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Title: Performance, Award Fee and Costs Incentives during System Design and Development
Authors: Gregory Hildebrandt
Keywords: General Accounting Office (GAO)
System Development and Demonstration (SDD)
Cost-Sharing Ratio
Performance Incentives
Award Fee
Accounting Profit
Economic Profit
Cost Uncertainty
Moral Hazard
Cost-Plus-Award Fee/Incentive Fee (CPIF/AF)
F/A-18E/F CPIF/AF Contract
System Design Specification
Issue Date: 3-Mar-2010
Publisher: Acquisition Research Program
Citation: Published--Unlimited Distribution
Series/Report no.: Performance Incentives & Award Fees
Abstract: The analysis addresses the use of Performance Incentives and Award Fees in DoD contracting during System Development and Demonstration (SDD). There is discussion of the F/A-18E/F contract that included cost-sharing, Performance Incentives and Award Fees. However, we first discuss recent GAO criticism of profits received on Award Fee contracts and the response by DoD and other organizations. Next, the general policy guidelines established in 1969 by DoD and NASA that are still in effect are reviewed, as are the recommendations made by academic economists beginning in the 1970s. We also discuss the recent introduction of System Design Specifications. While these specifications contain a great deal of information that can be used when developing Performance Incentives and Award Fees, this new policy represents a movement away from performance specifications and may constrain a contractor's ability to make trade-off decisions. The broad conclusion of this analysis is that the intuition obtained from the 1969 DoD and NASA Guide might be combined with that of economists when properly structuring incentive contracts. This may help achieve the objectives of the government when there is pervasive cost uncertainty, challenging performance characteristics, and certain contractor actions not easily observable by the government.
Description: Contract Management / NPS Faculty Research
Appears in Collections:Sponsored Acquisition Research & Technical Reports

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