Guidance on Using Incentive and Other Contract Types
When it comes to incentive contracts, the Director of Defense Procurement and Acquisition Policy (DPAP) has issued new April 2016 "Guidance on Using Incentive and Other Contract Types", which provides detailed information on the subject. According to the cover memo, “this guidance addresses in a comprehensive way the considerations our contracting an d acquisition professional should take into account when selecting and negotiating the most appropriate contract type for a given requirement.”
The DPAP Director goes on to remind readers that “incentive-type contracts are proven tools that enable the Department of Defense to achieve better acquisition outcomes in areas that are most important to our mission needs. They also are vehicles for DoD and industry to share equitably in cost savings or risks.”
Keep in mind, as the guidebook reiterates, “an incentive, which is a stimulus to a desired action, exists in every business arrangement. The effective application of incentives remains essential to building successful business arrangements that maximize value for all parties. DoD is committed to adopting incentive strategies that attract, motivate, and reward traditional and nontraditional contractors to ensure high performance.”
Additionally, it is important to also remember that “the profit motive is the essence of incentive contracting. Incentive contracts provide the opportunity for the contractor to realize increased profit for attaining cost, performance and/or schedule criteria. At the same time, negative incentives may be employed to motivate contractors to avoid reduced profitability when outcomes fall short of the Department’s desired levels. Incentive contracts should be structured to achieve desired objectives through reasonable and attainable targets that are clearly communicated to the contractor. When developing an incentive type contract, the team should consider factors other than profit/fee that will motivate a contractor to perform. Examples of these factors include follow-on business, growth, maintaining or retaining a production capability, and positive past performance information (collected via Contractor Performance Assessment Reports).”
Finally, in any business arrangement, both positive (e.g., “carrots”) and negative (e.g., “sticks”) incentives are available. As the guidebook reminds us, “negative incentives are the counterpart of reward. The traditional method of applying positive (reward) incentives for cost under target and negative (penalty) incentives for cost over target in a cost-incentive-only contract has been the most widely applied incentive arrangement.”
The memo mentions two continuous learning modules currently in development entitled “Understanding Incentive and Other Contract Types” and “Advanced Issues in Incentive Contracting.” We will provide links to these when they deploy later this year. In the meantime, we also offer an ACQuipedia article entitled “Incentives - Motivating Achievement of Desired Product Support Outcomes", which not only discusses contract types, but incentivizing and motivating desired product support outcomes for both industry and government product support integrators (PSI) and product support providers (PSP).