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A SPECIALizED INCENTIVE CONTRACT STRUCTURE· 

FOR SAT ELLITE PROJECTS 

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Ref No. SP142a66 

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A Specialized Incentive Contract Structure for Satellite Projects 

INDEX, 

Subject Page 

1. Introduction 3 

2. Objectives 3 

3. Overall Approach 4 

4. Basis of Performance Determination 6 

a. Critical Event List 6 

b. Definition of Satisfactory Performance 6 

c. Redundancy 7 

d. Overriding Events 7 

5. Incentive Structure 7 

a. Performance 7 

b. Cost 9 

c. Schedule 10 

d. Additional Provisions ,10 I.···· 

(l ) No Opportunity to Perform 10 

(2) Effect of Government Furnished Equipment Failures • 10 

(3) Flights out of Specification Limits 12 

(4) .Government Option to Fly After Initial Acceptance 13 

(5) Additional Incentive for In-Flight Support 13 

e. Savings Clauses 15 

6. Changes 16 

7. Variations 18 

a. Variation in Target Fee 18 

b. Negative Performance Incentive 19 

c. Minimum Acceptable Performance 21 

d. Cost SharIng Ratios 21 

e. Applications 22 

8. Projects with Long Lifetimes on Orbit 22 

9. Contracting Procedures 28 

10. Summary 29 

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A SPECIALIZED INCENTIVE CONTRACT STRUCTURE 

FOR SATELLITE PROJECTS 

1. 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 attainable on cost type contracts under current conventional incentive practice. but, by a specialized arrangement of 

the basis of fee calculation, places maximuni 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 7. It is intended for satellite projects for which 

continuing changes are characteristic and for which px:bmpt contractor 

. response is' essential, which, together with other circ~stances, 

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

2. Objectives. Although 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, repetitively, on pre-determined schedule, 

and in the face of continuing changes, is absolutely 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 ~s 

therefore essential that the incentive structure of such contracts be 

designed to assure 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 

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contractors on complex satellite projects, and, during this time, 

the deficiency which would prompt 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 or more per flight. Yet 

the entire satellite vehicle may represent only about two or three 

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 substitut 

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 emphaEis 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 ~fficers 

-- 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 performance. In order to have the desired 

effect, the "word must get to the bird" .. - the people who work on all 

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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 and, 

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 importance, and the only way in which the contractor can 

earn any fee. --

b. The measurement of performance must be based upon 

satisfactory flight operation in relation to criteria which are measur .. 

able prior to flight as well as normally determinable during flight, 

rather than the actual degree of attainment of the ultimate flight 

objectives. These criteria are covered by the contract technical 

specifications which form the basis of design and component, subsystem. system and acceptance test criteria. This is the only way to 

insure that the "word gets to the bird, " for these criteria have tangible 

meaning to workers and supervisors at all levels and are the basis of 

the actions taken at each step of the design, fabrication and test process 

which pre-deter:mine the degree of flight success. 

c. The achievement of this performance must be attained under 

responsible financial management; therefore, the contractor must 

share overruns by deducting fee from that otherwise earned. (No 

additional fee is paid for underruns, since any fee so paid would 

necessarily reduce the maximum fee which could be paid for perfor- . 

mance and would to some extent emphasize cost reduction at the expens e 

of maximum emphasis on performance. Maximum performance within 

contracted costs is the financial goal. ) 

d. The achi evement of this pe rfo rmanc e on a pre -dete rmined . 

schedule is also a~ objective, therefore the contractor must pay a 

penalty for lateness by deducting fee from that otherwise earned. 

e. 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 

fee will require better than average performance. 

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f. The incentive must be applied so that, regardless of perfor .. 

mance which has been obtained on previous flights, there is always 

a maximum incentive for each subsequent flight to be one hundred 

percent successful. 

g. The relationship between the fee that can be earned by performa.nce a.nd the fee that can be lost by failure to meet schedule 

and/or poor financial management must be selected to retain the 

desired balance between the se objective s, so that schedule sand 

costs are controlled effectively, but do not become dominant over, 

or in any manner counterbalance, poor orbital performance. 

4. Basis of Performance Determination 

a. Critical Event List. "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. 

As a reference for determining satisfactory revs, a specific list of 

"critical events" is compiled and made a part of the contract. This 

list is based upon the contract requirements and technical specifications 

and include s all malfunctions of equipment provided by this cop,tractor 

which, if they occur during flight, will probably cause serious degradation to the de signed flight capability, and which are measurable prior 

to flight and normally determinable during flight. The list includes 

events that either do or do not occur, as well as the required quantitative 

range s for critical parameters such as bus voltage, temperature. 

attitude position and rates, etc., including the method of determination 

(telemetry, analysis, etc). While the critical event list does not 

contain 100% of the specific 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. 

b. Definition of Satisfactory Performance. In each contract, 

satisfactory performance is specifically defined according to one or 

the other of the following definitions: 

(1) The number of revs completed prior to the occurrence of 

a "critical event." This is the most demanding definition and requires 

the highe at level 6f performance for a given fee. 

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(2) The nwnber of revS completed during which no "critical 

event" existed. This definition is less demanding in regard to the 

penalty for intermittent critical events which exist during a 

relatively small percentage of the flight. 

c. Redundancy. Whenever the system design includes a redundant 

feature (such as a backup motor or actuator, for example) the loss of 

the primary feature will not constitute a "critical event" unless the 

backup feature also fails to operate properly. Th'at is, for all functions 

which inclUde redundant means. the "critical event" will consist of 

loss of the function and not loss of the primary or backup means per se. 

d. Overriding Events. In any caSe where the contractors work, 

personnel, or eq~pment cause total loss of the data, as, for example j 

failure of a data capsule to re-enter as programmed, ~uch loss is <, 

considered an overriding critical event and will result in the minimupl 

performance score regardless of performance otherwise attained during 

that flight. 

5. Incentive Structure. A typical application of this incentive phil .. 

osophy to a satellite vehicle contract will include the following provisions 

(variations to this approach are discussed later in para,graph 7 and the 

manner of handling changes in paragraph 6): ' 

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 maximwn fee is set at the maximum 

normally allowed fOT cost type contracts. that is, 15% of the target cost 

of the contract. The maximum performance fee that can be earned by 

each vehicle -qnder 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 maximwn shown above to a minimum 

'of zero, and is determined as outlined i~ the following subparagraphs. 

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(2) The performance score of each vehicle is 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 100% of the 

planned lifetime of the flight. with the median fee of 7. 5% thuB 

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 '\ 

p'erformance: 

Performance score = Z Goo (;) -5~ 

where: a::: number of revs satisfactorily completed, as 

defined in 4b(1) or 4b(2) 

p ::: number of revs planned for the flight 

and a is greater than. 5 (the perforrr.ance score is zero 

p for. 5 and all smaller values) 

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

determined as follows: 

Actual fee ($) ::: Maximum fee ($) x Performance Score 

100 

Where the maximum fee is that calculated as described in 

subparagraph (1) above, , 

or: Maximum fee 

per vehicle 

::: 15% x target cost 

no of vehicles 

(4) The following table summarizes the results of the above 

formulae for varying degrees of orbital success: 

, If ratio of actual to 

planned performance 

(~) is: 

p 

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then perfonnance 

score is: 

o 

50 

and the perfonnance 

fee is: 

0% 

7.50/0 

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60 

90 

100 

9.0% 

13.5% 

15 % 

(5) It should be noted that the simple fonnulae described above 

result in a Ire dian fee of 7. 5% payable for 75% perforroance, so that 7.50/0 

may be said to be the target fee and 75% may be said to represent pal' pel'-

formance.However, these terms are only figures of speech in this 

incentive structure; it would be equally correct to call the target fee 150/0 

and par performance as 100%. The actual fee-is determined by the 

performance of each vehicle; it may vary from a maximum ci 15% (of 

its pro-rata share of the target cost) to a minimum of zero. Further, 

the same fee is paid for a given performance regardless of the fee 

considered to be the "target. " 

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 perforrt;lance. To maintain the desired balance between performance 

and cost, as described previously, the maximum 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. 50/0 of the target cost at an overrun of 22.50/0., Up to an 

additional fee penalty of 4.5%, the sharing is 70/30, which additional 

penalty applies for an additi6nal 15% overrun. In summary, the 

contractor shares overuns 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 cost 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 performance, schedule, or cost, there is always a high 

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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 goverrunent 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 O. 5% of the target cost, and pro-rated as a 

specific amount to each vehicle. Penalty for each vehicle is assessed 

at a fixed rate of $2000 per day of variance from the contract schedul,e, 

up to the total pro-rated amount allocated to that vehicle. This insures 

full attention to the short term schedule of each vehicle, that is, the 

period near its scheduled delivery date. The long term schedule incentive 

is automatically covered under the negative cost incentive, for large 

. schedule slips obviously will cause inc~eases in progr~m costs. 

(2) The basis of delivery is specified as the cpmpletion of a 

specific overall test at a specified location. TYpical1.y this is an, extensive,. 

electrically mated systems performance test, conducted at the launch base 

or just prior to shipment to the base. 

d. Additional Provisi'ons 

(l) No opportunity to Perform. Whenever an entire flight fails 

without the contractor having an opportunity to perform, as in the case 

of a booster failure, for infjtance, which would prevent the satellite 

vehicle contractor from having any chance to perform, then the performance score allocated to such flight will be awarded after completion 

of the contract and will be equal to the average per formance score of 

all vehicles on all flights flown under the instant contract on which this 

contractor did have an opportunity to perform. 

(2) Effect on Government Furnished Equipment (GFE) Failures. 

Equipment failures will generally be attributable to Contractor Furnished 

Equipment (CFE), Goverrunent Furnished Equipment (GFE), or inconclusive. 

Based upon analysis of flight data and any other data available, the senior 

goverrunent program official in charge of the flight will make a final 

determination as to the cause of critical events, i. e., failures of Contractor 

Furnished Equipment or services, (CFE). OFE, or inconclusive. 

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(a) If the critical event is attributed to failure of CFE, the 

contractor will be fully responsible under the incentive structure outlined herein. 

(b) If the critical event is attributed to failure of GFE, the 

flight will be scored under the full incentive provisions qutlined herein 

up to the critical event, and thereafter either at the average contractor 

performance score defined under 5d(1), or at the contractor performance. 

score for· the flight in question at the point of the GFE failure projected 

through to p'tanned mission completion, whichever is less. 

(c) If the critical event is attributed to failure of GFE, and . 

the analysis shows that the contractor either caused the failure or failed 

to detect its obvious presence in the resulting test data in accordance 

with the contractor's contract test specifications, the failure will be 

treated as though it occurred in CFE. 

(d) If the critical event is inconclusive as to whether caused 

by failure of CFE or GFE, the flight fee pool for that vehicle will be 

divided on the basis of total planned revs to the rev 011 which the critical 

event occurred. The contractor will be scored under the incentive 

structure outlined herein for all revs prior to the inconclusive critical 

event and the computed fee dollar value of the revs after the critical event 

will be reallocated evenly to the flights remaining under the instant 

contract. The reallocated fee dollars will be computed on the basis of 

~ ., . the contractor's earned score at the point of the inconlcusive critical 

event projected through to planned mission completion. Thus j the 

occ\lrrence of an inconclusive critical event involving GFE will not reduce 

the fee dollars that can be earned by the contractor. However, to get 

these dolla~s, the contractor must earn them by satisfactory performance 

on subsequent flights. 

(e) In the event of an inconclusive critical event on the last 

flight, the flight will be scored as if the failure were attributed to GFE. 

(f) For purposes of determining the average performance of 

vehicles on flights on which the contractor had an opportunity to perform,. 

for use as outlined in 5d(l) and elsewhere, the performance scores for 

.flights having critical events due to failures of GFE and inconclusive 

failures will be the contractor's earned score up to the point of such 

critical event projected through to planned mission completion •. 

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(3) Flights Out of Specification Limits. A situation may arise 

.. wherein either intentionally due to operational reasons or unintentionally 

due to a system malfunction or personnel error, the vehicle may be 

operated beyond contract specification requirements. If such a situation 

occurs, the following procedures will apply: 

(a) Government decisions to fly out-oi-spec will be given 

by the senior government official in charge of the program at the field 

location where the decision occurs to the senior contractor official , . present. The contractor mayor may not protest by deadline, as follows: 

When the notification is well prior to launch (R) day, deadline will be 

three working days (but not later than R-l). When notification is on R-l 

day, deadline will be within six hours (but not later than local midnight 

on R-l day). When notification is on launch day, de~dline will not be 

later than the start of terminal count. When notific~tion is given during 

flight, the deadline will not be later than the initiatipn of command genera .. 

tion for the commands which will produce the out-of-spec condition. 

,Protest must be in writing; signed, and given to the senior responsible 

program official at the scene, with a copy to the ~ontracting officer. 

(b) If the contractor protests prior to launch and the Government elects to fly out-of-spec anyway, then the performance score for 

that flight will be computed on the basis of the average of all flights' 

flown under the instant contract on which the contractor had an opportunity 

to perfonp, regardles s of the actual performance achieved on the protested 

flight. If the contractor protests during the flight and the Government 

elects to fly out-of-spec anyway, the performance score will ge computed 

under the full incentive provisions outlined herein up to the out-of-spec 

condition and thereafter at either the performance condition just prior to 

out-of-spec flight projected through to completion of the mission, or the 

, average performance defined in par Sd(l), whichever results in the lower 

net perforrra nce score, regardless of the <;I.ctual performance achieved 

after the out-of-spec condition occurs. 

(c) If the contractor does not protest, thm the flight will 

corne under the full incentive provisions outlined herein regardless of 

whether the out-of-spec conditibns cause or contribute to failures. 

(d) The same provisions will 'apply to unintentional out-of-

'''- spec conditions except that notification of the out':'of-spec condition will 

not be required of the Government and the deadline for protes~ will be 

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twelve hours after the occurrence of out -of-spec condition. This 

will provide additional incentive for prompt identification of such 

conditions by the contractor's personnel who assist the Government 

by technical analysis and advice during the conduct of such flights. 

However, if the W1.intentional out-of-spec condition was caused by 

this contractor's personnel or equipment, no protest will be allowed, 

and the flight will be scored W1.der the full incentive structure otherwise described herein. 

(e) For the purpose of determining the average performance 

of vehicles on flights on which the contractor had an opportW1.ity to 

perform, for USe as outlined in par 5d(1) and elsewhere, protested 

flights will not be included, regardless of the actual performance 

attained in any pprtion of such flights." 

(f) Flights on which protest is made wip not be eligible fu-:r 

the additional incentive feature described in par 5d(5) below. for any 

part of the flight. 

(4) Government Option. to Fly After Initial Acceptance. 

Effective with the first satisfactory completion of the initial acceptance 

tests at the laW1.ch base, or the factory, on the basis of which the 

schedule incentive provisions of the contract are coinputed, the perich .. 

mance incentives will become fully effective in the manner outlined 

below: The Government may, at its option, laW1.ch the vehicle in the 

condition in which it may exist at any time after satisfactory completion 

of this test. The Government may, at its option, elect to repair a 

,critical event or deficiency which occurs between completion of this 

test and laW1.ch, in which case such event or deficiency will not be considered in the vehicle performance scoring. However, if the Government 

elects to laW1.ch vehicles with known deficiencies which develop subsequent to satisfactory completion of this tEtst, the contractor will be 

held to the incentive provisions as though these deficiencies had occurred 

in flight on rev one. 

(5) Additional Incentive for In-flight Support 

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(a) In order to provide additional incentive to the contractor's ..... 

effort which supports the Government during the conduct of flights, pro-

-.- vision is made for the possibility of a higher performance score than 

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that which would be computed by the performance formulae with 

respect to critical events. To effect this, the incentive structure will 

therefore contain the following provision: 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 

unilaterally determine and award the contractor the higher score 

(except. that flights on which any protest is filed will not be' eligible 

for this feature). 

(b) Any such change of the performance score computed on 

the basis of critical events will be limited to those cases where the 

contracting officer is able to determine, through the method described 

here. a performance score which is higher than the one computed on 

the basis of critical events. This determination by the: contracting 

officer will be unilateral and is not in any sense intended to be an 

equivalent or alternate scoring method to the computaFon based upon 

critical events. The latter is based upon specifications, and measure:" 

ment and analysis and computation in relation to thes,:e specifications. 

The post-flight determination is not based upon any of these per se; it 

is based on judgment of overall mission results in relation to results 

desired by the Government. While the contracting officer may mak~ 

any calculations he deems appropriate to the circunlstances of each 

mission, to assist him in arriving at a quantitative determination, his 

determination is based solely on his unilateral judgment of the results 

achieved in comparison with the results desired by the Government 

for each particular mis sion and will not be governed by the results of 

any specified calculation. In making this judgment the Contracting 

. Officer will consider all factors that he deems appropriate to each 

individual mission. including all pertinent operational factors, the 

Government's expectations for the missio~, and the actual performance / 

attained by similar vehicles on previous flights, whether or not s,uch 

performance conforms in all respects to the extant vehicle performance 

specifications. Since his determination can only raise the contractor's 

earned performance score, and since it rests on comparison of actual 

mission results with Government desires, it will not be subject to any 

dispute by the contractor. It is intended that the contractor will make 

every effort to attain performance which will permit his score to be 

-determined by the critical event computation rather than being wi lling 

to rely upon the post-flight method. This latter is intended solely as 

added incentive to do everything possible to help the Government 

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salvage as much as possible even though some critical events have 

occurred, through competent and diligent technical analysis, diagnostic 

tests, both in-flight and at the factory, and the devising of in-flight 

work-around pr~cedures and provision of technical advice to enhance 

the degree of Success which may be achieved in spite of the deficiencies 

which have occurred. 

(c) While the sole reason for this 'provision is the added 

incent~ve for diligent and competent support to the Government during 

flight operations, through means described above, the higher score, 

if such is determined to exist as outlined above, will be awarded 

whether or not it is specifically attributable to such in-flight support. 

e. Savings Clauses. The incentive structure also will contain 

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 shaH not be less than zero. 

(2) In the event that any part or parts of the .entire system are 

operating in such a manner that the mission is not ~eing fully accomplished, 

even though no critical event may exist or have occurred in equiprrrent -

supplied by any contractor. the Government will have the option of 

terminating the flight prior to completion of the planned duration. In 

this event, scoring for any contractor not causing the early termination 

, will be scored as if the GFE failure caused the early termination (ie. , 

scored as outlined in par 5d(2) (b). ) 

(3) The planned performance used in the performance computations based upon the critical event list (outlined in par 5a and par 7b) 

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

(4) A further savings provision will apply, although not specifically 

as a contract savings clause: Whenev'er the incentive structure outlined 

herein is incorporated into a contract under which work is being done. it . 

is applicable only to equipment not yet fabricated as a system and tested 

at the time of its contractual effectivity. It is not acceptable as a 

gamble in any sense, nor as an expression of the contractorls confidence 

- in his product. There must be the opportunity, as well as the interest, 

to "get the word to the bird, II to build in the quality essential to assure 

maximum. performance. 

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6. Changes. 

a. 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. Whil~ 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 change, 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 prqvisions 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 detenn ined by the individual 

performance of each vehicle, less penalties for cost and schedule 

variance. The overall approach pre-detenn ines op.ly the specific' 

relationships of the vehicle performance and cost and schedule 

variances t~ 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 

150/0 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. Accordingly, contract changes that affect the 

performance of a vehicle through ·design change, modification (no matter 

how minor). testing procedures, launch procedures, or operational 

procedures will be under the same performance incentive fee structure 

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as the basic contract. Contract changes which the contracting 

officer determines have no bearing on the performance of a vehicle 

will be negotiated to have such fee as may be equitable for the type 

of effort for which they are issued. 

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

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

below: 

(1) Performance 

(a) The maximum performance fee is described in par 

4a(1) as: 

Maxiqlum Performance ($) 

fee (per vehicle) 

15% target cost 

:: No of vehIcles 

For changes t the additional maximum performance fee t to be 

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

Maximum additional ($) 

Performance Fee 

due to change (Pe r 

vehicle affected) 

= 15% x target cost of change 

No of vehicles affected by 

the change 

This additional increment of maximwn 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. 

(b) All other performance calculations are unaffected by 

the change. The actual fee earned is determined in the same manner 

outlined in par 5a(3). 

Actual fee '($) = Maximum fee ($) x Performance score 

100 

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

in the above equation. This figure reflects only the changes applicable 

to each particular vehicle, and since performance is the only method 

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. by which any fee can be earned, computation in this simple manner 

completely precludes subsequent changes affecting the fee paid for 

previous flights. 

(2) Cost 

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

incentive structure of the basic contract, in both sharing ratios and 

maximum fee penalties. 

• 

(b) To insure early definitization of changes, a limit of 40% 

is placed on the percentage of the cost of the change which may be incurred prior to submission of the contractor's cost proposal in accord .. 

ance with the changes clause. The cost proposal must be submitted 

prior to incurring costs beyond this limit in order for tl}'e same terms 

as the basic contract to be applicable to the change. Otperwise an 

. equitable adjustment will be negotiated on an individual 'basis. 

, 

(3) Schedule. The effect of changes upon schedhles is taken 

1:)0 into account when change s 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 incen'tive 

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 

(pe r vehicle) 

= o. 5% x target cost of change 

No. of vehicles affected by the change 

7. Variations. The overall incentive approach described above m~y 

be varied in implementation without changing the basic philosophy. 

The following examples illustrate such variation. 

a. Variation in target fee. A,S noted in paragraph 5a(5), the 

terms "target fee" and "par" are only figures of speech in this 

incentive structure, since under the formulae described the same 

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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; how .. 

ever, 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 in .. 

centive approach. 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% performanf!!e. In all cases, 

however, the maximum remains 15% and the minimum is zero. 

b. Negative Performance Incentive. 

(1) 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. Tlfis requires no 

change in the formulae previously described. Theiperiormance 

score is computed exactly as described in paragraph 5, and the 

actual fee is also computed in the same manner previously 

described: 

Actual fee $ :: Maximum fee x perf score 

(which is also lOO' 

now the "target") 

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

flight. as shown. This method requires the full 150/0 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 5. 

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 .:t 7.5% fee swing over the 

50%-100% performance region previously discussed, then the manager.1.ent can refer to this work as "meeting par, and, in addition, earning 

1. 5% extra fee for the company. II If the same incentive formula is 

described as 15% target fee, with a -15% fee swing over the same perfonnance region, then the management can 'refer to the same work as 

"costing the company 6% penalty for performance deficiencies." The 

,Ref No. SP142866 

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"'d 

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money paid is' the same j this method offers, at no cost, additional 

psychological assistance in insuring that the "word gets to the bird ". 

(2) An alternate method of computing this variation, which 

produces identical results, is to employ penalty points, as follows. 

A possible total of 100 points is assigned to each vehicle. Since 

performance incentive assessment can only be a reduction in fee, 

point determination results in penalties for vehicle performance less 

than 100 per cent success. Therefore penalty points will range from 

o for completely satisfactory performance to 50 for maximum fee 

penalty. Fee will be 150/0 for a net performance score of 100, 7.50/'0 

for a net score of 750/0 and 0 for a net score Qf 50. Penalty points will 

be determined as follows: 

Penalty points = a (lOO} 

P 

Where: a::::: number of satisfactory revs (as 4efined in par 4b) .. ' 

p = number of planned revs 

and net performance score = 100 penalty points or 

Net score = 100 _ ~ (100) . P 

(3) If the penalty point method is used, thiS! variation in 

performance scoring may be illustrated as follows,: 

15 _--------------------:----..." 

Q)7.5 __ _ Q) 

Q) 

- r.z. 

~ 

O~ __________________ ~~--------~~------~ 

o 50 75 

Per cent of planned mission satisfactorily (par 4b) completed 

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(4) When using this all-negative performance incentive, 

the matter of fee payment will be handled as follows: 

(a) The Government will make monthly fee payment to 

the contractor. The fee payments will be based upon the contracting 

officer's determination of percentage of completion of work applied 

to an am,oWlt which constitutes 8% of the' target cost. Upon completion 

of the first unit through Systems Test, the value of 8% above will 

increase to a cumulative of 15% based on percentage of completion 

of work and including full fee for performance of the first flight 

article. Thereafter, fee payment will continue at 15% based on 

percentage of work completed, subject to adjustment by the amount 

of any fee lost for flight and schedule incentives. 

(b) Notification of ,the performance incentive penalty, if 

any, will be given the contractor in writing after reviewing his 

analysis of each flight. Based upon the vehicle fee lost, the contractor 

will reimburse the Government for incentive fee ~djustment concurrent 

with target fee billings. 

c. Minimum Acceptable Performance. The minimum acceptable 

performance point may be set at a value higher than the 50% discusj:led 

, in paragraph 5, with the full 0-15% fee distributed ;over the redu'Ced 

performance range 1;>etween this point and 100%. This variation is 

particularly well suited for repetitive buys of reas'onably mature: 

systems, instead of reducing t;he fee structure; it counters the 

reduction in risk without reducing the emphasis on continued 

maximum performance. 

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 5, 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 maximum fee which can be lost and the maximum 

fee that can be earned through performance must be kept such that 

the emphasis is never taken off the necessity of attaining and main .. 

" - taining maximum performance in, orbit. 

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e. Applications 

(1) Although the typical illustrations 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. 

(2) An obvious difference between applications will be the 

makeup of the critical event list, which will differ considerably 

between, say, a vehicle contract and a payload contract. Yet, with 

this difference, which simply results from foHowing the definition of 

this list given in par 4a, the aPRroach outlined he rein is applicable to 

all contractors involved in such projects, including integrating 

contractors. 

8. Projects with Long Lifetimes on Orbit 

a. While the cost, schedule and other provisions of the structure 

outlined in the previous paragraphs are applicable to any type of satellite 

project, a further variation in the manner of performance scoring is 

desirable for projects of long lifetimes, considered here to be lifetimes 

in excess of one month on orbit. This variation in performance scoring 

includes limiting the definition of satisfactory performance to that of 

par 4b(2) (i. e •• revs where no critical event existed). In addition, a 

different structure is use'd for determining the performance fee earned 

throughout the flight. as is explained in the following subparagraphs 

for the case of vehicles with a planned lifetime of six months. 

b. The fee structure for the se long life satellites is based on 

allowing the initiation of fee earning only after an "infant mortality" 

period, and increasing the rate at which fee may be earned as the flight 

progresses, with the last month of the planned mission being the most 

valuable month~ The maximum rates at which fee may be earned are 

illustrated in Figure 1. 

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I . 

15 

11 

3 

o 

20th 

day.,.. 

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.ngure 1 

2 3 4 

Months on Orbit 

5 6 

Specifically, until the twentieth calendar day on orbit the contractor can 

earn no fee. On this day he can earn a maximum of 30/0 fee (on the ta t'get 

cost applicable to that vehicle on the day of launch) providing that the 

vehicle performance at that time is ,fully satisfactory (i. e., no critical 

events exist). No further fee can be earned until completion of the first 

month. After the completion of the first month, the maximum fee that 

can be earned is increased at a linear rate (2. O%/month) that will reach 

a cumulative total of 11 % at the completion of the n,ext to last month. 

During the last month, the maximum fee that can be earned is increased 

at a linear rate (40/0/month) that will reach a cumulative total of 150/0 at 

the completion of the last month. No fee can be earned after the lSOth f:. 

day (last). 

-

o 

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c. The above description, illustrated in Figu re 1, outlines the 

maximwn % fee that can be earned if no critical events occur. The 

actual % fee that is earned is computed for each day on orbit, with 

the maximwn % fee reduced by the proportion (by whole revs) of 

that day during which the vehicle ~ rformance was not satisfactory, 

(as defined in par 4b(2). The cwnulative % fee earned by the vehicle 

is the swn of the % fee earned on each day. These calculations are 

illustrated, below 'for the flight illustrated in Figure 1 for all days 

after completion of the first month: 

Actual fee 

earned per 

given day (0/0) 

:: (;~r~~::hmonth\ (~_!~ (~\ (from Fig 1) ) ~ \P) l ""V""" V~ 

(where a=satisfactory 

revs and p=total 

revs for that day) 

maximwn possible Reduction for unsatisfactory 

fee for that day performance that day , 

Then, the actual % fee earned in a given month or on a given flight is 

the sum of the actual fee earned on each day of the period in question, 

with each day computed as above. (The actual fee earned on the twentieth 

day is computed in the same manner, and this fee thert covers the « 

entire first month) •. 

d. The performance fee dollars are then computed as follows, 

depending upon the type of incentive swing employed: 

(1) If the target fee with.±. swing is used, then 

Fee dollars earned ,~ (actual fee earned) X (target cost appli- \ 

for the flight \by the flight ) \cable to that flight) 

(2) If the all-negative swing method is used, then the performance 

account is balanced at the end of each month of the flight, and the 

contractor will invoice the Government for fee VIh ich must be returned 

due to less than 1000/0 performance, as pr eviously described. The amouht 

due at the end of each month is computed as follows: 

Fee dollars to 

be returned for 

the month 

Page 24 of 29 Pages 

f(Maximwn possibl~ :: ~fee for that month)-

(actual fee earn~x~arget cost] ~or the month applicable 

, 0 that fli gh 

Ref No. SP142866 

Revised 2/28/67 

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e. Long lifetime sy stems do not afford a reasonable chance to 

develop a significant average performance of flights having an 

opportunity to perform, both due to the long flight lifetime and the 

long time between individual launches. For these and other reasons, 

these flights tend to be somewhat independent even though covered 

under a common contract. Therefore, the "average performance score 

of all vehicles on all flights flown under the instant contract on which 

, this cootrador did have an opportunity to perform, " described in par 5d(1) 

as the b~sis of scoring whenever the contractor has no opportunity to 

perform, is not applicable to the long lifetime system. Instead of 

using this average, cases where the contractor has no opportunity to 

perform, and all other caseS previously described in which the average 

is employed (par 5d(2)(b), (e), (g), and 5d(3)(b», will instead be scored 

by use of the "no-fault" rate as described in the folloW. ng paragraph. 

(i. e., in addition to the specific examples described below. the no-fault 

rate will be substituted in similar manner for previously described 

cases where the average performance of par 5d(1) was used.) I 

f. A linear rate equivalent to rising from 30/0 fee at the completion 

of the first month to 90/0 at the end of the last montli (1.20/0 per month) 

is defined as the no-fault rate. ani illustrated in figure 2. If, at 

any time, any contractor is pr ecluded from prope'r fee ea'rning operation 

through no fault of his own, he will earn fee for that day at the no-faUlt 

rate. If. through no fault of hi~ own. the contraGtor is precluded from r . 

earning any fee on performance during the flight'he will be credited 

with 90/0 fee. If he has already earned the first 30/0 but has not c'omplet~d 

30 calendar days J he will be credited with 90/0 fee. If the contractor 

has earned more than 30/0 fee. his final fee vi 11 be the sum of what he 

has earned plus that which he will be credited with for the remainder 

of the first 180 calendar days at the no-fault rate. For example, 

suppose that the contractor has earned 70/0 fee in 95 days on orbit. He 

will then be credited with additional fee of I i 80-95) (1 2(Jf) 0 3 4(Jf \ 30 • _/0 r ·fO 

for a total of 10.40/0 fee. However. in no event will the contractor be 

credited with any fee not earned if at any time it is determined that he 

could not earn this fee if other associate contra,ctors were performing 

properly • 

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Figure 2' 

15 

11 

20th 

o ~ day~ ____ ~ __ ~ ______ ~~ ______ ~ ________ -+ ________ ~ ______ ~ 

o 1 Z 

Page 26 of 29 Pages 

MONTHS ON ORBIT 

Rf'f No. SP142866 

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..... 
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........ I1.l 

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Approved for Release: 2018/02/01 C05101948 

g. However, the provisions of subparagraph 8f notwithstanding, if 

at any time any contractor is precluded from earning performance 

fee through no fault of his own and he has been performing in a manner 

that would result in a performance fee earning rate less than the nofault when performance is calculated on the same basis used between 

the end of the first month and the end of the next to the last month, 

he will be credited with a perionnance fee hased on extendi:o.g tha.t 

perfonnance rate from 30 days, or such later date as the event may 

occl,lr, to 180 days. 

h. The effect of higher risk in the initial flights of new projects 

is taken into account by varying the maximum ea1"ning rates of these 

flights as illustrated in Figure 3. 

15 Figure 3 

11 .. " :: 

9 

3 

20th 

o da 

o 1 2 3 4 

MONTHS ON ORBIT 

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The computation of the % performance fee that can be earned by all 

vehicles during the first month is the same, as already described. 

After the completion of the first month the maximum % fee may be 

earned at the linear rate determined by a straight line drawn from 

".. 3% at the end of the first month to 11 % fee at the completion of the 

third month. No fee will be earned during the fourth and fifth months. 

During the last month fee earning will be the same for all vehicles, as 

previously outlined above. The second vehicle of a new s~ries may 

earn maXimum % fee after the first month at a linear rate determined 

by a straight line drawn from 3% at the end of the first month to 11 % 

at the end of the fourth month, with no fee earning possible in the fifth 

month. 

9. Contracting Procedures. Several points related to the contract, 

its negotiation, and its implementation at the contractor's plant are 

fundamental to the overall incentive approach outlined herein: 

a. In negotiating the contract, the entire inc(lntive structure 

should be agreed to prior to beginning any other aspects of the 

negotiation. If necessary, higher level management should be brought 

in to settle this matter before proceeding. The negotiation should then 

proceed on the basis of defining and agreeing to the work necessary. to 

achieve the desired capability and the identification and justification of 

the costs involved, all in full realization of the incentive structure which 

will apply. The only. difference between this initially agreed to incentive 

exhibit and the final incentive exhibit of the negotiated contract will be: 

(1) The initial exhibit will not have the detailed list of critical 

events nor allowable quantitative ranges. However, the content of 

this list is clear, since the items will all be taken from or be consistent 

with the vehicle contract requirements and technical specification. 

There is no valid basis for objecting to putting anything on the critical 

event list which meets the definition of this list in par 4a. Therefore 

this degree of incompleteness which necessarily will exist at the start 

of negotiations should have no bearing upon ability to reach full agree .. 

ment on the incentive exhibit at the outset. 

(2) The initial exhibit will be written in terms of percent of 

applicable target cost, whereas the final exhibit will be written in 

terms o{dollar amounts that have been obtained by applying these 

percentage figures to the subsequently agreed target costs. 

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b. To be effective, the basic incentive structure must be 

simple, even though it is necessary in the contract exhibit to 

address the major contingencies and allowable options as previously discussed. If the basic incentive structure is not simple 

it will not readily be grasped by the many people at all levels of 

the contractor's plant whose work affects the chance c::f. success, 

If they don't understand it. they will not do anything differently because of the incentive structure. If they do not, the incentive 

contract will have failed to achieve its fundamental purpose. In 

the finai analysis, far more actual incentive can be realized by 

a simple structure than a compiex structure, even if some subtle 

points and centingencies must be emitted in order to attain a 

simple structure. 

c. The entire incentive. approach preswnes that the contractor 

will take specific internal implementing action. This should include 

a clear explanation ef the essential features of the' incentive structure 

to. all who. work in any manner on the vehicle, with the explanation 

specifically keyed to. the manner in which the work of each ene can 

affect the fee which can be realized by the company. It should also 

include seme tangible internal management actia"ns which place an 

additional incentive on the werk quality wherever feasible. And it 

certainly centemplates in all cases that the contractor is net simply' 

being effered a higher fee for potential success as compensation 

for accepting a lower fee fer potential failure, but that he will, because of this structure, devote better and more dlreful managerial 

attention and even selectively spend some of this potentially higher 

fee where necessary to. assure maximwn expectation ef the highest 

level of success and cerresponding net return. 

10. Summary. The incentive structure described herein'is fully 

consistent with the basic objectives of ince:ntive contracting and 

meets the ebjectives outlined in paragraphs 1 and 2. It is flexibl~ 

and adaptable to. all major aspects of complex satellite projects. 

It provides maximum incentive to attain and maintain the highest 

levels of performance, on a continuing, scheduled basis, yet it 

retairis firm financial control through substantial penalty provisions 

fer everruns. and a reasonable penalty provision for schedule 

variance. The centractor has the opportunity and the incentive to. 

make the maximmn fee; the government has increased probability 

of getting the best pessible perfermance at the contracted price, 

under conditiens which are fully cemp?-tible with prompt response 

to contract changes. 

Page 29 of 29 Pages 

. . 

Ref No. SP142866 

Revised 2/28/67 

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Approved for Release: 2018/02/01 C05101948 

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