The Obama administration plans to issue a new contracting rule in the next two months aimed at stopping the payment of performance fees to contractors that perform poorly.

"The changes will provide a better foundation for eliminating wasteful practices that undermine the incentive to excel, such as allowing contractors to receive fees for unsatisfactory performance, or routinely tying fees to effort rather than achievement of cost, schedule and performance goals," said Jeffrey Zients, the Office of Management and Budget's deputy director for management. Congress directed the administration to draft such a rule in last year's Defense Authorization Act.

Zients spoke before the Senate Homeland Security and Governmental Affairs subcommittee on financial management, which examined how agencies use cost-plus award fee contracts, which let vendors earn bonuses on work if they do a good job.

In June, the Government Accountability Office found agencies failed to carry out OMB guidelines written in 2007 that required agencies to pay award fees to contractors only if they deserve them because of good performance. Agencies have wasted millions of taxpayer dollars paying bonuses to poorly performing contractors, according to GAO's report.

Cost-plus award fee contracts should be used sparingly, when government cannot define what it needs from a contractor, like when it asks a contractor to design a major weapons or space system, he said.

When fees are tied to performance, these contracts can be a good way to encourage contractors to reduce costs, stay on schedule and meet or exceed performance goals, mitigating risk to government, Zients said. But the GAO's findings show that misuse has led to "the unnecessary loss of significant taxpayer dollars," Zients said.

A new Federal Acquisition Regulation will attempt to change that by providing granular detail on how to use award fees. It will:

• Require agencies to determine up front that an award fee contract is the appropriate contract for what they're buying.

• Provide evaluation standards to help agencies differentiate between levels of performance and the percentage of award fee the contractor can earn.

• Prohibit award fee payments for unsatisfactory contractor performance.

Provide guidance on when agencies can give contractors the opportunity to win the rest of a denied performance bonus.

In addition to issuing the new rule, OMB will ask agencies to periodically review the award fees they give their contractors to ensure they're properly given. Agencies will also have to report fee information into the Past Performance Information Retrieval System — a governmentwide past performance information database — so agencies can use that information for future contract award decisions, Zients said.

Finally, OMB will instruct agencies to collect data on award fees paid and the associated performance ratings dictating those payments so OMB can conduct a broader trend analysis.

Because 95 percent of award fee contracts are issued by five agencies — the Defense, Energy, Homeland Security, and Health and Human Services departments and NASA — there is opportunity to figure out what practices work and don't work and then educate procurement staffs, Zients said.