In any acquisition, the contract type provides the foundation for incentivizing a contractor’s performance and is just one element of the contract, which may also include performance, cost, or delivery incentives, and other contract terms and conditions that incentivize performance. The type of contract used for any given acquisition inherently determines how risk will be distributed between the government and the contractor. Since the contract type and the contract price are interrelated, they must be considered together. The government’s objective is to negotiate a contract type and price (including cost and the contractor’s fee or profit) that will result in an acceptable level of risk to the contractor, while also providing the contractor with the greatest incentive for effective and efficient performance. Incentive contracts, which include award fee contracts, are designed to attain specific acquisition objectives by including incentive arrangements that (1) motivate contractor efforts that might not otherwise be emphasized, and (2) discourage contractor inefficiency and waste. One of the main characteristics of award fees and other incentives is how they are administered in the contract. Award fees are generally subjectively determined and incentive fees are generally objectively determined. When incentive arrangements are done properly, the contractor has profit motive to keep costs low, deliver a product on time, and make decisions that help ensure the quality of the product. Our prior work has shown, however, that incentives are not always effective tools for achieving desired acquisition outcomes and that, in some cases, there are significant disconnects between program results and incentives paid. Additionally, we have repeatedly found that some agencies did not have methods to evaluate the effectiveness of award fees. More recently, in March 2017, we found that fixed-price incentive shipbuilding contracts did not always lead to desired outcomes, and that the Navy had not assessed whether adding incentives improved contractor performance. We made recommendations to the Navy, including that it conduct a portfolio-wide assessment of its use of additional incentives on fixed-price incentive contracts across its shipbuilding programs. DOD agreed with our recommendations. Numerous contract types are available to the government to provide flexibility in acquiring the supplies and services agencies need, including satellite acquisitions. Table 1 provides an overview of typical contract types and how they may be used to acquire satellites. When determining the contract and incentive structure for satellite acquisitions, the government may consider a number of factors: Where the satellite is in the acquisition phase. Satellite contracts can include design, development, integration, and testing, and can cover more than 15 years. The government can tailor the contract type and fees to meet the specific circumstances of the acquisition, for example, the phase of the acquisition cycle. Figure 1 shows the notional acquisition phases for a satellite. During the design and development phase, when technology risks are higher, the government typically uses cost-reimbursement contracts. When the government is acquiring a “production-model” satellite, or a copy of a satellite with a proven design and build, a fixed-price contract may be used. In addition, for the on-orbit phase, the government typically negotiates with the contractor regarding the amount of incentives related to successful on-orbit performance. Which satellite component is being acquired. Satellites are generally comprised of the bus and the instruments or payloads. The bus is the body of the satellite. It carries the payload and is composed of a number of subsystems, like the power supply, antennas, telemetry and tracking, and mechanical and thermal control subsystems. The bus provides electrical power, stability, and propulsion for the entire satellite. The payload of a satellite, which is carried by the bus, refers to all the devices or instruments a satellite needs to perform its mission, and can differ for each type of satellite. Some examples include cameras to take pictures of cloud formations for a weather satellite, and transponders to relay television signals for a communications satellite. Generally, developing payloads is riskier than developing buses. Number of contracts used to acquire satellite components. The government can choose to award one contract for the development and production of the satellite bus and all associated payloads, or it can award separate contracts for the development and production of the bus and each individual instrument. In the contracts we reviewed, DOD typically awarded a single contract to a prime contractor for the development of the bus and payloads, and according to officials, the prime contractor often awards contracts to subcontractors to provide the various instruments and parts. In contrast, for the NASA contracts and orders we reviewed, NASA typically awarded separate contracts and orders to multiple contractors to develop the bus and each instrument. Number of space vehicles being acquired on a contract. The government can acquire a single satellite or multiple satellites under one contract, and one contract may also include components for multiple satellites. Further, depending on the mission, an agency may buy a single satellite (such as for scientific discovery) or blocks of satellites (such as for global communications). The quality and performance of a satellite—including whether it meets on- orbit requirements—usually cannot be determined until after it launches and reaches its intended orbit. Satellite development and production contracts may include on-orbit performance incentives aimed at ensuring that the satellite will meet performance requirements. Because the incentive is not earned until a satellite successfully demonstrates its performance on-orbit, an on-orbit performance incentive can be thought of as the dollar amount at risk if the contractor fails to meet the performance requirements specified in the contract (see figure 2). On-orbit incentives are typically documented in a satellite contract’s fee plans or in contract clauses. There are generally three mechanisms for on-orbit performance incentives: negative incentives, positive incentives, and withholding of milestone payments. Agencies can use a combination of these when designing on-orbit incentives, which are generally tied to objective performance criteria, such as successfully getting into the right orbit and achieving critical performance parameters once there. When using negative incentives, the government generally pays the contractor incentives as the contractor completes work during the development or production phase. The contractor would have to pay back some or all of the incentives if the satellite fails to meet on-orbit performance parameters. With positive incentives, the government assesses satellite performance in any given period, such as 6 or 12 months, to determine how much the contractor earns for that period. The amount at risk for the contractor could be the same for a positive incentive or a negative incentive. Firm-fixed-price contracts for satellite programs may have progress or performance-based payment plans that require fixed payments to be made upon successful completion of milestones, such as preliminary design review, final system test, and successful on-orbit check-out. If a satellite fails prior to check-out, the government may withhold the final milestone payment from the contractor. Because satellite acquisitions are unlike other acquisitions, the Air Force’s Space and Missile Systems Center (SMC) and NASA have tailored guidance on space acquisitions, and each specifically addresses on-orbit performance incentives. SMC’s March 2007 incentives guide states that on-orbit incentives should be clearly written to ensure enforceability, and require fully demonstrable performance in order to earn fee. The guidance also specifies that the contract should contain specific descriptions as to the rights of the parties in the event of a failure, caused either by the contractor or by the government. One senior SMC contracting official stated that their contracting directorate maintains a repository of on- orbit incentive plans and contract clauses that have been implemented. These incentives arrangements can be used as guides for SMC programs as they develop new contracts. NASA’s FAR supplement generally requires certain contracts for hardware deliverables worth more than $25 million to include performance incentives. In the case of satellite acquisitions, the on- orbit incentives serve as performance incentives. In addition, NASA’s FAR supplement requires that for cost-plus-award-fee contracts for end items, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final. This allows NASA to evaluate the contractor’s total performance—after the end item is delivered—against the award fee plan to determine the total earned award fee from the contract award fee pool. In other words, under this “re-look provision,” the total award fee is not earned until the satellite has demonstrated its performance on-orbit. In addition to on-orbit performance incentives, it is important to acknowledge the totality of the incentives and other terms in satellite contracts that are designed to motivate contractors to achieve the cost, schedule, and performance goals of the program. In many cases, multiple incentives are used to achieve such goals. The FAR provides that when multiple incentives are used, a balance must be achieved in which no incentive is either so insignificant that it offers little reward for the contractor, or so large that it overshadows other areas and neutralizes their motivational effect. In addition, it requires all multiple incentive contracts to include a cost incentive that precludes rewarding a contractor for superior technical performance when their cost outweighs their value. For satellite programs, achievement of full mission performance is the primary objective, but cost and schedule goals also play key roles in a program’s success. Our body of prior work has shown that most major government satellite programs experience significant cost growth and schedule delays due to unmatched resources and requirements, immature technologies at program start, and inconsistent application of knowledge-based practices throughout the life of a program. As a result, although some programs may have successful on-orbit performance, they may also have had major cost overruns and schedule delays along the way. There are many nuances when it comes to satellite failures. These can be especially important when considering government opportunities for recourse should a satellite fail or underperform. The Aerospace Corporation (Aerospace), a federally funded research and development center (FFRDC) that provides engineering and technical support to national security space programs, categorizes satellite anomalies based on the criticality or severity of the anomaly and distinguishes them based on their impact on the mission.