Scott Quehl leads Accenture Federal Services Strategic Government Efficiency offering. He formerly served as Chief Financial Officer and Assistant Secretary for Administration at the U.S. Department of Commerce.
Since the 1990s, administrations of both parties have promoted acquisition practices emphasizing contractor performance. Today, federal agencies can encourage contractors to put a share of their fees at risk, focusing on results instead of inputs.
There is no need for a full rewrite of the Federal Acquisitions Regulations (FAR) to accomplish this. Agencies can move forward now. Federal practitioners can broaden use of Fixed Price Plus Incentive Fee (FPI) vehicles to put a larger share of contractor payments at risk – promoting performance, efficiency and value. FPI contract structures enable balanced risk and reward sharing.
A FPI contract has two components: a pre-set price that is not adjusted based on the contractor’s costs in performing the contract, and an incentive fee tied to performance milestones. Agencies can share risk with the contractor by withholding a portion of payment unless savings and other results agreed in advance are realized and by adding premium payment for exceptional contractor performance. The arrangement demonstrates the contractor’s commitment to ensuring the government entity realizes the benefits of the initial investment and reduces the overall risk to the government.
Contracting and program officers develop metrics and methods to assess contractor performance that emphasize measurable results – such as timely delivery within cost goals – not level of effort. In defining requirements, a job analysis identifies an agency’s need and the kinds of results and services a contractor should provide, instead of how the results should be produced. One set of best practices guidance cites a specification for a cleaning contract that floors must be clean, free of scuff marks and dirt, and have a uniformly glossy finish, instead of requiring that the contractor strip and rewax the floors weekly.
Traditionally, federal agencies have applied three types of incentives for FPI contracts:
■ Cost incentives, which are typically a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage its costs. Incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula where if actual costs are below the target, an upward adjustment of target profit or fee will occur.
■ Performance incentives, where the government pays incentive fees based on the value of the business outcome, i.e. fees based on cost savings realized by the government. Performance incentives are typically used where performance can be measured objectively. Both positive and negative incentives can be used.
■ Delivery incentives, which are used when the timeline of delivery of a service or product is a priority.
Going forward, agencies can place much greater weight on fixed price incentive contracts with heavier emphasis on the incentive portion of the payment and less on the fixed price portion.
So why aren’t FPI contracts used more? One barrier may be the time required in early stages of the acquisition cycle to develop performance requirements and monitoring methods for acquisitions with results which can be well defined and measured. By reducing effort on administering hundreds of contracts to buy the same commodity, strategic sourcing can free personnel to spend more time on such planning and oversight. Another constraint is experience. The Department of Defense Better Buying Power 2.0 initiative supports increased training to acquisition personnel in these methods. The Office of Management and Budget (OMB) and councils of acquisition, information technology, and finance chiefs and public-private industry associations can share best practices and build capacity.
Connecting contracting to results ties to broader efforts to improve federal acquisitions. Better Buying Power 2.0 emphasizes contract types and incentives to reward contractor performance with high value. This includes using FPI contracts when most appropriate and instituting a superior supplier incentive program. When using “best value” criteria, “value” should be more clearly defined, such that industry can bid understanding the acceptability of proposals for performance above minimum thresholds.
Many industry stakeholders believe that lowest price, technically acceptable criteria may be best for commodities and other procurements when agencies fully know solutions and underperformance risks are low. In other cases, best value criteria will promote innovation that can lead to lower cost, less frequent change orders and stronger delivery across a contract’s life cycle.
OMB calls for improved communications with industry so that agencies can access current market information when defining requirements and acquisition strategies. The Omnibus FY2014 Appropriations Act requires a report on guidance and plans to expand transaction-based or no-cost funding models for procuring information technology – presumably with a role from commercial partners.
All of these efforts add up to a sense that there is readiness for change in federal acquisitions – change with government, industry and associations engaging on value, cost, risk, acquisition training and performance. Incentive-based contracting is a good place to share in success.