee contracts provide a business strategy that enables the 

government to identify areas of emphasis and establish an awardfee pool that will motivate the contractor to succeed in meeting the 

government’s requirements. 

In these situations, typically the contract fee structure includes 

a base fee and award fee portion that together comprise the total 

potential fee to be earned by the contractor. If the government’s 

evaluation of the contractor’s performance is positive, a percentage 

of the award-fee pool will be awarded on the criteria and respective 

weightings of the criteria as defined in the contract’s award-fee 

plan. As a result, under a properly structured award-fee contract, 

a contract that performs significantly above satisfactory may earn 

at least the same or perhaps more fee than it would have earned 

if the contract had only used a fixed-fee structure. Conversely, a 

contractor that performs below satisfactory will earn only a base 

fee, which is significantly less than what they would have earned 

if it had been a fixed fee. 

The award fee is both a positive and negative incentive whereby 

the contractor may earn slightly more or substantially less than 

28 

1The prepared statement of Mr. Simpson appears in the Appendix on page 79. 

what a fixed-fee contract would have paid if the procurement had 

lent itself to that type of business strategy. 

DHS is committed to awarding quality contracts that deliver mission and capability and represent sound business judgment, including compliance with Federal procurement regulations, policies, and 

guidance. 

I thank you for the opportunity to testify before the Subcommittee about our use of award-fee contracts, and I am glad to 

answer any questions you or the Members of the Subcommittee 

have for me. 

Senator CARPER. Mr. Gunderson, thank you. Mr. Simpson, you 

are recognized. Please proceed. 

TESTIMONY OF EDWARD R. SIMPSON,1 DIRECTOR, OFFICE OF 

PROCUREMENT AND ASSISTANCE MANAGEMENT, U.S. DEPARTMENT OF ENERGY 

Mr. SIMPSON. I have been at the Department of Energy since 

1979. As noted, I have been in my current job, which is the Director of Procurement and Assistance Management, since February 

2006, and I also serve as the senior procurement executive for the 

Department of Energy other than the National Nuclear Security 

Administration, which has a separate contracting authority. 

Senator CARPER. Who was the Secretary in 1979, do you remember? 

Mr. SIMPSON. No. 

Senator CARPER. Thank you very much. Mr. Simpson, please proceed. 

Mr. SIMPSON. Mr. Chairman and Members of the Subcommittee, 

thank you for the opportunity to come before you today to present 

the Department of Energy’s views and perspective on the recent 

U.S. Government Accountability Office report entitled ‘‘Federal 

Contract: Guidance on Award Fees Has Led to Better Products, 

But Is Not Consistently Applied.’’ I am pleased to be here today to 

address how the Department is effectively using cost-plus-awardfee contracts to incentivize excellent contract performance and how 

DOE has implemented the Office of Management and Budget December 2007 guidance on the appropriate use of incentive contracts. 

DOE is the largest Federal civilian contracting agency based on 

fiscal year 2008 contract obligations of approximately $25 billion. 

A central element of DOE’s contracting structure is a cadre of special contracts called ‘‘Management and Operating Contracts,’’ which 

have their origins in the Manhattan Project and have endured 

under DOE and its predecessor agencies. These contracts for the 

management and operation of government-owned national scientific, engineering, and research facilities are unique in all of government and require a special authorization by the Secretary of 

Energy. 

Many of the scientific and research facilities are also DOE Federally funded research and development centers, a special designation applied to these facilities because of their criticality to DOE’s 

mission. The laboratory contracts for these facilities were the focus 

29 

of GAO’s review of DOE. Because of the broad mission and work 

scope of these contracts, they are cost-reimbursement contracts. In 

addition, DOE also awards and administers thousands of other contracts that represent the full range of fixed-price and cost-reimbursement type contracts for goods and services typically acquired 

by most Federal agencies. 

In its study, GAO noted two particularly positive aspects of 

DOE’s administration of cost-plus-award-fee contracts. Specifically, 

GAO concluded that for two of the four fundamental practices recommended in the OMB guidance linking award fee to acquisition 

outcomes and limiting the use of rollover, DOE’s supplemental 

guidance is in accordance with OMB’s guidance. 

GAO also noted that DOE should strengthen its policy for the 

other two practices OMB recommended, emphasizing excellent performance and prohibiting payments for unsatisfactory performance. 

DOE will address GAO’s concerns immediately. Shortly, we will 

issue policy that more strongly emphasizes contractor performance 

results and prohibits payment for unsatisfactory performance in 

language that is unambiguous and consistent with OMB’s guidance. 

DOE’s policy for the use of award fee in its major contracts adheres to Federal Acquisition Regulation requirements. There is, 

however, a need for consistency and rigor in the use of award fee. 

We should incentivize the contractor to performance excellence. I 

fully support the GAO’s recommendation that DOE ensure it has 

established evaluation factors, definitions of performance, associated fees, and evaluation scales that motivate excellent performance and prohibit award fee for unsatisfactory performance. 

In closing, the Department’s procurement policy assures it is effectively using cost-plus-award-fee contracts to incentivize excellent 

contract performance and is in line with the OMB guidance released in September 2007. We will strengthen that policy by 

issuing amplifying guidance that addresses the concerns raised by 

GAO and recognizes that our major programs’ award-fee requirements need to be tailored to their different mission portfolios and 

contract objectives. Specifically, we will issue expanded guidance on 

choosing the right contract type, defining terms and rating categories, defining standards of performance for each rating category 

and the fee paid for meeting the standards, and ensuring that the 

fee is not paid for unsatisfactory performance. 

We are committed to work with and participate in any interagency working group to be established to determine how to best 

evaluate the effectiveness of award fee as a tool for improving contractor performance and achieving desired program outcomes and 

to develop methods for sharing information and successful strategies. 

This concludes my formal remarks. I would be happy to respond 

to your questions. 

Senator CARPER. Good. Thanks, Mr. Simpson. Mr. Chvotkin. 

30 

1The prepared statement of Mr. Chvotkin appears in the Appendix on page 87. 

TESTIMONY OF ALAN CHVOTKIN,1 EXECUTIVE VICE PRESIDENT AND COUNSEL, PROFESSIONAL SERVICES COUNCIL 

Mr. CHVOTKIN. Thank you, Mr. Chairman. Good afternoon. I 

have been at Professional Services Council (PSC) for 9 years. Before that, I spent 10 years at AT&T in their Government Markets, 

and prior to that I spent 10 years as senior counsel in Rockfordbased Sundstrand Corporation, which is now part of United Technologies. 

Senator BURRIS. Good company. 

Mr. CHVOTKIN. Thank you. Thank you, Mr. Chairman, for the invitation to testify before the Subcommittee today. 

The Professional Services Council is the leading national trade 

association of the government professional and technical services 

industry. Our association members employ hundreds of thousands 

of Americans in all 50 States. 

Mr. Chairman, performance matters. Both government agencies 

and contractors need to understand the contractual relationships 

and requirements imposed and the compliance obligations being 

undertaken. It is also appropriate to look at the business relationship between the government and the contractor—including the 

contract type—to understand the performance obligations. 

Unfortunately, there are many fallacies about award-fee contracts. One common myth is that the award fee is equal to ‘‘more 

contractor profit’’; this myth really ignores the incentive nature of 

award-fee contracting when used properly. 

A second is that the award fee is paid even for a contractor’s 

‘‘satisfactory’’ performance of a contract. This myth ignores the key 

elements of the government-established award-fee plan that structures the outcomes to be achieved and the methodology for evaluating the contractor’s performance and often fails to recognize that, 

prior to recent legislative and regulatory changes, ‘‘satisfactory’’ 

performance often meant that the contractor ‘‘fully performed’’ according to the award-fee criteria—not merely complied with the 

basic contract requirements. 

But there are also many truths about award-fee plans and 

award-fee contracting. First, these are difficult contracts for agencies to write and for contractors to compete for. The challenge for 

the procuring agency is to describe the minimum performance of 

the contract and then to describe the appropriate ‘‘motivational’’ objectives—whether they be quality, timeliness, technical, cost management, or others. 

Second, the metrics selected as the evaluation criteria in the 

award-fee plan must be directly related to the objectives to be accomplished and must accurately measure the intended performance 

objectives. 

Finally, there must be governmental personnel knowledgeable 

about the motivational objectives to be achieved and the metrics selected and used. A contracting officer doesn’t normally have these 

skills, and this is yet another example of the skills shortage that 

is too often evident, with real implications, in the acquisition workforce. 

31 

There is another important factor to put on the table when addressing the current uses of award fees. The Federal Acquisition 

Regulation provides that an award-fee contract should have two 

key components: A base fee fixed at inception and an award fee 

that a contractor may earn. 

According to the Federal budget scoring rules, when an agency 

provides for a base fee, the agency must score that amount as an 

obligation at the time the contract is awarded. Thus, over the past 

several budget cycles, as agencies tried—or were directed—to minimize their contractual spending, they significantly shifted funds 

away from traditional base-fee amounts—essentially adopting a 

zero base-fee approach—and allocated more funds into the awardfee portion of the contract that would be obligated only after the 

government’s fee-determining official made the award-fee decision. 

Simply put, budget rules helped drive contracting practices, and 

the recent use of award fees masks the significant and intentional 

contractual and performance differences between base and award 

fees and between satisfactory contract compliance and stretch objectives. 

Finally, once the award-fee plan is established, it must be adhered to by all parties. The government has a responsibility to fairly evaluate the contractor’s performance against the metrics in the 

award-fee plan, make a fair and justifiable determination of the 

contractor’s accomplishments, and pay accordingly. Too often we 

hear about agencies delaying their review of the contractor’s 

award-fee submissions or failing to make any award-fee determination, and failing to make payment according to the award-fee 

schedule. By breaking faith with the contractor over the award-fee 

plan, the agencies put contractors—particularly smaller and midtier firms—at greater financial risk. 

In conclusion, cost-plus-award-fee contracting is an appropriate 

contract type, and agencies should have the flexibility to select this 

contract type—as with every other contract type—to best meet the 

buying activities’ requirements and to select the best acquisition 

method available. PSC supported the Office of Federal Procurement Policy’s December 2007 guidance, but agencies must also 

have the flexibility to implement that guidance in a manner that 

takes into account their specific requirements and market needs. 

The five agencies identified in the GAO report should ensure 

that the OFPP December 2007 guidance is implemented. Except for 

the regulations already in process to implement existing law, however, we should give these agencies an opportunity to take the administrative actions they talked about today, implement their own 

guidance in new contracts, and give the acquisition process a 

chance to work. 

Thank you again for the invitation to address this important 

matter. I look forward to any questions the Subcommittee may 

have. 

Senator CARPER. Mr. Chvotkin, thank you for your testimony and 

for giving us a little different perspective on an important issue. 

The next question I am going to ask—and I am going to ask this 

of each of our panelists on this panel. I am going to ask you to go 

back to what the two witnesses in the first panel had to say and 

just take a minute and tell us if there is anything that they may 

32 

have said that you disagree with strongly or have a different perspective on. Think about that for a moment. 

One of the departments that we had asked to participate today 

and invited to participate today is the Department of Health and 

Human Services, and I am just wondering if any of you can share 

with me who might have been an appropriate person to come from 

HHS, maybe the Chief Procurement Officer. But do you all have 

any idea who might have been an appropriate witness from that 

department? Mr. Gunderson. 

Mr. GUNDERSON. They have, I believe, a management type level. 

I know in the Department of Homeland Security we have an Under 

Secretary for Management. 

Senator CARPER. Do they have a Chief Procurement Officer at 

HHS? 

Mr. GUNDERSON. They do. 

Senator CARPER. Do you know who that is? 

Mr. GUNDERSON. Nancy Gunderson. 

Senator CARPER. No kidding. Your daughter? 

Mr. GUNDERSON. No. 

Senator CARPER. OK. That is a great coincidence. But, actually, 

she is your wife. 

Mr. GUNDERSON. Yes. 

Senator CARPER. You could have worn both hats. Next time, she 

could just come and testify for both agencies. [Laughter.] 

I say that with tongue in cheek, but that is, I thought, just a 

great coincidence that we had one family representing both departments in similar work. That is good. 

All right. Back to our first panelist, is there anything that our 

two panelists said on the first panel that you would like to just revisit, Mr. Assad, and that you may have a different take on? 

Mr. ASSAD. Mr. Chairman, not really. I was fundamentally 

aligned, frankly, with what the GAO’s findings were back in 2005, 

which is why we kicked off the change that we did within the Department. 

Senator CARPER. All right. Thank you. 

Mr. McNally, anything you would take issue with? 

Mr. MCNALLY. No, Chairman. Two issues that I will bring up 

that are really critical are to establish consistent policy, which we 

are going to be working on with this interagency working group 

and set up guidelines in the Federal Acquisition Regulation. Then 

comes practice with what agencies actually do with the guidance 

that they have. And the one thing that I would ask is that agencies 

be allowed to practice the appropriate type of contract based on 

their missions, like at NASA with our high-risk missions that we 

continue to be allowed to do the appropriate type of contracts based 

on those missions. 

Senator CARPER. OK. Thank you. 

Mr. Gunderson, anything you would take issue with from the 

first panel you would like to mention? 

Mr. GUNDERSON. Not that I take issue with. I do think that one 

of the larger challenges will be in the area of trying to figure out 

a way to determine or evaluate the effectiveness of these contracts, 

and I think that is something that we will have to put our heads 

together to find out how we can do that. 

33 

We can collect a lot of data, but what the data truly show us is 

going to be a difficult thing to get through. 

Senator CARPER. We find out in some other programs, and I 

think maybe even in cyber terrorism, we find in some cases our 

Federal agencies collect a lot of data, but the question is what they 

do with it to make us safer from—less vulnerable to those kinds 

of attacks. 

Mr. Simpson, anything you would like to speak of, or any differences, different perspectives? 

Mr. SIMPSON. We agree with the recommendations by GAO. I 

guess in looking at the regulatory framework that is under development, there is always a risk in creating such a prescriptive regulatory framework that you ultimately do develop a one-size-fits-all. 

And, at its essence, a contract is a business relationship, and agencies do need the flexibility to manage those business relationships 

with rigor. 

The other issue that would concern me here is we establish yet 

another overly burdensome reporting system that our front-line 

contracting officers have to actually fulfill those requirements, and 

they are already burdened with a number of other responsibilities. 

So I think the information is good to get, but I think we do need 

to be careful that we are not creating more work on already a 

stressed workforce. 

Senator CARPER. All right. Thank you. Mr. Chvotkin. 

Mr. CHVOTKIN. I am not sure I would know where to start or how 

much time I have. 

Senator CARPER. Just keep it fairly short—take about a minute. 

Mr. CHVOTKIN. Yes, sir. The GAO report hints at the answer— 

that there is a difference between performance of the core requirements and the incentives that an agency is trying to achieve 

through an award-fee process. Yet, when they continue to talk 

about satisfactory performance and mix contract performance with 

performance against an award-fee plan, they mask the real differences and the intention of the whole contractual relationship in 

an award-fee structure. 

I agree with Mr. Zients: Performance matters. The selection of 

the contract type is critical. Award fees have an appropriate place, 

but it is evidence that, of all of the Federal agencies, only five are 

using 95 percent of them. So blunt objects spread across all Federal 

agencies may not be what is necessary. Your point earlier, Mr. 

Chairman, and Mr. Zients’ as well, that four of the five agencies 

are sitting right here, and one of them—DOD—has already implemented a lot of the 2007 OFPP requirements and further regulations. So we may not need more laws or more regulations to accomplish the objectives for 95 percent of the government and it may 

not be worth the effort to try to get that last 5 percent. 

Senator CARPER. All right. Thank you. 

One of the things I think we discussed with, I think it was, Mr. 

Zients in the first panel was this idea of creating, I guess, an informal mechanism to share best practices. I think, Mr. McNally, if I 

heard your testimony correctly, you suggest that maybe there already is such an entity, that NASA is participating in it, and it is 

already beginning to work. Would you just clarify that for me? 

34 

Mr. MCNALLY. Yes. There is an interagency working—I have a 

member of my staff who is on it—and right now they are actually 

waiting to look at the Federal Acquisition Regulation change to 

then decide what further practice and guidance should be put out 

to supplement the regulation. 

But one of the things that was brought up earlier is even internally in some agencies there is the challenge of getting out best 

practices to do different buying centers and commands to talk to 

each other. And with our technology that we have available today, 

there is no reason why we shouldn’t share best practice within our 

agencies, but also across the government. 

As mentioned earlier, if 95 percent of award-fee dollars are with 

five agencies, we should be getting together and sharing best practice, not just on award fee, but also on performance incentives as 

well. 

Senator CARPER. Good. Thank you. My time has expired. Senator 

Burris, you are recognized. Please proceed. 

Senator BURRIS. Thank you, Mr. Chairman. 

The reason I asked for the time periods is because I was assuming that most of the gentlemen here from the four agencies were 

relatively new at their positions and that you will begin to undertake these major changes, and hopefully we will see some major 

improvements once you all begin to wrestle with or begin to implement some of the suggestions, even those that are coming out of 

this hearing this afternoon. 

But, Mr. McNally, I was a little concerned. Mr. Assad gave a 

number of how many award fees DOD had been dealing with. You 

gave us a percentage of 70 percent of firm-fixed, which was about 

50 percent of your appropriated dollars. Do you have a number of 

how many contracts that were award-fee base contracts, not a percentage but a number? 

Mr. MCNALLY. Yes. In 2008, we had 183 contracts that were active award-fee contracts. 

Senator BURRIS. Out of how many? 

Mr. MCNALLY. Out of 2,120 contracts. 

Senator BURRIS. OK. So that is 70 percent that you say were 

fixed? 

Mr. MCNALLY. In the same time frame, as far as actions, 68 percent were firm-fixed-price actions, contract actions. 

Senator BURRIS. Now, under the highway structure, I recall in Illinois when we repair all of our expressways—and none of those 

are done with Federal dollars—there are bonuses that are paid for 

early completion of projects. 

Now, I just wonder, in any of these arrangements in your agencies, are there any penalties involved—by the way, in those contracts there are also penalties involved, which you can imagine is 

evidently fixed into the bidding price when you get the penalties 

fixed in—mixed in with the bonuses, so you have got probably an 

offset. That is why you see some of the contractors having the incentive to finish those construction jobs a little bit early, especially 

to try to help the motorists try to get out of the way so we can have 

somewhere to go and not get tied up in all that traffic. 

But I just wondered whether or not there are any types of penalties that are put into any of these contracts that you all deal with 

35 

for mis-performance, non-performance, late performance, or inadequate performance? Are there any types of penalties that are put 

on these contractors? 

Mr. ASSAD. Senator, I think you would see very few award—I 

would be surprised if there were more than a handful of award-fee 

contracts that had ‘‘penalties’’ associated with them. We are looking 

across the Department at the appropriate use of what you would 

familiarly call ‘‘liquidated damages’’ or penalties for late completion. And we are looking at that right now in terms of is that an 

appropriate mechanism to use on some contracts. 

Senator BURRIS. Anyone else? How about you, Mr. Gunderson? 

Mr. GUNDERSON. I would just agree that in an award-fee contract 

scenario, I have not seen the use of an actual penalty. But in the 

area of an incentive-fee contract, which evaluates objective measures such as schedule, cost, or performance, you can see scenarios 

where the contractor not only can make money, but they can actually lose money and eat into the costs that they are getting. 

Senator BURRIS. You mean take away from what would be their 

profit so they will end up on the—— 

Mr. GUNDERSON. It would actually be on the negative side if they 

performed so poorly. But that is an objective scenario. 

Senator BURRIS. How about you, Mr. Simpson? Does your agency 

have any type of penalty for failure to perform or inadequate performance? 

Mr. SIMPSON. Yes, we do, sir. We have a contract clause entitled 

‘‘Conditional Payment of Fee,’’ and it is linked specifically to environmental safety and health and security matters that provides a 

graded approach based on severity of the infraction; regardless of 

what the contractor earns during the rating period against its performance rating plan, the fee determination official can take a portion or all of the fee away based on the severity of the infraction 

for that rating period for violations of safety, health, and certain 

security aspects. 

Senator BURRIS. In terms of the budgeting, how does DOD cover 

the cost overruns? If you get a budget line item on a missile program or a jet fighter program and the program started going into 

millions of dollars of cost overruns, do you use supplemental appropriations? Do you transfer funds out of other line items? How do 

you cover these in your budgets when you run into these situations? 

Mr. ASSAD. Senator, that is problematic. In fact, what happens 

is other well-performing programs are sometimes hurt because 

funds have to be transferred from one program to another. We 

come back to Congress and ask for their permission to do that. At 

other times, we have to come back and request additional funds for 

contract performance. 

So contract overruns, especially in significant amounts, are particularly problematic. 

Senator BURRIS. We heard Senator Coburn read off a list of cost 

overruns, which has happened recently. Did any of those apply to 

your agencies? Mr. McNally, any of those in your agency? 

Mr. MCNALLY. Yes. He mentioned the International Space Station contract with Boeing. 

36 

Mr. ASSAD. And I believe he mentioned a contract back in 2004 

and 2005 from the Department of Defense. 

Senator BURRIS. Did you all have to come back to Congress to get 

more money or did you shift money around? Or were you all there 

when that took place? 

Mr. ASSAD. I was not there, Senator. 

Senator BURRIS. OK. How about you, Mr. McNally? 

Mr. MCNALLY. I was not there during that time either. 

Senator BURRIS. Good time not to be there, right? [Laughter.] 

How about you, Mr. Gunderson? 

Mr. GUNDERSON. I did not hear a DHS contract listed. 

Senator BURRIS. OK. How about you, Mr. Simpson? 

Mr. SIMPSON. I did not hear him mention DOE. 

Senator BURRIS. So you did not have any of those cost overruns 

in your agencies? Is that what you are saying? 

Mr. SIMPSON. No, sir. I am not saying we do not have contracts 

with cost overruns. 

Senator BURRIS. OK, but you did not hear them mentioned by 

Senator Coburn, in other words. 

Mr. SIMPSON. Right. 

Sentor BURRIS. Mr. Chvotkin. 

Mr. CHVOTKIN. Senator, just a word of caution on cost overruns, 

because, again, the implication is that all of that falls on the contractor side for the cost overruns, and while the GAO reports about 

cost overruns and some of the items on Senator Coburn’s list had 

big numbers, many of those are as a result of program changes, or 

schedule changes that the government makes. Some of them are 

quantity changes or requirements changes, and so there is a mutuality of responsibility, and not all of that falls on the contractor. 

But I am certainly not suggesting that contractors have no accountability and no responsibility for performance. 

Senator BURRIS. If there is a fixed-price contract and there are 

cost overruns, does the contractor have to eat that cost overrun? 

Mr. CHVOTKIN. Yes, sir. On a fixed-price contract, the contractor 

performs according to the requirements and they bear the full cost 

of performing that contract according to the requirements for that 

stated price. 

Senator BURRIS. I am not talking about change orders or anything, where the agency may give a direction, but that loss is then 

absorbed by the contractor. 

Mr. CHVOTKIN. Yes, sir. And 70 percent of all of the Federal Government’s contracts are awarded on a fixed-price basis—70 percent 

according to the OMB numbers. 

Senator BURRIS. Thank you, Mr. Chairman. 

Senator CARPER. Thank you, Senator Burris, and thanks a lot for 

being with us and for your attention to these issues as well. Given 

your background and experience, it is very helpful to have you and 

Senators like Senator McCaskill and Senator Coburn. It is very 

valuable. Thank you. 

Let me return to the issue of rollovers again where contractors 

are given, a couple of them, one, maybe two, maybe three bites out 

of the apple, and just to go down the line, just start with Mr. 

Assad. What is your agency’s experience with rollovers over time? 

37 

Has it become less frequent, about the same, or more frequent in 

the last several years? 

Mr. ASSAD. It is definitely trending to be less frequent in terms 

of use of rollover. 

Senator CARPER. All right. Mr. McNally. 

Mr. MCNALLY. NASA’s policy and practice prohibits the use of 

rollover for—— 

Senator CARPER. And how long has that been the case; do you 

know? 

Mr. MCNALLY. I do not know. I will have to provide that for the 

record. 

INFORMATION FOR THE RECORD 

NASA’s policy on prohibiting the use of rollover on award fee service type 

contracts was established on October 8, 1993. 

Senator CARPER. Since before you arrived? 

Mr. MCNALLY. Before I arrived, yes, sir. 

Senator CARPER. All right. Good. Mr. Gunderson. 

Mr. GUNDERSON. I share the same concerns from the Subcommittee and the GAO with respect to the use of rollover, and I 

actually recently issued guidance which said it would only be used 

if approved by me. 

Senator CARPER. Mr. Simpson. 

Mr. SIMPSON. DOE has a similar provision on the use of rollover 

that requires my approval to use a rollover fee. But it should not 

be used to give the contractor a second bite at the apple in terms 

of getting rewarded for reworking unsatisfactory or sub-par work. 

There may be appropriate uses of rollover if there are accelerated 

or new requirements, and it is in the agency’s interest to use that 

fee to motivate the contractor to performance, but it should not be 

used to give the contractor an opportunity to earn fees that was already lost for work already done. 

Senator CARPER. We have had the hearings in this room before 

in talking about, among other things, cost overruns in IT projects. 

And one of the things we have learned, and Senator Coburn alluded to the handheld device that has been developed—that was 

asked to be developed for the census next year. But one of the 

things we have learned is that sometimes agencies, in outlining 

what their needs are, are not very clear at the outset. They maybe 

do not have a real good idea what they need from a contractor, and 

so their demands or objectives, initially stated, are modified as 

time goes by, and you have a contractor who might be chasing an 

objective that continues to change. 

I am wondering if sometimes agencies use award fees when they 

have not done the kind of job they should have initially in scoping 

the project that they are asking for—or seeking to bid, and they 

change the scope of that project, and then try to find a way to compensate the contractor for chasing that moving target. 

Does that sort of thing go on? Or is that conjecture on my part? 

Mr. ASSAD. Senator, that is not conjecture at all. I think that is 

one of the fundamental reasons why you are seeing a significant 

reduction in the use of award-fee contracts in the Department of 

Defense, is because there are numerous contracts that you can go 

back and look at historically, and you see that particular situation 

38 

that you are describing, in fact, occurred. And so what we are doing 

is stepping back from these things and insisting that proper contract planning and a real outstanding understanding of the risk 

structure before we get under contract. 

But what you have described is the reason why, in fact, the use 

of an award-fee contract in the Department of Defense will be the 

exception rather than the rule. 

Senator CARPER. OK. Anybody else want to make a comment on 

that? 

Mr. MCNALLY. Yes, Mr. Chairman. What I would like to say is 

there are probably three important frameworks of setting up a contract. 

First is to identify what is your true requirement, and at NASA, 

what we have set out in that area, we call ‘‘zero base requirements.’’ In other words, we identify what outcome we want, and 

then only put requirements in that support that outcome. We are 

not spending money on requirements that are not really needed. 

The second thing is to have the available resources, stable funding to support what you want to do and what you want to buy. 

And the last thing, of course, is to select a vendor who is going 

to do the work that you set out within the contract. 

So, to me, those are some of the three important things on any 

acquisition. 

Senator CARPER. I have also heard over time that a fourth criteria would be to have folks at the agency who are capable of effectively monitoring the work of contractors and evaluating that work. 

A couple more questions, and then we will excuse this panel. 

Thank you for bearing with us for this long into the afternoon. But 

while we were reading some of the testimony and speaking to my 

staff earlier, it seems that a number of the agencies have a different opinion on when a contractor should be awarded a fee and 

how much. I think I quoted earlier, I think it was an Air Force 

spokesperson who talked about awarding an award fee despite stating that some of the work by the contractor was, I think, egregious, 

or at least well below par. 

Why do you believe some contracting officials maybe are still 

awarding contractors monetary incentives, even though the project 

is just average or, in some cases substandard? Why does that still 

go on? 

Mr. ASSAD. I think the issue is, Senator, that folks get wrapped 

up in measuring process and interim success rather than keeping 

their eye on the ball as to what is the final outcome of this contract. What are we buying for the taxpayers or the warfighters? 

And are we getting what we contracted for? Do we believe it is 

going to happen? 

Folks get hung up on the instant award-fee period and what was 

accomplished there and really do not tie that work to what, in fact, 

is going to be completed in the end, which is why we are really 

pushing people towards those award fees must be tied to contract 

outcomes. 

Senator CARPER. Thank you for saying that. I welcome that comment. Mr. McNally. 

Mr. MCNALLY. Well, as I mentioned in my opening statement, 

one aspect is a rigorous process, and at NASA what we utilize is 

39 

a Performance Evaluation Board that follows NASA guidance and 

guidelines on how to conduct and how to evaluate the contractor’s 

performance and tie it once again back to the contract requirements and the evaluation criteria that is within the contract. So it 

is key, once again, to have good guidance out there, but then follow 

up with the practice. 

Then, the other thing that I mentioned in my opening statement 

is that at NASA we have a monthly Baseline Performance Review 

that is looking at the performance of our various projects and programs, and then going back and looking at the scores of award-fee 

contracts to make sure that the performance that is going on within a program or project also is measured by how it compares to the 

award-fee scores. If there is any disparity, senior management gets 

involved asking those kinds of questions about why there is a difference. 

Senator CARPER. All right. Mr. Gunderson, any response to my 

question? 

Mr. GUNDERSON. The only thing I would add is that when you 

look at all the factors being considered, one of the examples, I 

think, that was brought up earlier referred to some egregious communication or performance on a DHS contract, yet they still received some award fee. And in that situation, if you look at all the 

factors that had been laid out within the contract and the respective weightings, there was actually very positive performance in a 

number of other areas such as increasing the operational availability of equipment and outstanding progress—many strengths 

that were identified as well. And, yes, there was a negative finding 

by one evaluator that cited a challenge area. In the end, they decided that there was overall sufficient performance to grant a certain level of award fee. 

But what also should be noted is that in subsequent periods the 

contractor failed to take heed of the concerns that were identified 

in the two subsequent periods; no award fee was awarded to that 

contractor because they did not address the concerns we noted. 

Senator CARPER. Mr. Simpson, your response to my question? 

Mr. SIMPSON. Yes, sir. I will not repeat what has already been 

said. I do agree with the comments that have been made. 

I do think the other element here that gets us into that type of 

situation is that we do not use enough objective measures mixed 

with the traditional subjective measures. I think that is still an 

area in the award-fee disciplines that agencies have not worked at 

hard enough and how to work objective measures in with the subjective ones. 

Senator CARPER. All right. Senator McCain has been tied up on 

the floor, as I said earlier, with other issues that are before the 

Senate. And I asked the staff if they had a question that he would 

like to have asked had he been here, and they have given me one, 

so I will just ask this. This, I think, for you, Mr. Chvotkin. 

The note says: ‘‘Please ask Mr. Chvotkin his thoughts on whether 

his member companies use award-fee type contracts. And if so, 

would these companies think the problems we highlighted today 

could be addressed by the member companies. Last, what would 

they do about it?’’ 

40 

Mr. CHVOTKIN. Mr. Chairman, many of our companies are using 

award-fee contracts. Again, these are established by the government as part of the business relationship, and certainly contractors 

have a responsibility and accountability in the bidding process to 

make sure that the award-fee plan, the structure of the contract, 

the elements of the incentives, and the measurements and the 

metrics, are appropriate. So when there is a lack of clarity, firms 

have an obligation to come forward with that. Too many times the 

goal is to win the contract and then worry about it during performance, and these become difficult performance issues. 

The issue between base fee and award fee and making it clear 

that it is not a bonus is important to spell out, as is how an agency 

is going to evaluate an award fee. 

So, we absolutely use them in the discussions today. Our member 

companies are active in all four of these Federal agencies, and we 

watch those award-fee issues very carefully. That is why I said that 

this is an important discussion about what can be raised during 

the solicitation process and then, once awarded a contract, to make 

sure that performance is primary and that the elements in the 

award-fee plan are followed. 

Senator CARPER. All right. There are probably going to be some 

of my colleagues who were here—and some who were not—who will 

want to submit some questions for the record. If you could have 

your responses back within 2 weeks after you receive our questions, we would appreciate that very much. 

I was kind of reflecting on a couple takeaways for me on what 

we have heard from this panel, and from our first panel. I always 

think about what are my takeaways, what should be the takeaways 

for all of us. 

One is the notion that it is real important for us to get it right 

from the beginning, and that is, to clearly outline the agency’s objectives. For agencies to clearly communicate what their objectives 

are. For instance, what do agencies need from a contractor in the 

first place. 

Second, and I am not sure who said it; maybe it was Mr. Assad. 

But I think you talked about measuring outcomes not process, and 

I think that was a theme that a couple of you touched upon. 

I think one of you—I do not remember—was it our friend from 

NASA? But talked about cost/benefit analysis, using clear measurable criteria as an important point. 

We need clear guidelines from OMB, and I think they are endeavoring to provide better guidelines as time goes by. We need 

training for those whose job it is to manage contractors to make 

sure they have what they need to do their jobs well and to protect 

the interests not just of the agency, but of the taxpayers, too. 

Sharing of best practices for those agencies that are doing a better job in one way or the other, to make sure those agencies that 

have not come along as quickly benefit from what others are doing 

better. 

I think one or two people talked about aligning payments to contractor performance, and elevating roll-over approval. For example, 

when we are going to give contractors more than one bite out of 

the apple, maybe that decision should go up to a fairly high level. 

41 

Those are just some of the ideas. I suspect that folks who might 

have been joining us this afternoon during the course of this hearing, this is pretty dry stuff. But having said that, people get exercised when they think that their tax dollars are not being wisely 

spent. I know I do, and I know that others in my State do. In fact, 

people across the country do. We do not have much appetite for 

that. We would not have much appetite for that if we were running 

substantial budget surpluses. But as it turns out, we are running 

substantial budget deficits. We have done that for much of the last 

8 years. And every little bit helps. In this case, we are talking 

about billions of dollars that may have been misspent. And my 

hope is that as time goes by, we are getting our hands around that 

and our heads around that and being able to reduce the inappropriate awarding of these fees. 

Hopefully, based on the work that OMB is doing, GAO, some of 

the IGs, you, your counterparts, and those of us who serve on this 

Subcommittee, as time goes by will do an even better job. And the 

purpose of this hearing was to try to make sure that happens. 

We have sort of a history in this Subcommittee of not just focusing on an issue once and then going away, but continuing to focus 

on it so that secretaries and deputy secretaries of departments, will 

know that this is important, and they will know that we are here 

to put a spotlight on behavior that we want to hold up as a good 

example and just as well as we would put a spotlight on behavior 

which is inappropriate. 

So thank you very much. Thank you for the good work that you 

are doing, and we thank those who are in your departments who 

are supporting good work. For those who are not, we say we need 

them to do better, and taxpayers need for them to do better. We 

expect that. 

And we hope that the Departments that were unable to come 

today will have a chance to share some of their thoughts with us 

outside of a Subcommittee hearing. We will just maybe have a private meeting with one or two of them to see how they are doing. 

The last thing I would comment on and this is not your job, but 

we have a lot of senior positions, and some positions that are not 

so senior within various Federal departments, that require the Administration to nominate somebody, and to go through Senate approval. And in a lot of instances that makes sense. In some cases 

it does not. And in some cases we have folks who are on one side 

of the political aisle or the other that will hold up a nominee for 

really no valid reason except to try to make a point. And that is 

unfortunate, and as a result, we have in this Administration much 

like we had in the last Administration, a long period of time when 

we do not have the right folks in their jobs. 

A fellow was here a year or so ago, and he testified for the Department of Defense, a fairly senior acquisition person, worked for 

John Young, who was a very senior guy, and he worked for Bob 

Gates in the Secretary’s office. But I asked this fellow who worked 

for John Young in the Department of Defense, the Secretary’s office, I said, ‘‘How long have you been in your job?’’ And I think he 

said, ‘‘A year and a half.’’ And I said, ‘‘What kind of turnover did 

you get from your predecessor?’’ And he said the position had been 

vacant for 3 years. And I said, ‘‘How about your direct reports? 

42 

How many direct reports do you have?’’ He said, ‘‘I have six.’’ And 

he said, ‘‘I had only two on board. There were four vacancies when 

I assumed my new position.’’ That is just unacceptable. 

So these are issues that we need folks, not just in the kind of 

stuff we have talked about here today, but more broadly as well. 

But thank you for helping us to flesh out the picture and get our 

heads around these challenges just a little bit better. 

And, again, if you would respond to any follow-up questions that 

we submit in writing within 2 weeks, we will be grateful. 

With that having been said, this hearing is adjourned. Thank 

you all. 

[Whereupon, at 5:13 p.m., the Subcommittee was adjourned.] 

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