z . l: 

1-'roc: 1-'rocuremen t 

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DEPARTMENT OF THE AIR FORCE 

• < 

DIRECTORATE OF SPECIAL PROJECTS (OSAF) 

AF UNIT POST OFFICE, LOS ANGELES, CALI FORNI A 90045 

REPLY TO 

ATTN OF: SP-1 27 April 1966 

lllllllllllllll/lllll/11111111111111111/lllllllllllllllllllllllll. 14 000783070 

sueJE:CTt Request for Authority to Use Special Incentive Features 

To: SAFRD (Dr Flax) 

1. Because of the extremely critical nature of Special Projects Programs, 

I believe it necessary to offer the contractors the highest possible incentive to perform. Accordingly, I plan to negotiate all critical contracts 

using a special incentive approach tailored to fit these programs rather 

than the conventional multiple incentive formula. A description of the 

incentive approach I plan to use is attached, entitled "A Specialized 

Incentive Structure for Satellite Projects", Ref No SP 142866, (Atch 1). 

2. In December I obtained full agreement with Hilly Paige on the approach 

described in para 4, and negotiated a supplemental agreement incorporating 

this in_centive structure into my basic contract with his company. I have 

subsequently reached agreement withl pn the variation described in para 6. b. for a major follow-on contract, and have reached 

substantial agreement with[ ~long the lines 

of the illustration· in para $. e. 

3. I am convinced that this approach will result in attaining and maintaining better performance and is in the best interest of the government. 

Although it has required my direct negotiation with top company management to obtain agreement, the success I have had in my efforts so far has 

convinced me that the concept can be implemented on all of my programs, 

and I plan to do so on a systematic basis. However, while the overall 

concept is clearly within the intent of incentive contracting as outlined, for 

instance in the DOD Incentive Contracting Guide, it p.as become clear that 

some provisions or inferences of the ASPR can be in,terpreted to either 

prevent some of the proposed features or require time consuming justification and approvals on an individual basis. To apply the proposed concept 

without such continuing actions, I am advised that authorization to deviate 

from several provisions of the ASPR will be required. I attach a summary 

of these ASPR conflicts for illustration (A tch 2 ). 

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2 

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4. Several urgent procurement actions are being delayed pending 

resolution of this question, including the matter of changes to 

Hilly Paige 1 s contract and the conclusion of the other two contracts 

mentioned in para 2. Your assistance is solicited in obtaining the 

approval of Secretary Ignatius to apply the proposed concept to SAFSP 

programs and to deviate from such provisions of ASPR and related 

regulations as might be in conflict therewith. 

- JOHN L MAR TIN, JR 

Brigadier General, USAF 

Director 

2 Atch 

1. Doc, "A Spec Incent Structure 

for Sat Proj" Ref No SP 142866 

2. Summary of ASPR Conflicts 

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A SPECIALIZED INCENTIVE CONTRACT STRUCTURE 

FOR SATELLITE PROJECTS 

I. Introduction. This paper describes the overall rationale and outlines 

the individual features of an incentive contract structure for satellite 

projects. This structure requires no increase in the maximum fee possible 

under current conventional incentive practice, but, by a specialized arrangement of the basis of fee calculation, places maximum incentive upon the 

achievement of acceptable flight performance while simultaneously insuring 

responsible financial and schedule management. The plan is described as it 

applies to contracts for satellite vehicles, but the rationale is applicable to 

other aspects of satellite projects, as is outlined in paragraph 6. It is intended for satellite projects for which continuing changes are characteristic 

and for which prompt contractor response is essential, which, together with 

other circumstances, dictate the use of cost-plus-incentive-fee type contracts. 

2. Objectives. While this specialized approach is well suited to the general 

requirements of all satellite projects, it is particularly addressed to certain 

additional characteristics of some satellite projects: 

a. While, in all satellite projects, the achievement of satisfactory orbital 

performance is desired, for some projects the continuing achievement of this 

performance, repetitiv~ly, on pre-determined schedule, and in the face of 

continuing changes, is an absolute essential. For such projects, no realizable 

dollar penalty to the contractor for failure' of his product to perform can adequately compensate the government for failure to obtain the desired results 

from the scheduled flight. It is therefore essential that the incentive structure 

of such contracts be designed to as sure the maximum effort on behalf of the 

contractor to obtain the full performance on each flight. · 

b. Because of very long lead times for complex satellite vehicles, and 

extensive investment in associated specialized facilities, the government does 

not have, in practice, an acceptable option of simply changing contractors if 

the performance of the vehicles deteriorates. Typically, from eighteen months 

to two years would be required to change vehicle contractors on complex .... 

satellite projects, and, during this time, the deficiency which would prompt 

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such action would continue unless solved by the original contractor. 

Although the government could take other actions against the unsatisfactory 

contractor, none of these would compensate for the period of time during 

which scheduled flight performance is not obtained to an acceptable degree. 

It is imperative, therefore, that the terms of the contracts for such projects 

provide the maximum incentive to the contractor to achieve and to maintain 

fully acceptable flight performance. 

c. The actual cost to the government of flying-such complex satellite 

vehicles far exceeds the pro-rata cost of the individual vehicle or component. 

Typically, the net cost of a single flight of a complex satellite project with 

relatively frequent flights is on the order of twelve to fourteen million dollars 

per flight. Yet the entire satellite vehicle may represent only about two 

million of this cost. For such projects, the unit of measurement in all matters 

relating to financial management must therefore be the cost of the loss of the 

entire flight, not simply the cost of the vehicle or component which was produced under the contract in question. Cost savings through manufacturing 

shortcuts which increase, in any way, the risk of flight failure must be balanced 

against the potential cost of the entire flight. And no cost saving by any means 

is an acceptable substitute for failure to perform on orbit as scheduled., It is 

therefore imperative that the contracts for such projects provide cost incentive 

adequate to insure responsible financial management without detracting from 

the necessary emphasis on orbital performance and without providing for any 

way in which any failure to perform can be offset by spending less than the 

contracted amount. 

3. Overall Approach. In order for an incentive structure to meet the objectives 

outlined above, it must insure that the contractor will exert extra care because 

of this structure. If the incentive provisions of the contract mean nothing more 

than a task for the contracting officers - a way of arriving at a mutually 

acceptable pre-negotiated fee - then the incentive provisions will have little if 

any real effect upon the contractor's subsequent performan~e. In order to have 

the desired effect, the "word must get to the bird" -- th_e people who work on 

all aspects of the entire undertaking must be conscious of the incentive and 

must do their work with more care and quality because of it. For this reason, 

the incentive plan should be relatively simple ci~d, in particular, the key points 

must be easily understood by all affected contractor personnel as imperatives 

to which they must respond. These, and the previously noted considerations 

lead to the following overall approach to such an incentive structure: 

a. The achievement of satisfactory performance on orbit is of paramount 

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importance, and the only way in which the contractor can earn any fee. 

b. The achievement of this performance must be attained under responsible financ_ial management; therefore, the contractor must share overruns by 

deducting fee from that otherwise earned. (No fee is paid for underruns, since 

any fee so paid would necessarily reduce the maximum fee which could be paid 

for performance and v;.ould to some extent emphasize cost reduction at the 

expense of maximum emphasis on performance. Maximum performance within 

contracted costs is the financial goal.) 

c. The achievement of this performance on a pre-determined schedule is 

also an objective, therefore the contractor must pay a penalty for lateness by 

deducting fee from that otherwise earned. 

d. The achievement of maximum performance is an essential objective; 

therefore, for each flight, the maximum incentive will be placed upon the 

attainment of maximum performance, "and the median or average fee will 

require better than average performance. 

e. The incentive must be applied so that, regardless of performance 

which has been obtained on previous flights, there is always a maximum 

incentive for each subseque.nt flight to be one hundred percent successful. 

f. The relationship between the fee that can be earned by performance 

and the fee that can be lo.st by failure to meet schedule and/or poor financial 

management must be selected to retain the desired balance between these 

objectives, so that schedules and costs are controlled effectively, but do not 

become dominant over, or in any manner counterbalance, poor orbital 

performance. 

4. Incentive Structure. A typical application of this incentive philosophy to 

a satellite vehicle contract will include the following provisions (variations to 

this approach are discussed later in paragraph 6 and th~ manner of handling 

changes in paragraph 5): 

a. Performance 

(1) As noted previously, this is the only way_ that the contractor can 

earn any fee (although he can lose fee on costs and schedules). To provide 

maximum incentive, the maximum fee is set at the maximum normally allowed 

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for cost-plus type contracts, that is, 15% of the target cost of the contract. 

The maximum performance fee that can be earned by each vehicle under the 

contract is therefore: ., 

Maximum Performance fee ($) 

(per vehicle) 

15% x target cost 

= No of vehicles 

The actual fee will depend upon the performance attained by 

each vehicle; it may vary from the maximum shown above to a minimum of 

zero, and is determined as outlined in the following subparagraphs. 

(2) For the purpose of determining performance fee, the unit of 

measurement of orbital performance is the number of revolutions (revs} in 

orbit which are satisfactorily completed, defined as the number of revs 

completed prior to the occurrence of a: "critical event". For this purpose, a 

specific list of such "critical events" is compiled and made a part of the 

contract, including the method of determination (telemetry, analysis, etc) 

along with the acceptable bounds for data so used. While the critical event 

list does not contain 100% of the failures which can occur, it does contain all 

of those which can reasonably be anticipated and which can be determined by 

telemetry or analysis based upon telemetry (or physical recovery). 

(3) The performance score of each vehicle is then computed on the 

basis of 100 points for maximum performance and zero points for unacceptable 

. performance. Actual performance equal to that planned earns a score of 

100 points; actual performance equal to 50% (or less) of that planned earns a 

score of zero. The full range of 100 points is distributed linearly between the 

extremes of 50% and l 00% of the planned lifetime of the' flight, with the median 

fee of 7. 5% thus corresponding to a point score of 75, which requires actual 

performance equal to 75% of the planned performance. This relationship is 

expressed in the following simple formula by means of which the performance 

score of each individual vehicle is computed, based upon its individual flight 

performance: 

Performance score = 2 ~ 00 (~) - 5~ 

where: a = number of revs completed prior to occurence of a 

critical event 

p = number of revs planned for the flight 

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and~ is greater than . 5 (the performance score is zero for • 5 

p and all smaller values) ) 

(4) The actual performance fee earned by each vehicle is then 

determined as follows: 

Actual fee ($) ::: Maximwn fee ($) x PerfolOoance score 

Where the rnaximwn fee is that. calculated as described in 

subparagraph (1) above, 

or: Maximwn fee 

per vehicle 

::: 15% x target cost 

no of· vehicles 

(5) The following table swnmarizes the results of the above 

formulae for varying degrees of orbital success: 

If ratio of actual to 

planned perfo1"mance then performance . and the performance 

(_:) i's: score is: fee is: 

P" 

• 5 0 0% 

• 75 50 7. 5% 

• 80 60 9. 0% 

• 95 90 13. 5% 

1. 0 100 15% 

(6) It should be noted that the simple formulae described above 

result in a median fee of 7. 5% payable for 75% performance, so that 7. 5% 

may be said to be the target fee and 75% may be said to represent par performance. However, these terms are only figures of speech in this incentive 

structure; it would be equally correct to call the target fee 15% and par performance as 100%. The actual fee is determined by the performance of each 

vehicle; it may vary from a maximwn of 15% (of its pro-rata share of the target 

cost) to a minimwn of zero. 

b. Cost 

(1) To achieve the necessary financial management under the terms 

outlined previously, the contract will provide for penalties for overruns, with 

these penalties to come from the fees otherwise earned by performance. To 

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maintain the desired balance between performance and cost, as described 

previously, the maximmn penalty is set at 9% of the target cost (in contrast 

to' 15% maximum fee that can be earned by maximum performance.) 

(2) The maximum penalty of 9% for overrun is assessed in two 

sharing ratios, as follows. Up to a fee penalty of 4. 5% of the target cost, 

the sharing is 80/20. The contractor's share of 20% would reach this limit 

of 4. 5% of the target cost at an overrun of 22. 5%. Up to an additional fee 

penalty of 4. 5%, the sharing is 70/ 30, which additional penalty applies for 

an additional 15% overrun. In smnmary, the contractor shares overruns at 

80/20 up to 22. 5% overrun, then at 70/ 30 up to an additional 15% overrun; 

he is liable for overrun fee penalties up to a total overrun of 37. 5%,. and he 

can lose up to 9% of the target cost in such fee penalties, all of which must 

come from fees earned on the basis of the performance criteria previously 

discussed. 

(3) While the dollar value of individual vehicle performance is 

calculated on a pro-rata basis, and shown in the contract accordingly, the 

penalties for costs are not allocable to individual vehicles except on an 

after-the-fact basis, so the cost penalties pertain to the target cost of the 

entire contract. Accordingly, regardless of how well the contractor has 

done on performan~e. schedule, or cost, ther.e is always a high incentive to 

exert close financial control, since loss of such control even near the end 

of the contract could wipe out considerable fees earned by the performance of 

previous vehicle flights. 

c. Schedule 

(1) While it is important to maintain a pre-determined schedule, 

there is no net value to the government in the contractor delivering the vehicles 

ahead of schedule. The incentive on schedule is therefore a negative incentive. 

To maintain the desired perspective, the maximum schedule penalty is set at 

0. 5% of the target cost, and pro-rated as· a specific amount to each vehicle 

in the contract. To place maximum incentive on holding schedules, this prorated maximum amount for each vehicle is assessed at a fixed rate of $2000 

per day of variance from the contract schedule. 

(2) The basis of delivery is specified as the completion of the overall 

test on the basis of which the government "buys 11 or accepts the vehicle 

(executes form DD 250). Typ~cally this is an extensive, electrically mated 

systems performance test, conducted at the launch base or just prior to shipment to the base. 

__ ,' 

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d. Savings Clauses. The contract also contains savings clauses. 

covering the following provisions: 

(1) Notwithstanding any other provisions, the maximum fee under 

the contract shall not be more than 15% of the target cost, and the minimum 

shall not be less than zero. 

(2) Notwithstanding the performance fee computed on the basis of 

the critical event list, as previously described, whenever the contracting 

officer is able to determine after completion of the flight .that the actual 

degradation to the desired performance was less than computed, then he will 

award the contractor the higher score based upon such unllateral post flight 

determination. 

(3) The planned performance used in the performance computations 

shall not exceed the maximum orbital lifetime called.for in the contract. 

(4) Whenever a flight fails without this contractor having an opportunity 

to perform> as in the case of failure due to another contractor's product, such 

as a booster failure, for instance, then the performance score allocated to 

such flight shall be awarded after completion of the contract and shall be equal 

to the average performance score of all vehicles on all flights on which this 

contractor did have an opportunity to perform. 

5. Changes. The conventional approach to changes, considering each change 

as a separate contract, evaluating the risks, etc. , on an individual basis, and 

arriving at a separately determined fee structure for each change, is fundamentally incompatible with the objectives of the incentive structure described herein. 

To consider each change in this manner would be to consider it out of context 

with the basic contract of which the change will become a part. While the 

change itself may be relatively simple, and, taken out of context with the overall 

contract, involve seemingly little risk, in actuality any change can cost the 

entire flight, and thus any change involves some added risk to the entire flight. 

Changes provide an opportunity.for schedule slippage, for performance degradation or failure due to workmanship or procedure involved in the changet and 

also provide opportunity for additional overruns since the overall costs are increased. Obviously certain provisions must be made to insure that changes do 

not increase the fee payable for previous flights not affected by the change. 

However, with the provision of such safeguards, it is axiomatic that the overall 

approach to changes to an incentive contract as described herein be the same 

as the approach to the basic contract. In this regard it should be noted that 

this overall approach does not pre-determine the fee to be paid; the fee to be 

paid is determined by the individual performance _of each vehicle, less penalties 

for cost and schedule variance. The overall approach pre-determfnes only the 

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specific relationships of the vehicle performance and cost and schedule 

variances to the fee; in practice, this fee may be as high as 15%, but it 

may be as low as zero. Applying this same philosophy to changes means 

that the fee for any given change could be as high as 15% of the target cost 

of the change, but it also means that the fee for such change could be zero, 

even for reasons unrelated to the change. On balance, the inclusion of 

changes within the same incentive structure described herein for the basic 

.contract is fully consistent with the overall objectives described previously; 

for complex satellite projects which involve frequent changes throughout the 

life of the basic contract such inclusion is imperative in order to attain these 

objectives. The inclusion of changes is easily handled by slight modification 

of the procedure already outlined for the basic contract, as described below: 

a. Performance 

(1) The ma~imum performance fe~ is described in paragraph 4a(l) as: 

Maximum Performance fee ($) = 15% target cost 

No of vehicles (per vehicle) 

For changes, the additional maximum performance fee, to be added to 

each vehicle affected by the change, is determined as follows: 

Maximum additional 

Performance Fee due 

to change (per vehicle 

affected) 

($) = 15% x target cost of change 

No of vehicles affected by 

the change 

This additional increment of maximum performance fee is added to the 

maximum fee already allocated to this and other affected vehicles under the 

terms of the basic contract. Thus, the inclusion of a change involves changing 

the maximum performance fee that all vehicles affected by the change can earn. 

(2) All other performance calculations are unaffected by the change. 

The actual fee earned is determined in the same manner outlined in par 4a(4): 

Actual fee ($) = Maximum fee ($) x 

Performance score 

100 

The effect of the change is included in the maximum fee· used in the above 

equation.1 This figure reflects only the changes applicable to each particular 

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vehicle, and since performance is the only method by which any fee can be 

_earned, computation in this simple manner completely precludes subsequent 

changes affecting the fee paid for previous flights. 

b. Cost 

(1) The target cost of all changes comes under the full incentive 

structure of the basic contract, in both sharing ratios and maximum fee 

penalties. 

(2) To insure early definitization of changes, the basic contract 

contains a clause establishing a reasonably low limit on the percentage of the 

cost of the change which may be incurred prior to submission of the contractor's 

cost proposal in accordance with the changes clause. The cost proposal must 

be submitted prior to incurring costs beyond this limit in order for the same 

terms as the basic contract to be applicable to the change. Otherwise an 

equitable adjustment will be negotiated on an individual basis. 

c. Schedule. The effect of changes upon schedules is taken into account 

when changes are introduced, through the means of identifying the vehicles with 

which the change becomes effective. In all other respects, the change comes 

under the full schedule incentive provisions of the basic contract. That is, 

each vehicle to which the change is applicable can result in an additional maximum penalty for schedule variance of: 

Additional maximum penalty 

(per vehicle) 

= O. 5% x target cost of change 

No of vehicles affected by the change 

6. Variations. The overall incentive approach described above may be varied 

in implementation without changing the basic philosophy. The following 

examples illustrate such variation. 

a. Variation in target fee. As noted in paragraph 4a(6), the terms 

"target fee" and "par" are only figures of speech in this incentive structure, 

since under the formulae-described the same actual fee is paid for the same 

actual performance, regardless of the point in the performance range that is 

considered par and regardless of the fee (between 0 and 15%) that is considered 

the target. The only specific meaning that can be given to the term "target fee" 

in this approach is that funds based upon whatever is selected as the target fee 

must be put on the original contract; however, the amount paid is determined by 

the performance attained, regardless of the fee considered "target", in the same 

way that the fee is paid for performance which exceeds par on a conventional 

, incentive approach. 

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The target fee may arbitrarily be selected at the median of 7. 5%, 

corresponding to 75% performance. Or, to provide additional psychological 

incentive, it may be selected higher, as for instance, 9%, which corresponds 

to 80% performance. In all case~, however, the maximum. remains 15% and 

the minimum is zero. 

b. Negative Performance Incentive. To provide the maximum psychological incentive, while paying exactly the same fee for the same performance 

obtained, the "target fee" may be selected as the maximum fee {i.e., 15%) 

and all scoring carried out on a negative basis. This requires no change .in 

the formulae previously described. The performance score is computed 

exactly as described in paragraph 4, and the actual fee is also computed in 

the same'.manner previously described: 

Actual fee$ = Maximum fee x perf score 

{ h . h . 1 100 W lC lS a SO . 

now the "target") 

The'target" fee is thus reduced by the performance score of each flight, 

as show~. This method requires the full 15% fee to be put on the initial 

contract, but it pays exactly the same amount for the same performance as 

the approach described in paragraph 4. Its advantage is psychological; 

through this method the contractor's.internal management perspective is 

changed in the following way for, say, a situation in which the vehicles on 

a certain project have attained an 80% performance {corresponding to a 

performance fee of 9%) with no variance in costs or schedules: If the incentive 

formula is described as 7. 5% target fee, with a+ 7. 5% fee swing over the 

50%-100% performance region previously discus ;ed, then the management can 

refer to this work as "meeting par, and, in addition, earning 1. 5% extra fee 

for the company." If the same incentive formula is described as 15% target 

fee, with a -15% fee swing over the same performance region, then the 

management can refer to the same work as "costing the company 6% penalty 

for performance deficiencies. " The money paid is the same; this method 

offers, at no cost, additional psychological assistance in insuring that the 

"word gets to the bird. " 

c. Minimum Acceptable Performance. The minimwn acceptable performance point may be set at a value higher than the 50% discussed in 

paragraph 4, with the full 0-15% fee distributed over the reduced performance 

range between this point and 100%. This variation is particularly well suited 

for repetitive buys of reasonably mature systems, instead of reducing the fee 

structure; it counters the reduction in risk without reducing the emphasis on 

continued maximum. performance. 

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d. Cost sharing ratios. The cost sharing ratios may be varied with the 

risks associated with the individual project. For instance, the initial sharing 

of 80/20, as discussed in paragraph 4, may be set at 95/05 or 90/10 for the 

initial buy of a new project, with appropriate progressive increases; in followon contracts it may be progressively increased to 80/20, 70/30, 50/50, etc., 

consistent with the degree to which the project has matured. However, the 

relationship of the maximwn fee which can be lost and the maximwn fee that 

can be earned through performance must be kept such that the emphasis is 

never taken off the necessity of attaining and maintaining maximwn performance 

in orbit. 

e. Applications. Although the typical illustration~ described in this 

paper have referred to contracts for satellite vehicles, the basic incentive 

approach is applicable to all major aspects of satellite projects, including 

major components, with only slight variations to suit the particular item in 

question. For example, assume that a_ complex command and control system 

is bought under separate government contract and furnished on a GFE basis 

to the vehicle contractor in a complex satellite project. The command and 

control system may be essential for the entire systems integration and checkout process which may require it to be fully operational for, say, two or 

three months after goverrunent acceptance but prior to launch. While failure 

of such a system during this pre-launch period would not cause loss of the 

flight, it would cause considerable delays in schedules and increased overall 

project costs through these delays. In such a case, the approach described 

in paragraph 4 may be varied to fit the situation, either by adding penalties 

for failures during the pre-launch phase (such as specific penalties for each 

failure requiring return of components to the factory for repair, etc) or by 

defining the performance period to include the pre-lannch phase as well as the 

orbital phase, with the l 00 possible performance points appropriately divided 

between these two phases. Obviously, in such an instance, the contract would 

require an active lifetime equal to that planned for such pre-launch use plus 

the maximwn planned orbital lifetime. 

7. Swnmary. The incentive structure described herein meets the objectives 

outlined in paragraphs l and 2. It is flexible and adaptable to all major aspects 

of complex satellite projects. It provides maximum incentive to attain and 

maintain the highest levels of performance, yet it retains firm financial 

control through substantial penalty provisions for overruns. and a reasonable 

penalty provision for schedule variance. The contractor has the opportunity 

and the incentive to make the maximwn fee; the government has increased .,. 

probability of getting the best possible performance at the contracted price, 

under conditions which are fully compatible with prompt response to contract 

changes. The approach does require deviations _to conventional incentive 

procedure as outlined in ASPR, such as the use of weighted guidelines, the use 

of one-way fee swings instead of.:!:. swings, the use of the same incentive 

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formulae for changes, etc. Yet it is fully consistent with the basic objectives 

of incentive contracting. It justifies these deviations by providing an incentive 

structure specifically tailored for the particular applications outlined in 

paragraphs 1 and 2, and approaches, for these applications, the ultimate 

objective of overall incentive arrangements that provide a high possibility of 

maximum performance achievement/on a continuing, scheduled basis, within 

a close range of cost probability. 

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ATTACHMENT 2 

SUMMARY OF ASPR CONFLICTS 

I. ASPR 1-109. 3. Deviation Affecting More Than One Contractor 

or Contract 

·Deviations pertaining to more than one contractor or contract 

must be approved in advance by Assistant Secretary of Defense 

(Installations and Logistics) or by unanimous approval of ASPR 

Committee which constitutes approval of the Assistant Secretary. 

This approval is required since the referenced incentive concept 

will be applied to more than one contractor. 

z. ASPR 3-405. 4. Cost-Plus-Incentive-Fee Contract 

Definition of a GPIF contract contained in this paragraph does not 

precisely fit the referenced incentive plan in that it describes a 

cost formula which recognizes "increases in fee above target fee 

when total allowable costs are less than target costs. 11 The 

referenced plan recognizes only a decrease from target fee in the 

event of an overrun. 

3. ASPR 3 .. 407. 2. Contracts with Performance Incentives 

The description of a performance incentive cited in the paragraph 

does not conform to the referenced plan. This ASPR states: 11A 

contract with a performance incentive is one which incorporates 

an incentive to the contractor to surpass stated performance targets 

by providing for increases in fee or profit to the extent that such 

targets are surpassed and for decreases to the extent that such 

targets are not met. 11 One of the variations of •the referenced plan 

provides only for decreases from target fee for. less than 100% 

performance. 

4. ASPR 3-808. 2. Weighted Guidelines Method 

This ASPR specifies that the WG method of fee determination shall 

be used in all contracts where cost analysis is performed except 

as set forth in (b) below. Exception contained in paragraph (b)(2) 

states: "Other exceptions may be matj.e in the negotiation of contracts presenting unusual pricing situations when specifically 

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authorized by the Head of a Procuring Activity. Such exceptions 

shall be justified in writing and authorized only in situations where 

•, ·.· the weighted guidelines method is determined to be unsuitable. 11 

The 'referenced plan includes the variation of pre-determining a 

target fee of 15% and therefore does not literally comply with the 

mechanics of a WG determination. The formula proposed makes 

compliance with WG rmsuitable. 

5. ASPR 3-808. 3. Profit Objective 

· This paragraph specifies that: "Prior to the negotiation of a 

contract, change order, or contract modification, where cost 

analysis is nndertaken, the negotiator shall develop a profit 

objective. The weighted guidelines method, if applicable, shall 

be used for developing this profit objective. 11 The referenced 

plan specifies the same fee formula on changes as on the basic 

contract and therefore WG cannot be applied for the same reason 

as in paragraph 4, above. 

6. ASPR 3-902. 4. Changes to Make-or-Buy 

This paragraph requires the make-or-buy program be incorporated 

in cost-reimbursement type contracts "except cost sharing contracts 

where the contractor's share is 25% or more, and CPIF contracts 

having a cost incentive which provides for a swing from target fee of 

at least + 3% and a contractor's overall share of cost of at least 

1 Oo/o. 11 In the referenced plan there is no swing on the plus side from ... 

target fee if the target fee is at the maximum allowable (15%). However, since the plan contains a penalty of up to 9% for cost overrnn 

there is a great incentive to control costs. This ASPR recognizes 

this possibility and states: "Some contracts may provide sufficient 

incentive for control of costs and not meet this test; . • • • • • In 

such cases, contracting officers should seek authorization to deviate 

from this regulation (see 1-109). 11 Deviation is required so that 

make-or-buy may be omitted. 

7. ASPR 3-903. 2. Subcontract Clauses for Cost-Reimbursement 

Contracts 

This ASPR relaxes the consent requirements of the standard subcontracts cl~use in the + 3% situation. Deviation is required for 

the reasons given in pa;ag:raph 6, above, so that the relaxed 

requirement may be us ed. 

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8. ASPR 7-203. Required Clauses 

This paragraph specifies mandatory clauses to be inserted in 

all cost-reimbursement type supply contracts. The clause set 

forth in 7-203. 4b(i) again is applicable to a cost formula recognizing an increase in fee for a cost underrun. "The fee payable 

hereunder shall be the target fee increased by (insert contractor's 

participation) cents for every dollar by which the total allowable 

cost is less than the target cost of decreased by (insert contractor's 

participation) cents for every dollar by which the total allowable 

cost ex~eed the target cost. " Deviation is required be cause the 

referenced plan proposes a penalty for overrUl}, but no reward 

for underrun. 

9. ASPR 12-102. 3. Payment for Overtime Premiums Clause 

This ASPR states:." To prevent uneconomic use of overtime, at 

Government expense, this clause shall be included in all costreimbursement type contracts in excess of $100, 000, except 

cost-plus-incentive-fee contracts having a cost incentive which 

provides for a swing from target fee of at least + 3% and a con-

' tractor's share of cost of at least 10%." For the-reasons stated 

in paragraph 6, above, deviation is required so that the overtime 

clause may be omitted. 

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