In January 2004, the President announced a new “Vision for Space Exploration” calling for human and robotic missions to the Moon, Mars, and beyond. Over the next two decades, NASA plans to spend over $100 billion to develop a number of new capabilities, supporting technologies, and facilities that are critical to enabling space exploration missions. Development of the critical capabilities and technologies will be largely dependent on NASA contractors, who constitute more than two-thirds of NASA’s workforce. According to NASA officials, 87 percent of NASA’s $16.6 billion budget for fiscal year 2006 was spent on work performed by its contractors. Since 1990, we have designated NASA’s contract management as a high- risk area. This is based primarily on NASA’s lack of a modern integrated financial management system that can provide reliable information on contract spending and performance as well as NASA’s lack of emphasis on end results, product performance, and cost control. For example, our most recent high-risk report stated that while NASA has taken actions to improve its contract management function, it continues to face considerable challenges in implementing its contracts effectively. NASA is organized under four mission directorates—Aeronautics Research, Exploration, Science, and Space Operations—each of which covers a major area of the agency’s research and development efforts. The agency is composed of NASA headquarters, 10 field centers, and the contractor-operated Jet Propulsion Laboratory. NASA and other federal agencies can choose among numerous contract types for acquiring goods and services that can differ in part according to the nature of the fee that agencies offer to the contractor for achieving or exceeding specified objectives or goals. According to the FAR, a CPAF contract is appropriate to use when it is difficult to measure key elements of performance. It is widely used to procure nonroutine services such as the development of new systems. Typically, award-fee contracts emphasize several aspects of contractor performance, such as schedule performance, technical performance, and cost control. Because development and administration of award-fee contracts involve substantially more effort over the life of a contract than other types of contracts, the FAR and NASA’s Award Fee Contracting Guide specify that the expected benefits of using an award-fee contract must exceed the additional administrative effort and cost involved. The theory behind CPAF contracts is that although the government assumes most of the cost risk, it retains control over most or all of the contractor’s potential profit as leverage. On CPAF contracts, the award fee is often the only source of potential fee for the contractor. According to the NASA FAR Supplement and NASA’s Award Fee Contracting Guide, these contracts can include a base fee of anywhere from 0 to 3 percent of the estimated value of a nonservice contract. However, NASA’s regulations and guide do not allow the use of a base fee on service contracts. Table 1 shows the percentage of award fee available on the contracts we examined. (See app. II for a description of these contracts.) NASA relies heavily on CPAF contracts. This contract type accounted for 48 percent of obligated contract dollars and 7.7 percent of contract actions from fiscal years 2002 through 2004. By comparison, between fiscal years 1999 and 2003, award-fee contracts accounted for 13 percent of the contract dollars and 3.4 percent of contract actions at the Department of Defense (DOD). A CPAF contract includes an estimate of the total cost of what is being contracted for, may include a fee with a possible base amount fixed at the inception of the contract, and includes an award amount that is intended to motivate excellence in contract performance. The award fee is paid based upon the government’s periodic judgmental evaluations of contractor performance. When developing evaluation plans, NASA’s award-fee guide indicates that evaluation plans may include outcomes, outputs, inputs, or a combination of these elements. NASA’s guide expresses a preference for outcome factors. It notes that while it is sometimes valuable to consider input and output factors when evaluating contractor performance, outcome factors are better indicators of success relative to the desired result. An outcome factor is an assessment of the results of an activity compared to its intended purpose. Outcome-based factors are the least administratively burdensome type of performance evaluation factor, and should provide the best indicator of overall success. Outcome- based factors should therefore be the first type of evaluation factor considered for use, and are often ideal for nonroutine efforts. An output factor is the tabulation, calculation, or recording of activity or effort and can be expressed in a quantitative or qualitative manner. Output factors may be more desirable for routine efforts, but are administratively more burdensome than outcome factors due to the tabulation, calculation, or recording requirements. When output factors are used, care should be taken to ensure that there is a logical connection between the reported measures and the program’s mission, goals, and objectives. Input factors refer to intermediate processes, procedures, actions, or techniques that are key elements influencing successful contract performance. These may include testing and other engineering processes and techniques; quality assurance and maintenance procedures; subcontracting plans; purchasing department management; and inventory, work assignment, and budgetary controls. For CPAF contracts, NASA personnel conduct periodic, typically semiannual evaluations of contractor’s performance against the criteria specified in a performance evaluation plan. During the course of the evaluation period, performance monitors track contractor performance, and once the period is over they assess the performance and report to the performance evaluation board (PEB). The PEB considers the reports as well as any other pertinent information and prepares a report for the fee determination official (FDO) with findings and recommendations. The contractor is given an opportunity to provide a self-assessment of its performance during the evaluation period, which is often a written report. The FDO may meet with the PEB to discuss the report, after which a final determination is made in writing as to the amount of fee to be paid. The FDO provides the determination to the contracting officer and a copy of the related document to the contractor. When discussing award-fee contracts, it is important to acknowledge the acquisition environment in which they are used. Award fees are intended to motivate excellent contractor performance, which should result in excellent program outcomes. However, award fees should not be used to make up for factors internal or external to the acquisition environment that hinder the success of acquisition outcomes. These factors may include inadequate resources and financial management systems, lack of knowledge prior to starting the acquisition, or unsound acquisition practices. We have reported that in some cases, NASA’s failure to define requirements adequately and develop realistic cost estimates resulted in projects costing more, taking longer, and achieving less than originally planned. The persistence of these problems in NASA contract management is not only indicative of undisciplined processes or practices such as these, but may also reflect the fact that the design, development, and production of major space systems are extremely complex technical processes that must operate within complex budget and political processes. Even properly run programs can experience problems that may arise from unknowns, such as technical obstacles and changes in circumstances. Only a few things need to go wrong to cause major problems, and many things must go right for a program to be successful. The NASA FAR Supplement and NASA’s Award Fee Contracting Guide address many of the issues and problems identified by NASA on the use of award-fee contracts and provide criteria for appropriately using such contracts. Much of the guidance on award-fee contracting was issued in response to weaknesses in CPAF contracting practices identified by NASA internal reviews and NASA’s Office of Inspector General in the early 1990s. Those weaknesses included the awarding of excessive fees with limited emphasis on acquisition outcomes (end results, product performance, and cost control); rollover of unearned fee; use of base fee; and the failure to use both positive and negative incentives. NASA updated its award-fee guide in 1994, 1997, and 2001 to explain and elaborate on its award-fee policy. The 2001 revision also reflects the FAR’s additional emphasis on using performance-based contracts. NASA’s award-fee guide emphasizes tying fees to outcome factors. The guide states that outcome-based factors are the least administratively burdensome type of evaluation factor and should provide the best indicator of overall success. The award-fee guide warns against micromanaging performance and diluting the emphasis of criteria by spreading the potential award fee over a large number of performance evaluation factors. Instead, the guide recommends selecting broad performance evaluation factors, such as technical factors, project management, and cost control supplemented by a limited number of subfactors under these factors. Cost control is required to be a key performance evaluation factor in award-fee performance evaluation plans, largely because of past performance issues in which contractors were paid millions of dollars in fees on contracts that were experiencing hundreds of millions of dollars in cost overruns. The NASA FAR Supplement states that cost control shall be no less than 25 percent of the total weighted evaluation factors when explicit evaluation factor weightings are used. The NASA FAR Supplement states that emphasis on cost control should be balanced against other performance requirement objectives, and the contractor should not be incentivized to pursue cost control to the point that overall performance is significantly degraded. NASA’s regulations prohibit rolling over unearned fee to subsequent evaluation periods for service contracts. For such contracts, each interim evaluation and the last evaluation are final. Another key element of the current award-fee regulations is an increased emphasis on overall contractor performance and the end product, rather than on incremental progress. NASA requires conducting interim evaluations on end item contracts until final product delivery to monitor performance prior to contract completion and establish the basis for making interim payments. At the end of the contract, a final evaluation is conducted and the contractor’s total performance is evaluated against the award-fee plan to determine total earned award fee. For example, the contractor may be evaluated and paid an interim fee once every 6 months until the product is delivered.