Agencies can use a variety of contract types to acquire products and services. Cost-reimbursement contracts are suitable only when uncertainties in the scope of work or cost of services prevent the use of contract types in which prices are fixed, known as fixed-price contracts. A contractor may receive a fixed or base fee on a contract regardless of performance, and also may earn an incentive, which may be used separately or jointly. Such incentive-type contracts, of which award fee contracts are an example, reward contractors with fees based on performance. Award fee contract types are to be used when it is not feasible to devise predetermined objective incentive targets based on cost, technical performance, or schedule, with the focus instead being on subjective criteria, such as project management. In fiscal year 2008, cost- reimbursement contracts made up 94 percent of contracts using award fees. As shown in figure 1, since we issued our report on DOD’s use of award fees, DOD’s use of cost-plus-award-fee (CPAF) contracts has decreased while its use of other cost-type contracts has increased or stayed the same. Figure 2 shows that use of CPAF contracts as a proportion of overall cost- plus contracts varies greatly at the other agencies we reviewed. Contract type is based on a risk assessment by the contractor and the government. The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance. In advance of contract award, outcomes can be identifiable and measurable, identifiable but not measurable, or unable to be identified. The FAR states that an award fee should be used when the work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule. Alternatively, an incentive fee contract should be used when cost and performance targets are objective and can be predetermined, allowing a formula to adjust the negotiated fee based on variations relative to the targets. These incentive types also can be combined into a multiple-incentive fee contract, which combines objectively and subjectively measured criteria to reward contractor performance while maximizing the government’s ability to use performance metrics that are predetermined, measurable, and targete desired contract outcomes. Agencies, when using multiple-incentive contracts, generally split the available award money into categories that evaluate the contractor’s cost and performance using a combination of objective formulas and subjective judgments to evaluate performance tasks stated in the contract. Appendix II provides definitions contract types as well as terms associated with award fees. Our previous work reviewing the use of award and incentive fees found that programs often paid fees without holding contractors accountable for achieving desired acquisition outcomes, such as meet cost and schedule goals and delivering desired capabilities. Over 5 percent of DOD programs reviewed provided contractors multiple opportunities to earn an estimated $669 million in fees not awarded in previous periods. We also reported that DOD programs regularly paid contractors a significant portion of the available fee for what award fee plans describe as “acceptable, average, expected, good, or satisfactory”performance when federal acquisition regulations and military service guidance state that the purpose of these fees is to motivate excellent performance. To improve the use of award fee contracts we made sev recommendations including suggesting that DOD move toward more outcome-based award fee criteria, ensure that award fees are paid only for above satisfactory performance, and define when rollover is appropria We also recommended that DOD develop a mechanism for capturin award fee d contracts. te. ata for use in evaluating the effectiveness of award fee At NASA, we reported that guidance on the use of CPAF contracts provides criteria for improving the effectiveness of award fees. For example, the guidance emphasizes outcome factors that are good indicators of success in achieving desired results, cautions against using numerous evaluation factors, prohibits rollover of unearned fee, and encourages evaluating the costs and benefits of such contracts before using this contract type. However, we found that NASA did not always follow the preferred approach laid out in its guidance. For example, som evaluation criteria contained input or process factors, such as program planning and organizational management rather than focusing on outcomes or results. Moreover, some contracts included numerous supporting subfactors that may dilute emphasis on any specific criteria. Although the FAR and NASA guidance require considering the costs and e benefits of choosing a CPAF contract, NASA did not perform such analyses. In some cases, we found a significant disconnect between program results and fees paid. In 2007, OMB issued governmentwide guidance highlighting preferred practices and directing agencies to review and update their acquisition policies. That guidance included four fundamental practices: (1) linkingaward fees to acquisition outcomes, (2) limiting the use of rollover, (3) emphasizing excellent performance, and (4) prohibiting payments for unsatisfactory performance. DOD issued new policies on the prope of award fees, while NASA reemphasized its existing guidance. The policies at both agencies reflect these four elements in the OMB guidanc DOE, DHS, and HHS vary in the extent to which they have agencywide guidance, generally allowing operational divisions to supplement award fee guidance. However, existing guidance is not always consistent within agencies or consistent with practices outlined by OMB. e. DOD and NASA ha actions that influenced t d begun to address. Table 1 provides a timeline of he guidance and that have followed its issuance. In March 2006, DOD issued guidance on using award fees that was in direct response to our recommendations. This guidance stated that it is imperative that award fees are linked to desired outcomes such as discrete events or milestones. Such milestones include design reviews and system demonstrations for weapons systems. The guidance also stated that while award fee contracts should be structured to motivate excellent contractor performance, award fees must be commensurate with contractor performance over a range from satisfactory to excellent performance. The guidance recognized that performance that is less than satisfactory is not entitled to any award fee and that satisfactory performance should earn considerably less than excellent performance, otherwise the motiva achieve excellence is negated. Further, the guidance established tha practice of rolling over unearned award fees from one period to another should be limited to exceptional circumstances. The guidance also established the Award and Incentive Fee Co mmunity of Practice to facilitate discussion of strategies across the acquisition workforce and serve as a repository for policy information, related training courses, and examples of good award fee arrangements. In October 2006, Congress required DOD to develop specific guidance linking award and incentive fees to acquisition outcomes. The requirement specified that among other elements, the guidance should define acquisition outcomes in terms of program cost, schedule, and performance and provide guidance on determining ‘‘excellent’’ or ‘‘superior’’ performance. Additionally, the guidance was to prohibit the payment of award fees for performance that is judged to be below satisfactory or does not meet the basic requirements of the contract. The guidance was also to establish standards for determining the percentage of the available award fee, if any, for various levels of performance ranging from satisfactory to excellent. Further, DOD was to provide specific guidance on the circumstances, if any, in which it may be appropriate to roll over award fees that are not earned in one award fee period to a subsequent award fee period or periods and include performance measures to evaluate the effectiveness of award and incentive fees as a tool for improving contractor performance and achieving desired program outcomes. Finally, DOD’s guidance was to provide mechanisms for sharing proven incentive strategies for the acquisition of different types of products and services. on In April 2007, DOD responded by providing additional guidance that reemphasized that cost-plus award fee contracts are suitable for use when it is neither feasible nor effective to devise objective targets applicable to cost, technical performance, or schedule. Recognizing that most DOD contracts contain objective criteria, the guidance clarified that in insta where objective criteria exist and the Contracting Officer and Program Manager wish to also evaluate and incentivize subjective elements of performance, the most appropriate contract type would be a multiple incentive type contract containing both incentive and award fee criteria. Additionally, the guidance defined the levels of performance used to evaluate contractors and the corresponding percentage of fee that could be earned. Table 2 illustrates the scale as recommended by DOD. To address the use of award fees and specific weaknesses previously identified by its Inspector General in the early 1990s, NASA issued guidance in its FAR Supplement and Award Fee Contracting Guide. Previously identified 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 award fee policy. The 2001 revision also reflects the FAR’s additional emphasis on using performance-based contracts. NASA’s Award Fee Contracting Guide provides a tool to contracting officers with guidance on when to use an award fee contract, the risk involved with various contract types, and how to combine award fees with other contract types. Additionally, NASA’s guidance addresses award fee practices that are designed to produce positive results. For example, in describing evaluation factors to be used in award fee determinations, NASA established a preference to use outcome factors when feasible since they are better indicators of success relative to the desired result. Additionally, the guidance provides the scale displayed in table 3 with which to evaluate contractor performance and emphasizes that no award fee will be paid to contractors that perform unsatisfactorily. (percentage) Of exceptional merit; exemplary performance in a timely, efficient and economical manner; very minor (if any) deficiencies with no adverse effect on overall performance. Very effective performance, fully responsive to contract requirements; contract requirements accomplished in a timely, efficient and economical manner for the most part; only minor deficiencies. Effective performance; fully responsive to contract requirements; reportable deficiencies, but with little identifiable effect on overall performance.