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NASA wants to change award-fee evaluations and payments

On April 22, 2016, the National Aeronautics and Space Administration (NASA) announced proposed rule changes about award fees. The proposed changes are a result of the NASA Office of the Inspector General (OIG) audit report, “NASA’s Use of Award Fee Contracts” (Report IG-14-003). The changes will be made in Parts 1816 and 1852 of Title 48 of the Code of Federal Regulations (CFR).

Government procurements can generally be divided into two types: fixed-price contracts and cost-reimbursement contracts. The fixed-price contracts are typically used when costs and risks are clearly defined, as when purchasing commercially available items such as laptop computers. Cost-reimbursement contracts are typically used when risks are not clearly defined and the government is likely to require changes to the end product. This risk makes it difficult to estimate costs in advance. In the development of spacecraft, cost-reimbursement contracts are quite common.

A type of cost-reimbursement contract is an incentive contract in which a predetermined amount of money is set aside for the contractor to earn based on its performance. Properly structured incentive contracts can reduce the risk of cost overruns, delays, and performance failures by providing a contractor the opportunity to earn additional money. One type of incentive contract that NASA has used since the 1960s is the award-fee contract. An award fee is a pool of money a contractor may earn in whole or in part by meeting or exceeding predetermined performance criteria. NASA uses award-fee contracts to motivate contractor performance and as a means to periodically evaluate that performance.

NASA applies a clause unique to end-item deliverable contracts informally known as the “look-back clause.” For contracts with this clause, NASA evaluates contractor performance and makes interim award-fee payments throughout the course of the contract, but the amount of award fee the contractor ultimately receives is based upon demonstrated performance of the end-item deliverable.

The proposed rule changes implement the OIG’s recommendation that award fees not earned in interim evaluations are not available to contractors at the end of contract performance unless they are truly deserved. The proposed regulation provides that if the final evaluation is higher or lower than the interim evaluations, then a fee determination official must review the evaluation before the final award fee is disbursed. In some cases, a contractor may have to pay back part of the interim award fees.

Wording of the current 48 C.F.R. 1816.405-273:

(b) End item contracts. On contracts, such as those for end item deliverables, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final. At that point, the total contract award fee pool is available, and the contractor’s total performance is evaluated against the award fee plan to determine total earned award fee. In addition to the final evaluation, interim evaluations are done to monitor performance prior to contract completion, provide feedback to the contractor on the Government’s assessment of the quality of its performance, and establish the basis for making interim award fee payments (see 1816.405–276(a)). These interim evaluations and associated interim award fee payments are superseded by the fee determination made in the final evaluation at contract completion. The Government will then pay the contractor, or the contractor will refund to the Government, the difference between the final award fee determination and the cumulative interim fee payments.
(c) Control of evaluations. Interim and final evaluations may be used to provide past performance information during the source selection process in future acquisitions and should be marked and controlled as “Source Selection Information—See FAR 3.104.”

Wording of the proposed 48 C.F.R. 1816.405-273:

(b) End Item Contracts. On contracts, such as those for end item deliverables, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final. At that point, the total contract award fee pool is available, and the contractor’s total performance is evaluated against the award fee plan to determine total earned award fee. In addition to the final evaluation, interim evaluations are done to monitor performance prior to contract completion, provide feedback to the contractor on the Government’s assessment of the quality of its performance, and establish the basis for making interim award fee payments (see 1816.405-276(a)). These interim evaluations and associated interim award fee payments are superseded by the fee determination made in the final evaluation at contract completion. However, if the final award fee adjectival rating is higher or lower than the average adjectival rating of all the interim award fee periods, or if the final award fee score is eight base percentage points higher or lower than the average award fee score of all interim award fee periods (e.g. 80% to 88%), then the Head of the Contracting Activity (HCA) or the Deputy Chief Acquisition Officer (if the HCA is the Fee Determination Official) shall review and concur in the final award fee determination. The Government will then pay the contractor, or the contractor will refund to the Government, the difference between the final award fee determination and the cumulative interim fee payments.
(c) Control of evaluations. Interim and final evaluations may be used to provide past performance information during the source selection process in future acquisitions and should be marked and controlled as “Source Selection Information—see FAR 3.104.” See FAR 42.1503(h) regarding the requirements for releasing Source Selection Information included in the Contractor Performance Assessment Reporting System (CPARS).

Comments must be submitted on or before June 21, 2016.

Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.

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