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Appropriate Award-Fee Conversion Scales Can Enhance Incentive for Contractor Performance

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The contracts and related guidelines did not specify the type of award-fee conversion scale that was to be used in calculating award fees under these contracts, and the government agencies involved in managing the contracts used the same scale for calculating award fees for all sectors and all award-fee periods. The conversion scale used, however, was not a type recommended by the U.S. Army in that it did not provide proper incentives for contractors to strive for better-thanexpected results. For example, the scale awarded no fee for a performance score of less than 60, but did award a fee of at least 60 percent of the fee pool for a score of at least 60. Thus, a performance score of 65, which is in the Good range and barely above the award threshold, would bestow on the contractor 65 percent of the award-fee pool. Use of this scale represented a departure from best practices recommended by the Army and reduced the incentive for improved contractor performance. The Army Contracting Agency Award Fee Contracts Handbook was issued in September 2003 to provide information and guidelines for developing and administering this type of contract. The ACA handbook is intended to be a living document, updated to reflect current best practices and policy concerning award fee contracts, and to be responsive to the needs of the ACA acquisition community. The handbook suggests different types of conversion scales that could be used to create incentives for the contractor to achieve superior results. However, a common characteristic of effective incentives on all of the recommended scales is that the percentage of the fee awarded for meeting the minimum threshold begins at zero, not 60. For example, one of the conversion scales recommended by the ACA is called the cubic-distribution award-fee scale, in which a score of 70 would translate to an award of only 19 percent of the fee pool.

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  • Economics and Cost Analysis
  • Government and Political Science

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