Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured Incentives
Published: 2006-04-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: With DOD spending over $200 billion annually to acquire products and services that include everything from spare parts to the development of major weapon systems, our numerous, large, and mounting fiscal challenges demand that DOD maximize its return on investment and provide the warfighter with needed capabilities at the best value for the taxpayer. In an effort to encourage defense contractors to perform in an innovative, efficient, and effective way, DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives known as award and incentive fees. Using these incentives properly--in concert with good acquisition practices--is a key to minimizing waste, maximizing value, and getting our military personnel what they need, when and where they need it. Congress asked GAO to testify on DOD's use of award and incentive fees and the role they play in the acquisition system. This statement highlights the risks of conducting business as usual and identifies the actions DOD needs to take to use these fees more effectively. DOD concurred or partially concurred with the seven recommendations GAO made in a previously issued report on award and incentive fees. GAO looks forward to seeing DOD turn these promised steps into actual policy and practice.
section_title: What GAO Found
paragraphs: DOD's use of award and incentive fees is an issue at the nexus of two areas that GAO has designated "high risk" for DOD--contract management and weapon system acquisition. Contract management has been a long-standing business management challenge for DOD because it often cannot assure that it is using sound business practices to acquire the goods and services the warfighter needs. For weapon system acquisitions, the persistent and long-standing nature of acquisition problems has perhaps made a range of key decision makers complacent about cost growth, schedule delays, quantity reductions, and performance shortfalls. DOD's strategies for incentivizing its contractors, especially for weapon system development programs, reflect the challenges in these areas. DOD programs routinely engage in award-fee practices that do not hold contractors accountable for achieving desired outcomes and undermine efforts to motivate contractor performance, such as evaluating contractors on award-fee criteria that are not directly related to key acquisition outcomes (e.g., meeting cost and schedule goals and delivering desired capabilities to the warfighter); paying contractors a significant portion of the available fee for what award-fee plans describe as "acceptable, average, expected, good, or satisfactory" performance; and giving contractors at least a second opportunity to earn initially unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on contracts in GAO's study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. Despite paying billions of dollars, DOD has not compiled data or developed performance measures to evaluate the validity of its belief that award and incentive fees improve contractor performance and acquisition outcomes. These issues, along with those GAO has identified in DOD's acquisition and business management processes, present a compelling case for change. By implementing the recommendations GAO has made on award and incentive fees, DOD can improve incentives, increase transparency, and enhance accountability for the fees it pays. At the same time, by working more broadly to improve its acquisition practices, DOD can set the right conditions for getting better acquisition outcomes and making more efficient use of its resources in what is sure to be a more fiscally constrained environment.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Department of Defense’s  (DOD) use of monetary incentives known as award and incentive fees.  With DOD spending over $200 billion annually to acquire products and  services that include everything from spare parts to the development of  major weapon systems, our numerous, large, and mounting fiscal  challenges demand that DOD maximize its return on investment and  provide the warfighter with needed capabilities at the best value for the  taxpayer. In an effort to encourage defense contractors to perform in an  innovative, efficient, and effective way, DOD gives its contractors the  opportunity to collectively earn billions of dollars through monetary  incentives known as award and incentive fees. Using these incentives  properly, in concert with sound acquisition practices, is a key to  minimizing waste, maximizing value, and getting our military personnel  what they need, when and where they need it. Unfortunately, DOD has not  used these incentives effectively. How they have been used and how we  believe they should be used is the focus of my statement today.
To put the issues related to DOD’s use of award and incentive fees in  context, I want to step back and look at some of the broader management  challenges that confront DOD. The department is facing a significant  number of recurring problems in managing its major weapon acquisitions.  Although U.S. weapons are the best in the world, DOD’s acquisition  process for weapons programs consistently yields undesirable  consequences—dramatic cost increases, late deliveries to the warfighter,  and performance shortfalls. These problems occur, in part, because DOD  tends to consistently overpromise and underdeliver in connection with  major acquisition efforts. In addition, DOD’s weapons programs do not  capture, early on, the requisite knowledge that is needed to efficiently and  effectively manage program risks. For example, programs lack clearly  defined and stable requirements, move forward with unrealistic program  cost and schedule estimates, use immature technologies in launching  product development, and fail to solidify design and manufacturing  processes at appropriate junctures in development. As a result, wants are  not always distinguished from needs; expectation gaps are the norm;  problems often surface late in the development process; and fixes tend to  be much more costly than if they were caught earlier.
Cost increases incurred while developing new weapon systems typically  mean that DOD cannot produce as many of those weapons as intended nor  can it be relied on to deliver them to the warfighter when promised and  with the initially advertised capabilities. In addition, military operations in  Afghanistan and Iraq are consuming a large share of DOD resources and  causing the department to invest more money sooner than expected to  replace or fix existing weapons. Meanwhile, DOD is intent on transforming  military operations and currently has its eye on multiple megasystems that  are expected to be the most expensive and complex ever. These new  desires and long-standing acquisition and contract management challenges  are running head-on into the nation’s current imprudent and unsustainable  fiscal path. At the same time, DOD’s numerous business management  weaknesses continue to result in reduced efficiencies and effectiveness  that waste billions of dollars every year. These business management  weaknesses touch on all of DOD’s major business operations, ranging  from the department’s inadequate management of its overall business  transformation effort to decades-old financial management and  information technology problems to various contracting and selected  supply chain challenges. In fact, all these areas and more are on GAO’s  2005 “high-risk” list of programs and activities that need urgent attention  and fundamental transformation to ensure that our national government  functions in the most economical, efficient, and effective manner possible.
DOD’s use of award and incentive fees is an issue at the nexus of two of  these high-risk areas—DOD contract management and DOD weapon  system acquisition. Contract management has been a long-standing  business management challenge for the department. DOD is the  government’s largest purchaser, yet it is often unable to assure that it is  using sound business practices to acquire the goods and services needed  to meet the warfighter’s needs. For example, we have found that DOD has  not used various contracting tools and techniques effectively—such as  performance-based service contracting, multiple-award task order  contracts, purchase cards, and, most recently, award and incentive fees.  For DOD weapon system acquisitions, we have found the persistent and  long-standing nature of acquisition problems has perhaps made a range of  key players both in the Pentagon and the Congress complacent about cost  growth, schedule delays, quantity reductions, and performance shortfalls  in weapon system programs. DOD’s strategies for incentivizing its  contractors, especially on weapon system development programs, reflect  this complacency and are symptomatic of the lack of discipline, oversight,  transparency, and accountability in DOD’s acquisition process. As a result,  DOD programs routinely engage in practices that undermine efforts to  motivate positive contractor performance and that do not hold contractors  accountable for achieving desired acquisition outcomes, such as meeting  cost and schedule goals and delivering desired capabilities to the  warfighter.
DOD generally does not evaluate contractors based on award-fee  criteria that are directly related to key acquisition outcomes. In  addition, the link between the elements of contractor performance that  are included in the criteria and these outcomes is not always clear. As a  result, DOD paid out an estimated $8 billion in award fees over the life  of the contracts in our study population (from their inception through  our data collection phase), regardless of whether acquisition outcomes  fell short of, met, or exceeded DOD’s expectations.
DOD programs engage in practices that undermine efforts to motivate  excellent contractor performance by regularly paying contractors a  significant portion of the available fee for what award-fee plans  describe as “acceptable, average, expected, good, or satisfactory”  performance. Although the definition of this level of performance  varies by contract, these definitions are generally not related to  outcomes. About half of the contracts in our sample, allowed  70 percent or more of the available fee to be paid for this level of  performance.
DOD award fee practices do not promote accountability. DOD  programs gave contractors on about half of the award-fee contracts in  our study population at least a second opportunity to earn an estimated  $669 million in initially unearned or deferred fees.
Taken together, DOD’s acquisition, business, and contract management  practices are contrary to the purpose of performance-based contracting  concepts and have resulted and, if not corrected in both form and practice,  will continue to result in wasting billions of dollars in taxpayer funds. My  statement today will focus on what steps DOD must take to strengthen the  link between monetary incentives and acquisition outcomes and by  extension increase the transparency and accountability of DOD programs  for fees paid and of contractors for results achieved. This testimony draws  upon our recently issued report on DOD’s use of award and incentive fees  as well as the GAO High-Risk series and our body of work on weapon  system acquisitions.
GAO’s many acquisition-related reports over the years raise serious  questions about the reasonableness, appropriateness, and affordability of  DOD’s current investment plans; the soundness of the acquisition process  which implements those plans; and the effectiveness of the practices DOD  uses to manage its contractors, including the use of award and incentive  fees. These reports collectively present a compelling case for change.
Appendix I contains information about the scope and methodology for  GAO-06-66, Defense Acquisitions: DOD Has Paid Billions in Award and  Incentive Fees Regardless of Acquisition Outcomes. The work was  conducted in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Federal agencies, including DOD, can choose among numerous contract  types to acquire products and services. One of the characteristics that vary  across contract types is the amount and nature of the fee that agencies  offer to the contractor for achieving or exceeding specified objectives or  goals. Of all the contract types available, only award- and incentive-fee  contracts allow an agency to adjust the amount of fee paid to contractors  based on the contractor’s performance.
Federal acquisition regulations state that award- and incentive-fee  contracts should be used to achieve specific acquisition objectives, such  as delivering products and services on time or within cost goals and with  the promised capabilities. For award-fee contracts, the assumption  underlying the regulation is that the likelihood of meeting these  acquisition objectives will be enhanced by using a contract that effectively  motivates the contractor toward exceptional performance. Typically,  award-fee contracts emphasize multiple aspects of contractor  performance in a wide variety of areas, such as quality, timeliness,  technical ingenuity, and cost-effective management. These areas are  susceptible to judgmental and qualitative measurement and evaluation,  and as a result, award-fee criteria and evaluations tend to be subjective.  Table 1 provides a description of the general process for evaluating the  contractor and determining the amount of award fee earned.
subsections: section_title: Prevalence and Use of Award and Incentive Fees
paragraphs: From fiscal year 1999 through fiscal year 2003, award- and incentive-fee  contract actions accounted for 4.6 percent of all DOD contract actions  over $25,000. However, when taking into account the dollars obligated— award- and incentive-fee contract actions accounted for 20.6 percent of  the dollars obligated on actions over $25,000, or over $157 billion, as  shown in figure 1. Our sample of 93 contracts includes $51.6 billion, or  almost one-third, of those obligated award- and incentive-fee contract  dollars. These obligations include award- and incentive-fee payments as  well as other contract costs.
DOD utilized the contracts in our sample for a number of purposes. For  example, research and development contracts accounted for 51 percent  (or $26.4 billion) of the dollars obligated against contracts in our sample  from fiscal years 1999 through 2003; while non-research-and-development  services accounted for the highest number of contracts in our sample.  Further, we estimate that most of the contracts and most of the dollars in  our study population are related to the acquisition of weapon systems.
DOD has the flexibility to mix and match characteristics from different  contract types. The risks for both DOD and the contractor vary depending  on the exact combination chosen, which, according to the Federal  Acquisition Regulation, should reflect the uncertainties involved in  contract performance. Based on the results from our sample, about half of  the contracts in our study population were cost-plus-award-fee contracts.  The theory behind these contracts is that although the government  assumes most of the cost risk, it retains control over most or all of the  contractor’s potential fee as leverage. On cost-plus-award-fee contracts,  the award fee is often the only source of potential fee for the contractor.  According to defense acquisition regulations, these contracts can include a  base fee—a fixed fee for performance paid to the contractor—of anywhere  from 0 to 3 percent of the value of the contract; however, based on our  sample results, we estimate that about 60 percent of the cost-plus-award- fee contracts in our study population included zero base fee. There is no  limit on the maximum percentage of the value of the contract that can be  made available in award fee, although the 20 percent included in the  Space-Based Infrared Radar System High development contract we  examined was outside the norm. The available award fees on all the  award-fee contracts in our study population typically ranged from  7 to 15 percent of the estimated value of the contract.
section_title: A System in Need of Reform
paragraphs: DOD’s use of award and incentive fees is symptomatic of an acquisition  system in need of fundamental reform. DOD’s historical practice of  routinely paying its contractors nearly all of the available award fee  creates an environment in which programs pay and contractors expect to  receive most of the available fee, regardless of acquisition outcomes. This  is occurring at a time when DOD is giving contractors increased program  management responsibilities to develop requirements, design products,  and select major system and subsystem contractors. Based on our sample,  we estimate that for DOD award-fee contracts, the median percentage of  available award fee paid to date (adjusted for rollover) was 90 percent,  representing an estimated $8 billion in award fees for contracts active  between fiscal years 1999 and 2003. Estimates of total award fees earned  are based on all evaluation periods held from the inception of our sample  contracts through our data collection phase, not just those from fiscal  years 1999 through 2003. Figure 2 shows the percentage of available fee  earned for the 63 award-fee contracts in our sample.
The pattern of consistently high award-fee payouts is also present in  DOD’s fee decisions from evaluation period to evaluation period. This  pattern is evidence of reluctance among DOD programs to deny  contractors significant amounts of fee, even in the short term. We estimate  that the median percentage of award fee earned for each evaluation period  was 93 percent and that the contractor received 70 percent or less of the  available fee in only 9 percent of the evaluation periods and none of the  available fee in only 1 percent of the evaluation periods.
subsections: section_title: A Case for Change: Moving Toward Outcome-Based Award-Fee Criteria
paragraphs: March 29, 2006, emphasizing the need  to link award fees to desired program  outcomes.
Award fees have generally not been effective at helping DOD achieve its  desired acquisition outcomes, in large part, because award-fee criteria are  not linked to desired acquisition outcomes, such as meeting cost and  schedule goals and delivering desired capabilities. Instead, DOD programs  structure award fees to focus on the broad aspects of contractor  performance, such as technical and management performance and cost  control, that they view as keys to a successful program. In addition,  elements of the award-fee process, such as the frequency of evaluations  and the composition of award-fee boards, may also limit DOD’s ability to  effectively and impartially evaluate the contractor’s progress toward  acquisition outcomes. Most award-fee evaluations are time-based,  generally every six months, rather than event-based; and award-fee boards  are made up primarily of individuals directly connected to the program. As  a result of all these factors, DOD programs frequently paid most of the  available award fee for what they described as improved contractor  performance, regardless of whether acquisition outcomes fell short of,  met, or exceeded DOD’s expectations.
High award-fee payouts on programs that have fallen or are falling well  short of meeting their stated goals are also indicative of DOD’s failure to  implement award fees in a way that promotes positive performance and  adequate accountability. Several major development programs— accounting for 52 percent of the available award-fee dollars in our sample  and 46 percent of the award-fee dollars paid to date—are not achieving or  have not achieved their desired acquisition outcomes, yet contractors  received most of the available award fee. These programs—the Comanche  helicopter, F/A-22 and Joint Strike Fighter aircraft, and the Space-Based  Infrared System High satellite system—have experienced significant cost  increases, technical problems, and development delays, but the prime  systems contractors have received 85, 91, 100, and 74 percent of the award  fee, respectively to date (adjusted for rollover), totaling $1.7 billion (see  table 2).
DOD can ensure that fee payments are more representative of program  results by developing fee criteria that focus on its desired acquisition  outcomes. For instance, DOD’s Missile Defense Agency attempted to hold  contractors accountable for program outcomes on the Airborne Laser  program. On this program, DOD revised the award-fee plan in June 2002 as  part of a program and contract restructuring. The award-fee plan was  changed to focus on achieving a successful system demonstration by  December 2004. Prior to the restructuring, the contractor had received 95  percent of the available award fee, even though the program had  experienced a series of cost increases and schedule delays. Importantly,  the contractor did not receive any of the $73.6 million award fee available  under the revised plan because it did not achieve the key program  outcome—successful system demonstration.
section_title: A Case for Change: Motivating Excellent Contractor Performance and Promoting Accountability
paragraphs: While DOD stated that award fee  motivating excellent contractor  performance by only paying award fees  for above satisfactory performance  arrangements should be structured to  encourage the contractor to earn the  preponderance of fee by providing  excellent performance, it maintains that  paying a portion of the fee for  satisfactory performance is appropriate  to ensure that contractors receive an  adequate fee on contracts. In its   March 29, 2006 policy memo, DOD  reiterated this position and emphasized  that less than satisfactory performance  is not entitled to any award fee.
In its March 29, 2006 policy memo,  DOD provided guidance and placed  several limitations on the use of rollover.
DOD programs routinely engage in award-fee practices that are  inconsistent with the intent of award fees, reduce the effectiveness of  these fees as motivators of performance, compromise the integrity of the  fee process, and waste billions in taxpayer money. Two practices, in  particular, paying significant amounts of fee for “acceptable, average,  expected, good, or satisfactory” performance and providing contractors  multiple opportunities to earn fees that were not earned when first made  available, undermine the effectiveness of fees as a motivational tool and  marginalize their use in holding contractors accountable for acquisition  outcomes.
Although DOD guidance and federal acquisition regulations state that  award fees should be used to motivate excellent contractor performance,  most DOD award-fee contracts pay a significant portion of the available  fee for what award-fee plans describe as “acceptable, average, expected,  good, or satisfactory” performance. Although the definition of this level of  performance varies by contract, these definitions are generally not related  to outcomes. Some plans for contracts in our sample did not even require  the contractor to meet all of the minimum standards or requirements of  the contract to receive one of these ratings. Some plans also allowed for  fee to be paid for marginal performance. Even fixed-price-award-fee  contracts, which already include a normal level of profit in the price, paid  out award fees for satisfactory performance. Figure 3 shows the maximum  percentage of award fee paid for “acceptable, average, expected, good, or  satisfactory” performance and the estimated percentage of DOD award-fee  contracts active between fiscal years 1999 through 2003 that paid these  percentages.
The use of rollover is another indication that DOD’s management of  award-fees lacks the appropriate incentives, transparency, and  accountability necessary for an effective pay-for-performance system.  Rollover is the process of moving unearned available award fee from one  evaluation period to a subsequent evaluation period, thereby providing the  contractor an additional opportunity to earn that previously unearned  award-fee. We estimate that 52 percent of DOD award-fee contracts rolled  over unearned fees into subsequent evaluation periods, and in  52 percent of these periods, at least 99 percent of the unearned fee was  rolled over. Overall, for DOD award-fee contracts active between fiscal  years 1999 through 2003, we estimate that the total dollars rolled over  across all evaluation periods that had been conducted by the time of our  review was $669 million.
section_title: A Case for Change: Ensuring Practice Is Consistent with Policy
paragraphs: DOD plans to conduct an analysis to  to review new contracts to make sure  award-fee criteria reflect desired  acquisition outcomes and award-fee  structures motivate excellent contractor  performance by only providing fees for  above satisfactory performance  determine what the appropriate  approving official level should be for new  contracts utilizing award fees and issue  additional guidance if needed by  June 1, 2006.
The inconsistent application of DOD’s existing policies on award fees and  weapon system development reinforce the need for increased  transparency and accountability in DOD’s management of award fees.  Although DOD award-fee guidance and federal acquisition regulations  state that award fees should be used to motivate excellent contractor  performance, most DOD award-fee contracts still pay a significant portion  of the available fee for what award-fee plans describe as “acceptable,  average, expected, good, or satisfactory” performance. Air Force, Army,  and Navy guidance that states rollover should rarely be used in order to  avoid compromising the integrity of the award-fee evaluation process;  however, about half of the contracts in our study population used rollover.
section_title: A Case for Change: Developing and Sharing Proven Incentive Strategies
paragraphs: DOD will conduct an analysis of existing  award- and incentive-fee data within  existing data systems, such as the  Defense Acquisition Management  Information Retrieval system  systems and determine which, if any, is  best suited, to capture this type of data  and at what cost. DOD expects to  complete the study by June 1, 2006.
DOD will review and identify possible  evaluate the effectiveness of award and  incentive fees as a tool for improving  contractor performance and achieving  desired program outcomes  performance measures and determine  the appropriate actions by June 1, 2006.
In its March 29, 2006 policy memo,   DOD tasked Defense Acquisition  University to develop an online  repository for award- and incentive-fee  policy information, related training  courses, and examples of good award  fee arrangements.
Very little effort has gone into determining whether DOD’s current use of  monetary incentives is effective. Over the past few years, officials  including the Undersecretary of Defense for Acquisition Technology and  Logistics and the Assistant Secretary of the Air Force for Acquisition  expressed concerns that contractors routinely earn high percentages of  fee while programs have experienced performance problems, schedule  slips, and cost growth. However, DOD has not compiled information,  conducted evaluations, shared lessons learned, or used performance  measures to judge how well award and incentive fees are improving or can  improve contractor performance and acquisition outcomes. The lack of  data is exemplified by the fact that DOD does not track such basic  information as how much it pays in award and incentive fees. Such  information collection across DOD is both necessary and appropriate.
section_title: Conclusions
paragraphs: DOD’s use of award-fee contracts, especially for weapon system  development, reflects the fundamental lack of knowledge and program  instability that we have consistently cited as the main reasons for DOD’s  poor acquisition outcomes. DOD uses these fees in an attempt to mitigate  the risks that it creates through a flawed approach to major weapon  system development. The DOD requirements, acquisition, budgeting, and  investment processes are broken and need to be fixed. DOD’s  requirements process generates much more demand for new programs  than fiscal resources can reasonably support. The acquisition environment  encourages launching product developments that promise the best  capability, but embody too many technical unknowns and too little  knowledge about the performance and production risks they entail.  However, a new program will not be approved unless its costs fall within  forecasts of available funds and, therefore, looks affordable. Further,  because programs are funded annually and departmentwide,  cross-portfolio priorities have not been established, competition for  funding continues over time, forcing programs to view success as the  ability to secure the next funding increment rather than delivering  capabilities when expected and as promised.
The business cases to support weapon system programs that result from  these processes are in many cases not executable because the incentives  inherent in the current defense acquisition system are not conducive to  establishing realistic cost, schedule, and technical goals. As a result, DOD  has to date not been willing to hold its programs or its contractors  accountable for achieving its specified acquisition outcomes. Instead,  faced with a lack of knowledge and the lack of a sound business case,  DOD programs use award-fee contracts, which by their very nature allow  DOD to evaluate its contractors on a subjective basis. This results in  billions of dollars in wasteful payments because these evaluations are  based on contractors’ ability to guide programs through a broken  acquisition system, not on achieving desired acquisition outcomes.
Implementing our recommendations on award and incentive fees will not  fix the broader problems DOD faces with its management of major  weapons or service acquisitions. However, by implementing our  recommendations, DOD can improve incentives, increase transparency,  and enhance accountability for the fees it pays. In particular, moving  toward more outcome-based award-fee criteria would give contractors an  increased stake in helping DOD to develop more realistic targets upfront  or risk receiving less fee when unrealistic cost, schedule, and performance  targets are not met. To make this new approach to incentives function as  intended, DOD would also need to address the more fundamental issues  related to its management approach, such as the lack of a sound business  case, lack of well-defined requirements, lack of product knowledge at key  junctions in development, and program instability caused by changing  requirements and across-the-board budget cuts. Working in concert, these  steps can help DOD set the right conditions for more successful  acquisition outcomes and make more efficient use of its resources in what  is sure to be a more fiscally constrained environment as the nation  approaches the retirement of the “baby boom” generation.
section_title: Recent DOD Actions
paragraphs: Last week, DOD issued a policy memorandum on award-fee contracts that  takes steps towards addressing several of the recommendations made in  our report, and the department has indicated that further actions are  planned to address the remaining recommendations. This guidance is a  positive first step, but, like so many prior DOD concurrences, its  effectiveness will ultimately be determined by how well it is implemented.  Identifying who will be responsible for ensuring it is carried out and how  progress will be monitored and measured are key ingredients that are  missing in the new guidance. We continue to believe that DOD must  designate appropriate approving officials to review new contracts to  ensure that award-fee criteria are tied to desired acquisition outcomes;  fees are used to promote excellent performance; and the use of rollover  provisions in contracts is the exception not the rule. Changing DOD  award-fee practices will also require a change in culture and attitude. The  policy memorandum’s position that it is appropriate to pay a portion of the  available award fee for satisfactory performance to ensure that  contractors receive an “adequate fee on contracts” is indicative of DOD’s  resistance to cultural change. Finally, we encourage the department to  fully implement our remaining recommendations including developing a  mechanism to capture award- and incentive-fee data and developing  performance measures to evaluate the effectiveness of these fees.
Mr. Chairman and Members of the Committee, this concludes my prepared  statement. I would be happy to answer any questions you may have at this  time.
section_title: Appendix I: Scope and Methodology
paragraphs: In this statement, we examine fixed-price and cost-reimbursable award-  and incentive-fee contracts, as well as contracts that featured  combinations of these contract types. These contracts were selected as  part of a probability sample of 93 contracts from a study population of  597 DOD award-fee and incentive-fee contracts that were active between  fiscal years 1999 and 2003 and had at least one contract action coded as  cost-plus-award-fee, cost-plus-incentive-fee, fixed-price-award-fee, or  fixed-price incentive valued at $10 million or more during that time. Unless  otherwise noted, the estimates in this statement pertain to (1) this  population of award- and incentive-fee contracts, (2) the subpopulation of  award-fee contracts, or (3) the evaluation periods associated with  contracts described in (1) or (2) that had been completed at the time of  our review. In the sample, 52 contracts contained only award-fee  provisions; 27 contracts contained only incentive-fee provisions; and  14 contracts included both. Estimates of total award fees earned and total  award fees that contractors received at least two chances to earn are  based on all evaluation periods held from the inception of our sample  contracts through our data collection phase, not just those from fiscal  years 1999 through 2003. Because the estimates in this report are derived  from a probability sample, they are subject to sampling error. All  percentage estimates from our review have margins of error not exceeding  plus or minus 10 percentage points unless otherwise noted. All numerical  estimates other than percentages (such as totals and ratios) have margins  of error not exceeding plus or minus 25 percent of the value of those  estimates.
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