Sign In
  • Question

    Is it acceptable to have an Award Fee Period for 3 years and make interim assessments (including partial payments) with the final determination made at the end of the three year period?


    Answer


    The short answer is yes.  However, there are limitations in the FAR, DFARS, and PGI that must be adhered to.  Additionally, it is common for organizations to have their own specific limitations or local policies that may even further restrict the use of Cost Plus Award Fee (CPAF) type contracts.  I can advise down to the DOD level, but am not versed in local policies.  The regulatory background including limitations contained in the regulations and a summation of how they pertain to your question follows:

    FAR 16.401(e) is quoted here for reference:
    “Award-fee contracts are a type of incentive contract.
    (1) Application. An award-fee contract is suitable for use when--
    (i) The work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, schedule, and technical performance;
    (ii) The likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivates the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved; and
    (iii) Any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits as documented by a risk and cost benefit analysis to be included in the Determination and Findings referenced in 16.401(e)(5)(iii).
    (2) Award-fee amount. The amount of award fee earned shall be commensurate with the contractor's overall cost, schedule, and technical performance as measured against contract requirements in accordance with the criteria stated in the award-fee plan. Award fee shall not be earned if the contractor's overall cost, schedule, and technical performance in the aggregate is below satisfactory. The basis for all award-fee determinations shall be documented in the contract file to include, at a minimum, a determination that overall cost, schedule and technical performance in the aggregate is or is not at a satisfactory level. This determination and the methodology for determining the award fee are unilateral decisions made solely at the discretion of the Government.
    (3) Award-fee plan. All contracts providing for award fees shall be supported by an award-fee plan that establishes the procedures for evaluating award fee and an Award-Fee Board for conducting the award-fee evaluation. Award-fee plans shall--
    (i) Be approved by the FDO unless otherwise authorized by agency procedures;
    (ii) Identify the award-fee evaluation criteria and how they are linked to acquisition objectives which shall be defined in terms of contract cost, schedule, and technical performance. Criteria should motivate the contractor to enhance performance in the areas rated, but not at the expense of at least minimum acceptable performance in all other areas;
    (iii) Describe how the contractor's performance will be measured against the award-fee evaluation criteria;
    (iv) Utilize the adjectival rating and associated description as well as the award-fee pool earned percentages shown below in Table 16-1. Contracting officers may supplement the adjectival rating description. The method used to determine the adjectival rating must be documented in the award-fee plan;
    Award-Fee Adjectival Rating Award-Fee Pool Available To Be Earned Description
    Excellent 91%--100% Contractor has exceeded almost all of the significant award-fee criteria and has met overall cost, schedule, and technical performance requirements of the contract in the aggregate as defined and measured against the criteria in the award-fee plan for the award-fee evaluation period.
    Very Good 76%--90% Contractor has exceeded many of the significant award-fee criteria and has met overall cost, schedule, and technical performance requirements of the contract in the aggregate as defined and measured against the criteria in the award-fee plan for the award-fee evaluation period.
    Good 51%--75% Contractor has exceeded some of the significant award-fee criteria and has met overall cost, schedule, and technical performance requirements of the contract in the aggregate as defined and measured against the criteria in the award-fee plan for the award-fee evaluation period.
    Satisfactory No Greater Than 50%. Contractor has met overall cost, schedule, and technical performance requirements of the contract in the aggregate as defined and measured against the criteria in the award-fee plan for the award-fee evaluation period.
    Unsatisfactory 0% Contractor has failed to meet overall cost, schedule, and technical performance requirements of the contract in the aggregate as defined and measured against the criteria in the award-fee plan for the award-fee evaluation period.
    (v) Prohibit earning any award fee when a contractor's overall cost, schedule, and technical performance in the aggregate is below satisfactory;
    (vi) Provide for evaluation period(s) to be conducted at stated intervals during the contract period of performance so that the contractor will periodically be informed of the quality of its performance and the areas in which improvement is expected (e.g. six months, nine months, twelve months, or at specific milestones) [emphasis added] and;
    (vii) Define the total award-fee pool amount and how this amount is allocated across each evaluation period. [emphasis added]
    (4) Rollover of unearned award fee. The use of rollover of unearned award fee is prohibited.  [emphasis added]
    (5) Limitations. No award-fee contract shall be awarded unless--
    (i) All of the limitations in 16.301-3, that are applicable to cost-reimbursement contracts only, are complied with;
    (ii) An award-fee plan is completed in accordance with the requirements in 16.401(e)(3); and
    (iii) A determination and finding is completed in accordance with 16.401(d) addressing all of the suitability items in 16.401(e)(1).  [emphasis added]
    (f) Incentive- and Award-Fee Data Collection and Analysis. Each agency shall collect relevant data on award fee and incentive fees paid to contractors and include performance measures to evaluate such data on a regular basis to determine effectiveness of award and incentive fees as a tool for improving contractor performance and achieving desired program outcomes. This information should be considered as part of the acquisition planning process (see 7.105) in determining the appropriate type of contract to be utilized for future acquisitions.
    (g) Incentive- and Award-Fee Best Practices. Each agency head shall provide mechanisms for sharing proven incentive strategies for the acquisition of different types of products and services among contracting and program management officials.”
    Of course, the entirety of the clause must be complied with.  Emphasis has been added to a few of the later paragraphs to draw attention to the FAR discussion of evaluation periods and how the award fee pool amounts are to be allocated across the periods, as well as some limitations in the use of Award Fees.

    The
    DFARS at 216.405-1 and -2 has more guidance on CPAF contracts and is reproduced here:
    Cost-plus-award-fee contracts.
    (1) Award-fee pool. The award-fee pool is the total available award fee for each evaluation period for the life of the contract. The contracting officer shall perform an analysis of appropriate fee distribution to ensure at least 40 per cent of the award fee is available for the final evaluation so that the award fee is appropriately distributed over all evaluation periods to incentivize the contractor throughout performance of the contract. [emphasis added]  The percentage of award fee available for the final evaluation may be set below 40 per cent if the contracting officer determines that a lower percentage is appropriate, and this determination is approved by the head of the contracting activity (HCA). The HCA may not delegate this approval authority.
    (2) Award-fee evaluation and payments. Award-fee payments other than payments resulting from the evaluation at the end of an award-fee period are prohibited. (This prohibition does not apply to base-fee payments.) [emphasis added]  The fee-determining official’s rating for award-fee evaluations will be provided to the contractor within 45 calendar days of the end of the period being evaluated. The final award-fee payment will be consistent with the fee-determining official’s final evaluation of the contractor’s overall performance against the cost, schedule, and performance outcomes specified in the award-fee plan.
    (3) Limitations.
    (i) The cost-plus-award-fee contract shall not be used—
    (A) To avoid—
    (1) Establishing cost-plus-fixed-fee contracts when the criteria for cost-plus-fixed-fee contracts apply; or
    (2) Developing objective targets so a cost-plus-incentive-fee contract can be used; or
    (B) For either engineering development or operational system development acquisitions that have specifications suitable for simultaneous research and development and production, except a cost-plus-award-fee contract may be used for individual engineering development or operational system development acquisitions ancillary to the development of a major weapon system or equipment, where—
    (1) It is more advantageous; and
    (2) The purpose of the acquisition is clearly to determine or solve specific problems associated with the major weapon system or equipment.
    (ii) Do not apply the weighted guidelines method to cost-plus-award-fee contracts for either the base (fixed) fee or the award fee.
    (iii) The base fee shall not exceed three percent of the estimated cost of the contract exclusive of the fee.
    (4) See PGI 216.405-2 for guidance on the use of cost-plus-award-fee contracts.”
    Emphasis has been added above to highlight specific areas that are particularly relevant to your question.  I will reference back to these in my summation.

    The final piece of guidance comes from DFARS Procedures, Guidance, and Information (PGI) at PGI 216.405-2 and contains a discussion of how to handle profit or fee when definitizing an action with an award fee.  Also at (2) of the clause, there is the caveat that if contractor performance has been submarginal or unsatisfactory, the Fee-Determining Official (FDO) normally should not allow the contractor any award fee.


    Summarizing, yes it is acceptable to have an Award Fee period for 3 years and make interim assessments.  In fact, that is exactly what
    FAR 16.401(e)(3)(vi), emphasized above, discusses.  However, you may not roll over any unearned fee from one evaluation period to another [FAR 16.401(e)(4) above] and you must abide by the limitations contained in FAR 16.401(e)(5) [also above].  The DFARS also includes limitations at 216.405-2(1) and (2) which require that at least 40 percent of the award pool be held until the final evaluation period and distribute the fee available for each period in a manner that incentivizes the contractor throughout performance of the contract.  Also, note that “award fee payments other than payments resulting from the evaluation at the end of an award-fee period are prohibited.”  [DFARS 216.405-2(2)]


    Open full Question Details