Award Fees and Their Relationship to Contract Success

Abstract

Award fee contracts are applicable when objective criteria are neither feasible nor effective. They were heavily used to incentivize contractor performance in the procurement of major defense acquisition programs (MDAPs) until 2005, when the Government Accountability Office (GAO) released Report 06-66. The report caused the Department of Defense to shy away from using award fee contracts, resulting in a usage decrease by 46% in 2007 and 85% in 2008. The purpose of this research is to determine whether a relationship exists between award fee contracts and contract success as measured by earned value management (EVM) or contractor performance ratings. Data was collected from a sample of contracts from a major Navy command. Six contract observations were identified as successful contracts, with one contract being labeled a failure. Further analysis showed a positive correlation between award fee decisions and contractor performance ratings on the successful contracts. Although the findings are encouraging, they were not statistically significant due to the small sample size.