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l111111111111111111111)~1!~1\~~l~III 111111111111111111 

A SPECIALIZED INCENTIVE CONTRACT STRUCTURE 

FOR SATELLITE PROJECTS 

Page 1 of 41 Pages c 

John L. Martin, Jr. 

Major General, USAF 

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Ref No. SP142866 

Revised 4/ 18 / 69 
.. 

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A Specialized Incentive Contract Structure for Satellite Projects 

INDEX 

Subject 

1. Introduction 

2. Objectives 

3. Overall Approach 

4. Basis of Performance Determination 

a. "Critical Event" List 

b. "Critical Event 11 Weight 

c. Definition of Satisfactory Performance 

d. Redundancy 

e. Overriding Events 

5. Incentive Structure 

a. Perfonnance 

b. 

(1) Performance Score 

(2) Applicable Fee 

(3) Fee -Earned 

Cost 

3 

3 

5 

6 

6 

7 

7 

8 

8 

8 

8 

8 

9 

10 

11 

c. Schedule 12. 

d. Target Fee 12 

e. Fee Payment l 3 

f. Penalty Payment 14 

g. Contract Changes 14 

h. Contingency Provisions 1 7 

(l) No Opportunity to Perform l 7 

(2) Effect of Government Furnished Equipment Failures 18 

(3} Flights out of Specification Limits 19 

(4) Government Option to Fly After Initial Acceptance 21 

(5) Additional Incentive for In-Flight Support 2.1 

i. Additional Provisions 2.3 

6. Variations 23 

7. Projects with Long Orbital Lifetimes 29 

8. Application to Satellite Mission Software 34 

9. Implementation 39 

10. Summary 40 

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Ref No. SP142866 

Revised 4/18/69 
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A SPECIALIZED INCENTIVE CONTRACT STRUCTURE 

FOR SATELLITE PROJECTS 

1. Introduction 

a. 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 maximum 

incentive upon the achievement of acceptable flight performance while 

simultaneously insuring responsible financial and schedule management. 

The plan is de scribed "initially as it applies to contracts for satellite 

vehicles, but it is equally applicable to payloads, boosters, and other 

aspects of satellite projects, as is outlined later in paragraph 6. The 

application of this incentive approach to non-flying end items is outlined 

in paragraph 8, for the case of satellite mission software. This incentive 

structure is intended for satellite projects for which prompt contractor 

response is essential, which, together with other circumstances, dictate 

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

b. It should be understood at the outset that this document is a 

description of the overall incentive approach, its principal provisions 

and features, and its underlying philosophy. It is not a contract exhibit, 

nor does it contain the complete aspects of the specific incentive structure 

for any particular project. It is based upon the approach actually used in 

a variety of projects, altered in some instances to reflect current perspective after several years of such experience. Taken as a whole, it serves 

as a guide both as to the general incentive approach to major.characteristics 

of different kinds of satellite projects, and to the way essential contingencies 

are handled in order to preserve the full effectiveness of the incentive 

features while providing the necessary operating flexibility for the government and a fair and reasonable consideration for the contractor. 

2. Objectives. Although this specialize.cl approach is well suited to the 

general requirements of all satellite projects, it is particularly addressed 

') 

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to certain additional characteristics of some satellite projects. 

a. While the achievement of satisfactory orbital performance is 

desired in all satellite projects, 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 governm_ent for failure to obtain the desired results from the scheduled flight. 

It is therefore essential that the incentive structure of such contracts be 

de signed 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 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. 'I'he 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 0£ a complex satellite project with 

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

dollars or more per flight. For those which fly less frequently, the cost 

is substantially higher. Yet the entire sa telli.te 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. No cost saving by any means is an acceptable 

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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 inc en ti ve 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 performance. In order to have the 

desired effect, the "word must get to the bird" - - the 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 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 measurable 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 11word gets to the bird, 11 for these criteria. have tangible 

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

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

which pre-determine 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 t.m.t otherwise earned. (No 

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additional fee is paid for underruns, since any fee so paid would necessarily reduce the maximum fee which could be paid for performance and 

would to some extent emphasize cost reduction at the expense of maxi1num emphasis on performance. The complete specified performance 

within contracted costs is the financial goal, not some reduced level of 

performance at lower cost. If such lower performance is in fact ,• 

acceptable, it should be the performance specified in the contract.) 

d. 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. 

e. The achivement 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. 

f. 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 subsequent flight to be one hundred percent successful. 

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

and 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 these objectives, so that schedules and costs are controlled 

effectively, but do not become dominant over, or in any manner counterbalance, poor orbital performance. 

h. The incentive structure must be such that the government is free 

to use the satellite system without becoming entangled in complicated 

interactions with the contractor's fee structure. This flexibility is 

imperative. At the same time, it must be provided in such a way that 

the contractor is afforded a reasonable opportunity to earn t};le full fee 

provided under the terms of the contract. 

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 

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reference for determining satisfactory revs, a specific list of 

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

list is based upon the contract requirements and technical specifications and includes all malfunctions of equipment provided by this 

contractor, which, if they occur during flight, will probably cause 

degradation to the designed 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 ranges 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 l 00% 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. "Critical Event" Weights. All "critical events 11 are assigned 

numerical weights in proportion to the seriousness of their occurrence 

on the planned mission capability, in increments of one tenth or more, 

ranging from as low as zero for serious degradation to as much as 

nine tenths for minor)oss. In a system with a single mission, all 

events which· cause serious mission degradation are weighted as zero. 

A satellite vehicle typically has all, or nearly all, of its "critical 

events II weighted as zero. The payload in a single payload system 

typically has most of its "critical events 11 weighted as zero, except for a 

few which cause degraded but still quite usable mission performance. 

In the case of a multi-payload mission where the payloads are provided 

by a single contractor, the "critical _events II of each payload are weighted 

with the minimum value corresponding to the relative importance of 

loss of the individual payload to the multi-payload mission (instead of 

zero, as is the case for a· single payload mission). Weights above this 

minimum value but less than unity are assigned as previously described. 

c. Definition of Satisfactory Performance. Satisfactory performance is defined as performance during which no 11 critical event" existed. 

The basic interval of measurement is an entire rev; a 11 critical event 11 

is considered to have existed throughout the rev if it existed at any time 

during the rev. The basic unit of measurement is the equivalent 

number of revs completed during which no "critical event 11 existed. 

This is computed by adding the net weights of each rev actually flown, 

where the net weight of a rev on which any "critical event 11 occurred is 

the product of all weights of all 11 critical events II which existed at any 

time during the rev, and the net weight of a rev on which no''c ritical 

event'' occurred is unity. 

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d. Redundancy. Whenever the system design includes a redundant 

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

primary feature constitutes a "critical event" only from the time of its 

occurrence until the backup feature is operating properly. That is, for 

all functions which include redundant means, the 11 critical event" consists 

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

e. Overriding Events. In any case where the contractor's work, 

personnel, or equipment cause total loss of the data, as, for example, a 

personnel error which causes catastrophic termination of the flight, such 

loss is considered an overriding 11 critical event 11 and results in the minimum performance score regardless of performance otherwise attained 

during that flight. 

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

to a satellite vehicle contract includes the following provisions (variations 

to this approach are discussed later in pa;,.agraph 6). 

a. Performance. 

(1) Performance Score. The performance score of each vehicle 

is computed on the basis of the ratio of the number of revs satisfactorily 

completed, as defined in paragraph 4. c. above, to the number of revs 

planned for the mission, where the smallest interval of measurement is 

an entire rev. Actual satisfactory performance equal to that planned earns 

a score of unity, and actual satisfactory performance equal to 50% (or less} 

than that planned earns a score of zero. Satisfactory performance between 

50% and 100% of that planned is scored on a linear basis between zero and 

unity. Thus a median performance score of O. 5 requires actual satisfactory 

performance of 7 5% of that planned. This relationship is expressed in the 

following simple formula by means of which the performance score of each 

vehicle is computed, based upon its individual flight perforn:iance: 

Performance Score (PS) = 2 ( ~ ) - 1 

p 

Where: s = equivalent number of revs satisfactorily completed, 

as defined in paragraph 4. c. 

and 

p = number of revs planned for the flight 

s 

p 

is equal to or greater than 0. 5 {the performance score 

is zero for Oo 5 and all smaller values} 

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This relationship is graphically illustrated below. 

1.0 

o+--------------~---------------1- 0 • 5 • 75 

Ratio of satisfactory revs to planned revs 

( ~} 

p 

1.0 

(2} Applicable Fee. As noted previously, satisfactory 

performance is the only way in which 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 for 

cost type contracts, that is, 15% of the target cost of the contract. The 

maximum fee that can be earned by each vehicle is defined as the applicable 

fee for that vehicle, and is computed initially ~~ as: 

15% X target cost 

Applicable performance fee ($) = (per vehicle) number of vehicles 

):~ see paragraph 5. g. for effect of contract changes on applicable fee .. 

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(l) 

(l) 

l:<-t 

0 

3 

7.5 

12 

15 

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(3) Fee Earned. The actual fee earned by each vehicle is 

computed by multiplying its applicable fee by its performance score. 

Fee earned::: Performance Score X Applicable Fee 

This may be expressed fn terms of satisfactory revs by substituting the 

formula for the performance score: 

Fee earned == Applicable fee X ~ ( i- ) -~ 

Similarly, the fee lost due to less than completely satisfactory 

performance may be expressed as the applicable fee less the fee earned, 

which reduces to: 

Fee lost ::: _Applicable fee X ( 1 - ;] 

These relationships are graphically illustrated •below, for the case where 

the applicable fee is 15%. 

(l) 

(l) 

μ; 

1514-- - -& - 12-,E--- - - (1)' -

H 

0 

u 

(/) 

(1) 

g - .,.5<:"' - - - - - - - - - ro 

s 

H 

0 

..... 

H 

~ - • 2·· +- - ~ - - - - - - -

0 • 5 

.., -

I. 

. 6 .75 . 9 l. 0 

Ratio of Satisfactory revs tcr planned revs 

{ ~) 

p 

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b. Cost 

(1) To achieve the necessary financial management under the 

terms outlined previously, the contract provides for penalties for overruns, 

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

To maintain the de sired balance between performance and cost, as 

described previously, the maximum cost 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% wouid 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 summary, the -contractor 

shares overruns at 80/20 up to 22. 5% overrun, then at 70/30 up to an 

additional! 5% overrun; he is liable for overrun fee penalties up to a total 

overrun of 3 7. 5%, and he can lose up to 9% of the tar get cost in such fee 

penalties, all of which must come from fees earned on the basis of the 

performance criteria previously discussed. 

(3} While percentage figures are used in the negotiation of the 

contract, and in explanations of the incentive fee structure, they are not 

used in listing the cost penalties in the contract, except as noted below 

when referring to final target cost. The percentages of penalizable overrun 

and corresponding fee penalties are all converted to specific dollar values, 

and a table of these values is included in the contract, as illustrated below: 

$ Amount of Overrun 

$xxx 

$xxx 

$xxx 

$ Amount of Penalty 

$yyy 

$yyy 

$yyy 

The table concludes with the following statement: "Any amount of 

overrun between the last amount shown in the above table and 37. 5% of the 

final target cost will be penalized at the maximum sharing ratio (i.e. , 

70/30 in the example discussed herein} up to a cumulative fee penalty of 

9% of the final target cost." This provision insures that the subsequent 

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increase in target cost by addition of contract changes will not change the 

penalties for cost overruns from the values established in the original 

contract, yet it provides for extending the fee penalty up to the full r3:nge 

represented by the increase in the target cost over the original contract 

figure. 

{4) 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, so the co st 

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 incentive to exert close financial control, 

since loss of such control even near the end of the contract can 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 insure full attention to the short term schedule 

of each vehicle, that is, the period near its scheduled delivery date, a 

maximum schedule penalty is set at 0. 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 schedule, up 

to the total pro-rated amount allocated to that vehicle. The long term 

schedule incentive is automatically covered under the negative cost incentive, 

for large schedule slips obviously will cause increases in program costs. 

{2) The basis of delivery is specified as the completion of a 

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

electrically mated systems performance test, conducted prior to shipment 

to the launch base. 

d. Target Fee. 

To provide maximum emphasis that 100% performance is expected, 

and to provide maximum incentive to the contractor's internal management 

structure to achieve this performance, the target fee is defined as the 

maximum fee, par performance as performance with no "critical events", 

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and all accounting carried out on a penalty basis. The "target 11 fee is 

thus reduced by the penalties incurred on the schedule and flight performance of each vehicle, in addition to cost penalties on the entire 

contract. This method requires the full l 5% fee to be put on the initial 

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

as the conventional equal swing from a median target fee. 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% - l 00% performance region previously discussed, then the management 

obviously will consider this work as "meeting par, and, in addition, 

earning 1. 5% extra fee for the company. n If the same incentive formula 

is described as l 5% target fee, with a -15% fee swing over the same 

performance region, then the management must consider the same work 

as 11 costing the company 6% penalty for performance deficiencies. " The 

money paid is the same, but this method offers additional assistance in 

insuring that the "word gets to the bird". Its advantage is more than 

psychological, for it forces the contractor's management to account on a 

loss basis for all performance which is' in any manner unsatisfactory. 

e. Fee Payment 

The government makes monthly fee payment to the contractor. 

Initially, the fee payments are based upon the contracting officer's 

determination of percentage of completion of work applied to an amount 

which constitutes 8% of the target cost. Upon completion of each flight 

vehicle through Systems Test, the value of 8% is increased to a cumulative 

amount representing the entire fee applicable to that vehicle; i.e., the 

maximum that it could earn for l 00% satisfactory flight performance. 

Payment of the maximum.attainable fee applicable to the individual vehicle 

prior to validation of its earning by flight performance reinforces the 

expectation of complete success and provides essential additional incentive 

to the contractor's management since any of this fee that is not earned 

must be repaid to the government. The time when this full individual 

vehicle fee is paid is selected to meet the following criteria: it must be 

sufficiently in advance of the flight to insure that the money will be fully 

accounted for in the internal accounts of the company, but not further 

in advance than is necessary to assure that this action will have been 

completed prior to the flight. Thus, for a vehicle contract, this fee is 

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paid at the time the vehicle completes Systems Test, which is normally 

less than two months prior to flight. 

£. Penalty Payment 

Upon writte·n ~emand by the contracting officer, as soon as the 

results of each flight have been analyzed by the government, the full 

amount of any fee lost due to schedule and performance penalties must 

be paid to the government in cash. No form of credit to future contractor 

billings is acceptable; each payment must be in the form of a check 

presented by the contractor to the contracting officer, made payable to 

the Treasurer of the United States and supported by a credit fee voucher. >'.c 

In this way it necessarily reflects an actual loss to the internal company 

management and not merely an adjusted fee. Internal management echelons 

are automatfoally alerted to the actual outflow of company cash because of 

failure to meet target performance. This insures additional managerial 

attention toward keeping this outflow to a minimum. Settlement of cost 

penalties must necessarily await completion of the contract, since the 

cost penalties apply to the entire contract and are not pro-rated to 

individual vehicles. 

g. Contract Changes 

(1) 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,. 

* Contracts implementing this incentive fee structure normally 

cover a number of satellite flights and are normally incrementally funded. 

Contract obligations on current contracts are generally well below the 

contract face value (even with foll payment of individual flight fees as 

herein described). Therefore, it is not usually necessary to de-obligate 

any funds when penalty payments are received. Government accounting 

records reflect the collection as an "Appropriation Refund" (i.e., collection 

of an erroneous disbursement) which is reapplied against current 

requirements •. 

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and, taken out of cm;text 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 i.n the change, and 

also provide opportunity for additional overruns. 

(2) This overall incentive approach pre-determines the specific 

relationships of the vehicle performance and cost and schedule variances 

to the fee but not the fee to be paid. In practice, this fee may be as high 

as l 5%, 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 

de scribed herein for the basic contract .is fully consistent with the overall 

objectives described previously; for complex satellite projects which 

involve frequel)t changes throughout the life of the contract, such inclusion 

is imperative in order to attain these objectives. Accordingly, contract 

changes that affect the performance of a vehicle through de sign change, 

modification (no matter how minor), testing procedures, launch procedures, 

or operational procedures are included under the same performance 

incentive fee structure as the basic contract, Contract changes which the 

contracting officer determines have no bearing on the performance of a 

vehicle are negotiated to have such fee as may be equitable for the type of 

effort for which they are is sued. 

(3) The inclusion of the changes is easily handled by slight 

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

described below: 

(a) Performance 

The applicable performance fee is described m 

paragraph 5. a. (2) as: 

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l 5% X target cost Applicable Performance {$) = _______ _ 

fee (per vehicle} No. of vehicles 

For changes, the additional applicable performance fee, to be 

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

Additional ($) _ 15% X target cost of change 

Applicable performance 

fee due to change {per 

vehicle affected) 

No. of vehicles affected by the 

change 

This additional increment of applicable performance fee is added to 

the applicable 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 applicable performance fee for all vehicles affected 

by the change (but only those affected by the change). All other performance 

calculations are unaffected by the change (except that the change may 

involve changes to the "critical event 11 list for affected vehicles). The 

actual fee earned is determined in the same manner outlined in par 5. a. (3). 

(b) Cost 

The target cost of all changes comes under the full 

incentive structure of the basic contract as previously described, except 

for the effect of the increase in target cost on the possible fee penalty for 

overrun. As explained in paragraph 5. b. (3), the addition of changes does 

not alter the original table of overrun amounts and corresponding amounts 

of penalties. The increase in penalizable overrun due to the increase in 

target cost is penalized at the maximum sharing ratio, up to the full 9% 

of the final target cost. · To insure that these costs are promptly negotiated 

and the changes definitized, 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 accordance with the changes clause of the 

contract. The cost proposal must be submitted prior to incurring costs 

beyond this limit. 

(c) Schedule 

The effect of changes upon schedules is taken into account 

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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, for each vehicle to which the change is applicable, 

there is an additional maximum penalty for schedule variance of: 

Additional maximum penalty = O. 5% X target cost of change 

(per vehicle) No, of vehicles affected by the change 

h. Contingency Provisions. The following additional contract 

provisions are essential aspects of this incentive structure. 

(1) 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 instance, which prevents the satellite vehicle 

contractor from having any chance to perform, then the performance score 

allocated to such flight is awarded after completion of the contract and _is 

equal to the average performance score of all vehicles on all flights flown 

under the instant contract on which this contractor did have an opportunity 

to perform. (It is important in this regard to note that the performance 

fee applicable to each vehicle is paid for work which is mostly done prior 

to the flight, io e. , for building a vehicle that will work properly when 

flown. The flight thus serves to validate the extent to which this work has 

been done. The average performance score attained in flight on all vehicles 

on which the contractor had an opportunity to perform is a reasonable 

measure of the average quality of the contractor Is work, and thus is a 

fair basis for this fee in instances where he has no opportunity to perform. * 

Paying on this basis keeps the incentive motive at the highest possible 

level, since it provides a second reason for the contractor to achieve the 

highest possible performance score on each vehicle: first, because of the 

fee applicable to that vehicle, and second, because the performance of 

that vehicle will affect the average performance score, and consequently 

more of his fee than that applicable to the individual vehicle alone.) 

* Providing there is a reasonable number of flights per year to 

establish such an average. For projects with long orbital lifetime, and 

consequently very infrequent flights, this is handled differently, as is 

explained in paragraph 7. 

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

Equipment failures are generally attributable to Contractor Furnished 

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

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

government program official in charge of the flight makes a final determination as to the cause of ''critical events, 11 i.e. , failures of Contractor 

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

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

contractor is fully responsible under the incentive structure outlined 

herein. 

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

flight is scored under the full incentive provisions outlined herein up to 

the critical event, and thereafter either at the average contractor.performance 

score defined under 5h(l), or at the contractor performance score for the 

flight in question_ at the point of the GFE failure projected through to planned 

mission completion, whichever is less. (If the contractor's performance is 

below his average performance score, this prevents his performance 

being improved by the occurrence of a GFE failure. ) 

(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 is treated as 

though it occurred in CFE. 

(d) If the "critical event" is attributed to GFE built or procured by the contractor, the failure is treated as though it occurred in CFE. 

(e} If the "cr1tical event" is inconclusive as to whether 

caused by failure of CFE or GFE, the flight is scored normally up to the 

occurrence of this critical event, but the contractor's earning· on this 

flight is limited to revs on which no inconclusive "critical events 11 exist. 

The otherwise earnable fee represented by the portion of the flight during 

which inconclusive 11 critical events" exist is reallocated to subsequent 

flights. This allocation is used instead of scoring on the no-opportunityto perform basis for the following reasons. In the no-opportunity-toperform case, it is clear that the contractor is not at fault, so his average 

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performance score is a fair basis for payment, as outlined previously. 

In the inconclusive case, it is not clear that the contractor ie not at fault; 

the very fact that the failure is inconclusive means that he cannot be 

exonerated. Thus there is no basis for paying him any fee for the 

period of flight during which the inconclusive failure existed. Yet, by 

the same token, it is not clear that he is at fault either, and there is no 

basis for depriving him of the opportunity to earn the fee in question, 

which opportunity was a consideration in the original contract. Accordingly, 

settlement of inconclusive "critical events" is handled as follows: If the 

11 critical event 11 is inconclusive as to whether caused by failure of CFE or 

GFE, the flight fee pool for that vehicle is divided on the basis of total 

planned revs to the rev on which the inconclusive''critical event" occurred. 

The contractor is 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''is reallocated evenly 

to the flights remaining un.der the instant contract. The reallocated fee 

dollars are computed on the basis of the contractor's earned score at the 

point of the inconclusive "critical event" projected through to planned 

mission completion. Thus, the occurrence of an inconclusive "critical 

event" involving GFE does not reduce the fee dollars that can be earned 

by the contractor. However, to get these dollars the contractor must 

earn them by satisfactory performance on subsequent flights. 

(f) In the event of an inconclusive "critical event 11 on the last 

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

(g) 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 5h(l) and elsewhere, the performance scores for 

flights having "critical events 11 due to :failures 0£ GFE and inconclusive 

failures are computed on th~ basis of the contractor's earned score up to 

the point of such "critical event 11 projected through to planr:e d mission 

completion. 

(3) Flights Out of Specification Limits. Situations arise wherein 

either intentionally due to operational reasons or unintentionally due to a 

system malfunction or personnel error, the vehicle is operated beyond 

contract specifications. When such a situation occurs, the following 

procedures apply: 

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(a) Government decisions to fly out-of-spec are given by 

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

location where the decision occurs to the senior contractor official 

pre sent. The contractor has the option to protest, by deadline, as 

follows: When the notification is well prior to launch (R) day, deadline 

is three working days (but not later than R-1 ). When notification is on 

R-1 day, deadline is within six hours ( but not later than local midnight 

on R-1 day). When notification is on launch day, deadline is not later 

than the start of terminal count. When notification is given during flight, 

the deadline is not later than the initiation of command generation 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. 

(b) If the contractor protests prior to launch and the government elects to fly out-o!-spec anyway, then the performance sco.re for 

that flight is computed on the basis of the average of all flights flown 

under the insta~t contract on which the contractor had an opportunity to 

perform, regardless of the actual performance achieved on the protested 

flight. If the contractor prate sts during the flight and the government 

elects to fly out-of-spec anyway, the performance score is computed under 

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

and thereafter at either the performanc~ condition just prior to out-of-spec 

flight projected through to completion of the mission, or the average 

performance defined in paragraph 5.h. (1), which ever results in the lower 

net performance score, regardless of the actual performance achieved 

after the out-of-spec condition· occurs. 

(c} If the contractor does not protest, then the flight comes 

under the full incentive provisions outlined herein regardless of whether · 

the out-of-spec conditions cause or contribute to failures. 

(d) The same provisions apply to un1.ntentional out-of-spec 

conditions except that notification of the out-of-spec condition is not 

required of the government and the deadline for protest is twelve hours 

after. the occurre.nce of out-of-spec condition. This provides 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 unintentional out-of-spec 

condition is caused by this contractor's personnel or equipment, no protest 

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is allowed, and the flight is scored under 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 opportunity to 

perform, Jor use as outlined in paragraph 5. h. (1) and elsewhere, protested 

flights are not included, regardless of the actual performance attained in 

any portion of such flights. 

(£) Flights on which any protest is made are not eligible for 

the additional incentive feature described in paragraph 5. h .. (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 launch base, or the factory, on the basis of which 

the schedule incentive provisions of the contract are computed, the 

performance incentives become fully effective in the manner outlined 

below: The government may, at its option, launch 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 11 or defici~ncy which occurs between completion of this test and 

launch, in which case such event or deficiency is not considered in the 

vehicle performance scoring. However, if the government elects to launch 

vehicles with known deficiencies which develop subsequent to satisfactory 

completion of this test, the contractor is held to the incentive provisions 

as though these deficiencies had occurred in flight on rev one. 

(5) Additional Incentive for In-Flight Support 

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

effort which supports the government during the conduct of flights, provision is made for the possibility of a higher performance score than that 

which would be computed by the performance formulae with respect to 

11 critical events". To effect this, the incentive structure provides that 

irrespective of the performance fee computed on the basis of the 11 critical 

event 11 list (as previously described), when the contracting officer is able 

to determine after completion of the flight that the actual degradation of 

performance was less than computed, then he will unilaterally determine 

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and award the contractor the higher score (except that flights on which 

any protest is filed are not eligible for this feature). 

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

the basis of "critical events 11 is limited to those cases where the contracting 

officer is able to deter~ine, through the method described here, a performance score which 1.s higher than the one computed on the basis of 11 critical events'1. This determination by the contracting officer is unilateral and is~ in any sense intended to be an equivalent or alternate 

scoring method to the computation based upon 11 critical events 1

1

• The 

latter is based upon specification, and measurement and analysis and 

computation in relation to these 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 make any calculations he deems appropriate to the circumstances 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 mission and is not governed 

by the results of any specified calculation. In making this judgment the 

Contracting Officer considers all factors that he deems appropriate to 

each individual mission, including all pertinent operational factors, the 

government 1 s expectations for the mission, and the actual performance 

attained by similar vehicles on previous flights, whether or not such 

performance conforms in all respects to the extant vehicle performance 

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

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

mission results with government desires, it is not 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 11 critical event 11 c;omputation rather than being willing to rely upon 

the post-flight method. This latter is intended solely as added incentive 

for the contractor to do everything possible to help the government 

salvage as much as possible even though some "critical events 1' have 

occurred. Through competent and diligent technical analysis, diagnostic 

tests, both in-flight and at the factory, the devising of in-flight workaround procedures and provision of technical advice to enhance the 

degree of success which may be achiev~d in spite of the deficiencies 

which have occurred, the final effect of many ''critical events" on the 

degree of mission success often can be altered substantially. 

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(c) While the sole reason for this prov1s1on is the added 

incentive for diligent and con1petent support to the government during 

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

if such is determined to exist as outlined above, is awarded whether 

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

1. Additional Provisions. The incentive structure also contains 

the following additional provisions: 

(1) The maximum fee under the contract is limited to not more 

than 15%. of the final target cost, and the minimum limited to not less 

than zero (or a lower specified limit). 

(2) The government has the option of terminating the flight 

prior to completion of the planned duration, even though no 11 critical 

event 11 may exist or have occurred. In this event, scoring for any 

contractor not c~using the early termination is scored as if a GFE 

failure caused the early termination (i.e., scored as outlined in par 

5h(2)(b). ). 

(3) The planned performance used in the performance computations based upon the 11 critical event 11 list (outlined in par 5a) does not 

exceed the maximum orbital lifetime called for in the contract. 

(4) Whenever 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 contractor 1 s confidence in his product. 

There must be the opportunity, as well as the interest, to "get the word 

to the bird, 11 to build in the quality essential to assure maximum performance. 

6. Variations. Although the typical illustrations described earlier 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. An obvious difference between applications 

is the makeup of the "critical event 11 list, which differs considerably between, say, a vehicle contract and a payload contract. Yet, with this 

difference, which simply results from following the definition of this list 

given in paragraph 4, the approach outlined herein is applicable to all 

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Ref No. SP142866 

Revised 4/18/69 
0 ....... -'v 

13'2- 0 ..._...,M ,_. +-' (l) (I) 

( 4 

1-i ,.i..; 

u Q) ('j Q) Q) 

~ 

7. 5 

"' 

Approved for Release: 2020/02/07 C05111733 

contractors ihvol ved in such projects, including integrating contractors. 

The follow ng subparagraphs illustrate major ch~racteristics of selected 

variations. 

a. In the case of a project in which data axe to be returned in 

more than one data capsule, the applicable fee for that flight is divided 

in proportion to the relative length of the planned flight which is served 

by each capsule, and each flight period is scored separately in the same 

manner as previously discussed in paragraph Sa. For example, if 15% 

is taken as the fee applicable to the entire flight, and the flight is divided 

into two periods on the basis of two separate data capsules, then the 

performance scoring for all orbital aspects is carried out as previously 

described, but on the basis of the two separate flight periods, each of 

which can earn a maximum of 7. 5% fee, as illustrated in the following 

sketch: 

------- 7.5 --------- 1.0 

~-

-'v Q) - 'v 0 u 'v ,,... J:i 0 Q) H ,.....,,... J:i (l) ('j U) H 

H 0. s .e:. Q) 

('j 0. Q) ..!:1 H 

u 0 (I,) ..!:1 Q) ro 4.; H u Q) H 0 ('j (I,) Q) 

~ - u Q) 

- - 0 ~ U) ------ 0 ------------

Page 24 of 41 Pages 

j-c.---First Flight 

Period 

~ ,~econd Flight 

Period 

---------------------------------------~ I /1 I 

I 

I 

• 5 1.0 0 

/ 

/ 

• 5 l. 0 

Ratio of satisfactory revs to planned revs 

s ( p) 

(Scored separately for each flight 

period, with planned revs for the 

second period starting at completion 

of planned revs for the first} 

Ref No. SP142866 

Revised 4/ 18/69 

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b. In the case of a project which includes a very critical 

component which is difficult to manufacture repetitively to conform 

exactly with specifications'. but which is quite usable within a close 

range of specifications, the previously described performance 

scoring may be modified to place a specific incentive upon the quality 

of such a component. Th-is is done by modifying the formula for the 

performance score to include .. the term (0. 33 MF+ 0. 67) as a multiplying 

factor, 1. e., 

X [; 33 MF + O.~ 

The modifying factor, MF, is determined on the basis of the 

individual acceptance test of each of these critical components, in 

accordance with the sketch below: 

1. 5 

0 

Minirti <'.:-Worse S pec1 'ft 1cation. . B etter 

Acceptance 

Page 25 of 41 Pages 

Value 

ACCEPTANCE TEST MEASUREMENT 

OF QUALITY 

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Revised 4/18/69 

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.. 

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As can be seen from the sketch, and the modified performance score 

formula, the effect of the modifying factor is to alter the performance 

score only when the acceptance test measurement of quality is below or 

above the specification value; when MF = 1, the performance score formula 

is the same as previously described. If the acceptance test measurement 

is below specification, .the otherwise earned orbital performance score is 

lowered proportionately, down to a maximum reduction of a third of the 

possible score. This balance insures a realistic penalty for belowspe,cification quality while still keeping an effective incentive for a completely 

successful flight. It is also possible for the modifying factor, MF, to 

exceed a value of unity for any unit which exceeds the specified quality. 

This has the effect of compensating for the occurrence of some critical 

events, and thus provides incentive to exceed the specified manufacturing 

quality. The modifier is not used in the computation of the contractor's 

average performance score which is used in no-opportunity-to-perform 

and other cases previously described. However, in the scoring of noopportunity-to-perform cases, the modifier for the particular flight in 

question is use-d, with this average score, in determining the performance 

score forthat flight. It should be noted that the use of this modifier 

technique does not alter the fundamental principle that the only way any 

fee can be earned is in flight, in the latter part, as previously described. 

c. In the case of a critical component which is not necessarily 

unusually difficult to manufacture but which must function properly throughout an extended period of ground use prior to flight, the same modifier 

technique may be used as described above, with only the determination of 

the modifier, MF, adapted to the particular component. As an example, 

consider a complex flight command system which is also used in extensive 

ground testing of the satellite vehicle and payload in the system level tests 

conducted before any of the hardware is shipped to the launch base. Time 

lost in system tests due to malfunctioning of such a command system 

during these tests seriously affects the entire flow of system flight hardware and impacts all other contracts involved in the entire satellite system. 

Command system malfunctioning during such system level tests often 

requires that the entire test be repeated, in addition to the time lost in 

identifying and correcting the malfunction. In such a case, the modifier, 

MF, is determined on the following basis and used in the computation of 

the performance score of each individual flight as previously described. 

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DAYS LOST DUE TO MALFUNCTIONS 

1.5 

,_, 

0 

.;.., 

u 

rd 

l. 0 {:-----------------

~ 

bl)~ 

.s ~ ::,..,-

'-H 

0 

1

1' "=- More 

Maximum 

Acceptable 

Number 

11' 

Specified 

Allowable 

Number 

Less-> 

d. In the case of satellite system elements which have a specific 

function to be accomplished that is essentially either satisfactory or 

unsatisfactory, the computation of performance score is not made on 

a rev basis, but is computed on a complete success or complete failure 

basis. Thus, a data capsule either is de-orbited into a recovery zone 

within specified boundaries, or it is not, and it earns or loses its full 

applicable fee accordingly. Similarly1 a booster either launches its 

payload into a specified space boundary within specified velocity tolerances, 

or it does not, and either earns or loses its full applicable fee accordingly. 

Other aspects of the basic incentive structure, such as use of the contractor's· 

average performance score in cases of no-opportunity-to-perform, GFE 

failures, etc. apply as previously discussed. 

e. In the case of satellite systems which employ more than one 

satellite in orbit in some related manner 1 the same performance scoring 

on a rev basis and on a go-no go basis, as applicable, is used with a 

further variation concerning the proportion of the contract fee that can 

be earned by each satellite. The total fee is not divided equally between 

each satellite, but is proportioned in accordance with the relative 

importance of the success of each launch. For example, if the complete 

system involves two satellites, success on the first launch is relatively 

more important than success on the second, since it allows a chance at 

earlier validation of the complete satellite system and earlier identification 

of corrective work which may be required. A failure of, say1 the booster 

on the first launch totally precludes any checkout of the satellite vehicle or 

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payload until the next launch, which may be some months later, and thus 

sequentially postpones the discovery of corrective work which may be 

required. Other factors concerning the di vision of the applicable fee 

include the relative worth of particular combinations of operating satellites 

in multi-satellite system configurations. 

f. In the case of follow-on buys of on-going systems, the maximum 

fee that can be earned is held at the 15% level, in order to keep the " 

contractor's incentive at the maximum, and compensating steps are taken 

in other ways to tighten the management proportionate to the relative 

reduction in risk associated with increased system maturity. The following 

variations address this objective without changing the basic philosophy of 

this incentive structure: 

(1) The minimum possible fee may be set at a value less than 

zero. This variation could be appropriate for folow-on buys of very 

mature vehicles. It is preferable to reducing the maximum fee in such 

cases, since it keeps the incentive for continued top performance at a 

higher level. Under such presumed conditions of low risk, it is not 

unreasonable to impose a "below zero" profit possibility for unsatisfactory 

performance. 

(2) The minimum acceptable performance point may be set at a 

value higher than the 50% discussed in paragraph 5, with the full O - 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 or incentive 

on continued maximum performance. 

(3) The cost sharing ratios may be varied with the risks as sociated with the individual project. For instance, the initial sharing of 

80/20, as discussed in paragraph 5, may be set at 90/10 for the initial 

buy of a complex new project, with appropriate progressive increases; in 

follow-on contracts the initial sharing 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 maintaining maximum performance in orbit. 

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7. Projects with Long Orbital Lifetimes 

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

structure outlined in the previous paragraphs are applicable to any type 

of satellite project, a further variation in the m:anner of performance 

scoring is desirable fo:r• projects of long orbital lifetimes, considered 

here to be lifetimes in excess of one or two months and ranging up to a 

few years. In these applications, flights are too infrequent for the average 

performance score to be meaningful. In addition, the much longer period 

of useful life makes it desirable to use a different structure for determining 

the performance fee earned throughout the flight, Except as described in 

the following paragraphs, the other aspects of the overall incentive approach 

apply as previously described. 

b. The fee structure for this type of satellite is based on allowing a 

specified increase in the rate at which the fee may be earned as the flight 

progresses. Initiation of fee earning starts only after an initial period on 

orbit with no fee, so that no fee is paid for "infant mortality". The rate 

is then increased in specific steps, with the last month of the planned 

mission being the most valuable month. This feature insures maximum 

attention to the achievement of the entire mission lifetime as specified in 

the contract. 

c. As an example, the subsequent discussion in this paragraph 

considers the application of this structure to a satellite with a planned 

orbital lifetime of six months. The maximum rates at which fee may be 

earned are illustrated in Figure 1. 

Page 29 of 41 Pages 

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:Ref No. SP142866 

Revised 4/ 18/69 
,......_ 

-,;!2. 

-.μ 

~ 

on 11 ...... 

......, 

'-H 

-OJ 

OJ 

'-H 

OJ 

;> 

...... 

.μ 

(lj 

,-< 

::J 

s 

;j 

u 

s 

::J 3 s ...... 

~ 

(lj 

~ 

0 

... 

l 

I 

l 

I 

I 

I 

..J 

I 

l 

\ 

! 

20th 

. day 7.1. 

Approved for Release: 2020/02/07 C05111733 

Figure 1 

0 1 2 3 4 5 6 

Months on Orbit 

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

earn no fee. On this day he can earn a maximum of 3% fee (on the ta -rget 

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. 0%/month} that will reach 

a cumulative total of 11 % at the completion of the next to last month. 

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

at a linear rate (4%/month) that will reach a cumulative total of 15% at 

the completion of the last month. No fee can be earned after the 180th 

day (last). 

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d. The above description, illustrated in Figure 1, outlines the 

rnaximum % fee th.at can be earned if no 11 critical events II occur. The 

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

maximum % fee reduced by the proportion (by whole revs) of that day 

during which the vehicle performance was not satisfactory, (as defined 

in paragraph 4). The cumulative % fee earned by the vehicle is the sum 

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 (%} 

= for that m.onth (__}:_\ (

%/Month ~ 

(from Fig 1) \ 30 / 

maximum possible 

fee for that day 

(where s = satisfactory 

revs and p = total 

revs for that day) 

Reduction for_ unsatisfactory 

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 then covers the entire 

first month). 

e. The performance fee dollars earned by the flight are then 

computed as follows: 

Fee dollars earned 

for the flight 

= (actual fee earned'\ X (target cost applicable\ 

by the flight (%) ) \to that flight ) 

f. As previously noted, long lifetime systems 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 

contractor had an opportunity to perform, described in paragraph 5. h. (1) 

as the basis 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 

are scored by use of the 11 no-fault 11 rate as described in the following 

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paragraph. (i.e., in addition to the specific examples described below, 

the no-fault rate is substituted in similar manner for previously described 

cases where the average performance of paragraph 5. h. (l} was used.) 

g. A linear rate equivalent to rising from 3% fee at the completion 

of the first month to 9%.at the end of the last month (1. 2% per month) is 

defined as the no-fault rate, and illustrated in Figure 2. If, at any time t 

any contractor is precluded from proper fee earning operation through no 

fault of his own, he earns fee for that day at the no-fault rate. If, through 

no fault of his ownt the contractor is precluded from earning any fee on 

performance during the flight he is credited with 9% fee. If he has already 

earned the first 3% but has not completed 30 calendar days, he is credited 

__ with 9% fee. If the contractor has earned ·more than 3% fee, his final fee 

is the sum of what he has earned plus that which he is credited with for the 

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

suppose that the contractor has earned 7% fee in 95 days on orbit. He is 

then credited with additional fee of (180-95) (1.2%) or 3.4% for a total 

- \ 30 

of 10. 4% fee. However, in no event is the contractor credited with any 

fee not earned if at any time it is determined that he could not earn this 

fee if other associate contractors were performing properly. 

15 FIGURE 2 

11 

9 

3 j 

,\ 

I 1 

20th 

0 day~ 

0 l 

Page 32 of 41 Pages 

2 3 4 

MONTHS ON ORBIT 

Approved for Release: 2020/02/07 C05111733 

Ref No. SP142866 

Revised 4/ 18/69 
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.μ 

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Approved for Release: 2020/02/07 C05111733 

h. However, the proVLs1ons of subparagraph 7. g. 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 no-fault 

when performance is calculated on the same basis used between the end 

of the fir st month and the end of the next to the last month, he is credited 

with a performance fee based on extending that performance rate from 

30 days, or such later date as the event may occur, to 180 days. 

Figure 3 

-----9% 

20th 

Ll~::::::.;zl._....L----.....J,.-----A-----..J.:-----·------ 4 5 6 0 1 2 3 

MONTHS ON ORBIT 

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

vehicles during the first 1nonth is the same, as already described, as is 

the fee which can be earned during the last month. The variation between 

flights occurs between the first and last month, and includes periods 

when no fee can be earned, as illustrated in Figure 3. 

j. The fee payment for each individual system is increased from an 

incremental value of 8% to the full 15% applicable to that vehicle at the 

completion of systems test, as previously described, The performance 

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

pays the government by check as previously described for fee penalties 

due to less than 100% performance. The amount due at the end of each 

month is computed as follows: 

'J ,-l -, • 

d

Penaflty dollars ~~aximum pos sibl' ~ctual fee earne~ x[arg1:-t cbolst j ue or = - ~ app 1ca e 

th th fee for that month or the month (%) h fl. h 

e mon · (%} to t at 1g t 

In addition, any fee that cannot be earned is due at the conclusion of the 

month in which this inability to earn is established (i.e. , if the satellite 

power system fails in the first month of flight, the fee that cannot be 

earned is due at the end of that month rather than continuing to be due 

incrementally at the end of each month.) 

8. Application to Satellite Mission Software 

a. This paragraph describes the application of this incentive fee 

structure to the development of a non-flying end itehl. The example 

illustrated is the development of the project-peculiar on-orbit software 

for a satellite project. This software is mandatory for flight of the 

satellite project, in regard to both availability and functional adequacy. 

For this reason, its development is handled in two stages (under the same 

contract): first. an Initial Operational Capability (IOC), providing 

mandatory features ;-n a minimum risk-basis to meet the first launch 

date, followed by a Full Operational Capability (FOC) providing a more 

complete capability -;t a later date. The basis of performance measurement 

is the satisfactory demonstration of selected computer program subsystem 

milestones. >:C 

s,, standard computer program subsystem milestones as defined in 

SSD Exhibit 61-47B, l April 1966 

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Ref No. SP142866 

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FEE 

EARNED 

Approved for Release: 2020/02/07 C05111733 

The fee range is from a maximum of 15% of final target cost to a minimum 

of zero. 

b. The basic incentive structure provides for a single way in which 

fee can be earned, in discrete steps, up to a maximum fee of 15% of 

target cost. Performance is measured on the basis of satisfactorily 

demonstrating accomplishment of milestones 2, 4, and 5, and completion 

by the contractor of an Operational Demonstration (OD} of the adequacy 

of the software at the milestone 8 level of performance. The contract 

contains two schedules: a schedule for delivery of the end items which 

are referred to in these milestones and OD, and a separate schedule for 

completion of these demonstrations of their adequacy to the government. 

Performance under the incentive structure relates to the dates for 

satisfactory demonstration, not to the earlier delivery dates. Upon 

satisfactory demonstration of milestones 2, 4, 5 and the OD, a specific 

increment of fee is earned, as outlined in the chart of Figure l; The 

specific criteria as to what constitutes satisfactory demonstration of each 

mile stone and the OD are included in the contract. These criteria must 

be met completely; there is no provision for graduated or partial earning 

of these incremental steps of fee. 

FIGURE 1. 

15% -

1.5 

4.5 

9% 

l. 8<}\ 7.2 

1. 8 

2 4 5 OD ,:.: 

MILESTONES SATISFAGTORIL Y DEMONSTRATED 

)!<OD = Operational Demonstration by the 

contractor of the operational 

adequacy of his software at the 

milestone 8 level of performance .• 

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c. The incentive structure provides for fee penalties for failure to 

meet the contract dates for satisfactory- demonstration of mile stones 2, 

4, 5 and the OD. These penalties are assessed as outlined in the chart 

of Figure 2, on a linearly graduated basis in units of whole days late, 

"Days late" means calendar days from the date specified in the contract. 

The chart shows both the maximum fee penalty for lateness in demonstrating each mile stone and the OD, and the time when this maximum 

penalty is reached in each case. Penalties for lateness in satisfactorily 

demonstrating a specific milestone are not always related to the increment 

of fee that can be earned by this milestone. For example, as shown in 

the charts, satisfactory demonstration of mile stone 2 can earn l. 8% fee, 

and 60 days lateness can lose 1. 8% fee. However, satisfactory demonstration of milestone 4 can earn 7,2%but 60 days lateness can lose 9%. 

In other words, at the degree of lateness corresponding to maximum 

penalty for each mile stone arrl the OD, the penalty is equal to the maximum 

amount that could have been earned by satisfactorily demonstrating that 

and all previous milestones on the contract schedule, and within target 

cost. 

FIGURE 2. DAYS LATE IN DEMONSTRATING MILESTONES 

FEE 

PENALTY 

30 

9%1 

13. 5 

I l 5o/o ____________ • _ _ _ _ _ _ _ _ _ OD 

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d. The incentive structure provides for cost penalties up to a 

maximum of 9% of final target cost, assessed in two sharing ratios, as 

illustrated in the chart of Figure 3. The initial sharing is 80 /20 up to 

an overrun of 22. 5%, at which the fee penalty is 4. 5% of target cost. 

Subsequent sharing is o:r,:i. a 70/30 basis, up to a maximum fee penalty of 

9% of final target cost. · 

FEE 

PENALTY 

FIGURE 3 

4. 5% _ .. ___ _ 

9% 

OVERRUN 

22. 5% 37. 5% 

e. The balance of a maximum that can be lost by cost overrun of 9% 

compared with the maximum that can be earned of 15% is intended to 

provide for two different incentives, both of which are essential, as 

previously discussed. The penalty for cost overrun must be severe enough 

to insure re spo:nsibfo :financial 1nanngernont. Howav<:l:t', even ut the m$;1.Xi• 

mum cost penalty, there .must still remain an incentive for the work to be 

successful in the event the government chooses to proceed in the face of 

such increased costs (which, in actuality, is a probable course of action 

if there is tangible reason to expect functional success, since the total 

cost of the software, even in such an overrun condition, is but a fraction 

of the cost of even a single flight of many satellite systems, which cannot 

fly without this software}. 

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£. The effect of a two-step procurement, such as an IOC followed 

by a later FOC, is as follows. The IOC milestones and OD constitute 

the onlyway that any fee can be earned, as outlined above in paragraph 

8. b. The earned fee percentages pertain to the total fee for the contract, 

i.e., the total IOC/FOC task. However, these steps are earned on 

satisfactorily demonstrating milestones Z, 4, 5 and the OD of the IOC 

only, as outlined in the chart of Figure 1. The fee penalty for lateness in 

demonstrating milestones and the OD is the same as previously discussed, 

as illustrated in the chart of Figure 2, except that these penalties apply 

separately to both the IOC and the FOC. That is, the maximum penalty 

for lateness i~monstrating the OD of the IOC is 15%; it is also 15% for 

failure to demonstrate the OD of the FOC. This insures priority to the 

IOC, but also insures responsible attention to the FOC. No fee can be 

earned except by satisfactorily completing IOC milestones and OD, and 

the full 15% can be lost by failure to meet these. Yet any fee earned in 

the IOC can be lost by failure in the FOC. Cost penalties are the same 

as previously tj.escribed, and pertain to the target cost of the entire 

IOC/FOC contract. 

g. The government makes payments to the contractor as follows: 

(1) Cost payments are made monthly upon the contracting officer's 

determination of percentages of completion of work. 

(2) Fee payments are made in lump sum steps on the mile stone 

and OD demonstration schedule in the contract. The amounts are the 

full percentage of contract target cost that can be earned by the milestone 

for which the scheduled demonstration date has been reached (regardless 

of the status of satisfactory demonstration). For example, as indicated 

in the chart of Figure 1, no fee is paid until the scheduled demonstration 

date for milestone 2, at which time a lump sum payment of 1. 8% of the 

target co st of the contract is paid. No additional fee is paid until the 

scheduled milestone 4 demonstration date, at which time a lump sum 

payment of 7. 2% of the target cost of the contract is made. 

h. The contractor makes payments to the government for fee lost 

due to lateness in satisfactorily demonstrating mile stones and the OD 

as follows. At each 30-day interval following the scheduled dates for 

satisfactory demonstration of milestones 2, 4, 5 and the OD, all fee 

adjustments due to performance penalties up to that date become due, and 

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the contractor makes such adjustments by refunds in the form of a check 

presented by the contractor to the Contracting Officer, made payable to 

the Treasurer of the United States and supported by a credit fee voucher, 

as previously discussed for other applications. 

1. Changes to the 9riginal contract come under the same fee structure, 

in the same manner previously discussed for other applications. 

9. Implementation. 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. A full description of this incentive fee structure, together with 

specific provisions intended for the work in question, is included in 

the bidder's package for the source selection competition, together with 

the requirement that proposals must be based upon this structure. In 

this manner, the costs and schedules are proposed in the full knowledge 

of the fee structure that will apply to any resulting contract, and the full 

effect of performance, schedule, and cost variance is considered in the 

initial preparation of the competitive proposals. 

b. In negotiating the contract, agreement is reached on the entire 

incentive structure prior to beginning any other aspects of the negotiation. 

If necessary, higher level management is brought in to settle this matter 

before proceeding. The negotiation then proceeds 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 differences 

between this initially agreed to incentive exhibit and the final incentive 

exhibit of the negotiated contract are: 

{l) The initial exhibit does not have the detailed list of "critical 

events II nor allowable quantitative ranges. However, the content of this 

list is clear I since the items are all taken from or are consistentwith the 

vehicle contract requirements and technical specifications. There is no 

valid basis for objecting to putting anything on the "critical event 11 list 

which meets the definition of this list in paragraph 4. a, Therefore, this 

degree of incompleteness which necessarily exists at the start of negotiations has no valid bearing upon ability to reach full agreement on the 

incentive exhibit at the outset. 

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(2) The initial exhibit is written in terms of percent of 

applicable target cost, whereas the final exhibit is written in terms 

of dollar amounts that have been obtained by applying these percentage 

:figures to the subsequently agreed target costs. 

c. 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 of 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 

final analysis, far more actual incentive can be realized by a simple 

structure than a complex structure, even if some subtle points and 

contingencies must be omitted in order to attain a simple structure. 

d. The entire incentive approach presumes that the contra~tor will 

take specific internal implementing action. This should include a clear 

explanation of 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 one can affect the fee which 

can be realized by the company. It should include some tangible internal 

management actions which place an additional incentive on the work quality 

wherever feasible. It contemplates in all cases that the contractor is not 

simply being offered a higher fee for potential success as compensation 

for accepting a lower fee £or potential failure, but that he will, because of 

this structure, devote better and more careful managerial attention and 

even selectively spend some of this potentially higher fee where necessary 

to as sure maximum expe_ctation of the highest level o:f success and corresponding net return. 

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

with the basic objectives of incentive contracting and meets the objectives 

outlined in paragraphs 1 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, on a continuing, 

scheduled basis, yet it retains firm financial control through substantial 

penalty provisions for overruns, and a reasonable penalty provision for 

schedule variance. In all applications, it results in no fee_ for failures or 

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even half way successful flights, a relatively low :fee for good performance 

with poor financial management, and even lower for poor performance. 

The contractor has the opportunity and the incentive to make the maximum 

fee; the government has increased probability of getting the best possible 

performance at the contracted price, under conditions which provide 

essential operating flexibility and which are fully compatible with prompt 

response to contract changes. 

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