Approved for Release: 2018/02/01 C05101944 

DEPARTMENT OF THE AIR fORCE 

WASHINGTON 

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M/W u 1%7 

1'1I:':f'.10RANDUH FOR DR. FLAX, SAFRD 

SUBJECT: Incentives for Satellite Projects 

1 have reael the paper titled, "A Specialized Incentive 

Con trac t S true ture for Sa tell. i te PrD j ec ts" (Ref. No. SP1L~2866, 

Revised 2/28/67) and agree with you that it is an excellent 

piece of work. Its concept should b~ applied whenever the 

conditions so warrant. 

I have only two suggestions, which do not in any way 

cbange the basic concept. The first suggestion stems from 

the fact that I see no magic in assuring that the fee will 

never fall below zero and, particularly, I see no reason why 

unsatisfactory technical performance, coupled with a cost 

overrun or a schedule slippage, or both, should not result 

in a negative fee. I recognize, of course, that a "below 

zero" profit possibility creates contractor pressure for an 

"above 15%" profit, assuming a 7~% fee is considered normal. 

111e answer is that a normal profit contemplates satisfactory 

performance, that the zero-to-15% range encompasses varying 

degrees of satisfaction within the spectrum of acceptable 

performance, but that unacceptable performance is not 

entitled even to a zero fee. 

1'h.e desired rcsul t can be achieved by having the contractor continue to share in cost overruns (perhaps at a 

reduced share rate) after the cost and delivery penalties 

have reduced his performance reward to zero. Similar treatmen-t Wl . tl 1 respec t t .0 lib e 1 ow zero " (e 1 l' 1very pena ·1 t . . t 1es 1S no 

necessary becau.se a delivery delay will automatically entail 

increased cost which would be shared by the contractor. If 

some such arrangement is not included, the contractor can be 

in the position, once his profit has been reduced to zero, 

where there is no further incentive to exercise fiscal discipline. 

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. Approved for Release: 2018/02/01 C05101944 

TIl(' :;cc(llld r;uggf'D t::ion hn8 to do wi th cases where thr 

('('lltl-;lctur'r; performance' nn [I rlL,L~lJt cannot be demonstra.::ed . .f!tALef . ..-

'I'll(' E~/\F- ;;p [lppro(JchU~ en npply tile average of the scor s on , ~ 11 

flights for which perfOrIll;JIlCC i~ dell10nstrated to flight; for~f ,vil Lc II pel~ CUl1nane e ~lS ~1(~_~ demons tratPll, exc ep t in cases here 

the con trnc tor is respnnsi h 1e for the failure thf.! t pre ents 

dClllonstration. The result is that the contractor is ewarded 

(or penalized) [or successes (or failures) that:: are n)t known 

to lwvE' Clccurred. The rcwn 1:'<1 or penal ty is uneClrned and it 

is not clear \\Iby either rewnnl or penalty should apply where 

knmvn performance does not rne:d t it. 

I suggest that, instead of applying the demonstrated 

aver;lge to undemonstratcd performance, it might be better 

to /lpply the pro rata part of the target fee so that neither 

roward nor penalty would be involved. Wllere the nominal target fee is set at the maximum (e.g., 15%), provision should 

he made to apply [or this purpose Cl. stipulated "real" target 

fee (e.g., 7~%) in lieu of the nominal target. 

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Approved for Release: 2018/02/01 C05101944 

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illi''\i, 1111 fl'l iiI 1111 /df~ n IFf E DEPAFUMFHT OF TIfE Am For~CE EPARTMENT Of HIE AIR FOF(i , 

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Approved for Release: 2018/02/01 C05101944 

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