DOD: "Satisfactory" Is Good Enough For Award Fee The Defense Department will continue paying contractors award fees for satisfactory performance, despite a Government Accountability Office recommendation that the fees be reserved for those companies receiving higher marks. DOD issued new guidance on the use of award fees in a March 29 memo from James Finley, deputy undersecretary of defense for acquisition and technology. (See www.acq.osd.mil/dpap/policy/policyvault/2006-0334-DPAP.pdf.) In a December report, GAO said the department should ensure “that award-fee structures are motivating excellent contractor performance by only paying award fees for above satisfactory performance.” But the new DOD guidance rejects that approach. “Clearly satisfactory performance should earn considerably less than excellent performance, otherwise the motivation to achieve excellence is negated,” it says. “However, because base fees are limited to no more than three percent of target cost (DFARS 216.405-2), it is appropriate to award a portion of the award fee pool for satisfactory performance to ensure that contractors receive an adequate fee on our contracts.” The guidance says no award fee should be given for less than satisfactory performance. GAO said Defense had wasted taxpayer money by paying fees for “‘acceptable, average, good, expected or satisfactory’ performance when federal acquisition regulations and military service guidance state that the purpose of these fees is to motivate excellent performance.” (SAA, 12/23/05) The report says DOD did not assess a contractor’s performance based on the outcome of the acquisition – whether the product or service was satisfactory and was delivered on time and on budget – but on such factors as the contractor’s responsiveness to feedback from department officials. ‘DOD programs have paid contractors large amounts of fee on acquisitions that are falling behind schedule, overrunning costs, and experiencing significant technical problems,” GAO said. In the new guidance, Finley wrote, “It is imperative that award fees be tied to identifiable interim outcomes, discrete events or milestones, as much as possible” GAO also criticized the practice of allowing a company a second chance at winning an award fee, a practice called “rollover.” DOD said, “Use of a ‘rollover’ provision should be the exception rather than the rule,” and a contractor who does not earn the award fee on the first try should receive only part of the available fee on a rollover. GAO estimated that most contractors were paid 90% of the available award fees, for a total of $8 billion, over a recent five-year period. The report is GAO-06-66, available at www.gao.gov.