Obama Administration Seeks to Curtail Award Fee Contracts

During a recent Senate hearing, a top official from President Obama's budget office detailed the administration's plan for curtailing the use of award fee contracts, controversial vehicles that, according to good government groups, are filled with waste, fraud, and abuse. This plan stems from the Office of Management and Budget's (OMB) latest release of guidance to federal agencies on reforming the federal procurement process – part of a larger reform effort the administration is undertaking. During the same hearing, however, chief procurement officials from several federal agencies raised concerns over the possible consequences of further regulation.

On Aug. 3, the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management convened a hearing on award fee contracts, titled "Eliminating Wasteful Contractor Bonuses." Headed up by Sen. Thomas Carper (D-DE), the subcommittee first heard testimony from a panel consisting of representatives from OMB and the Government Accountability Office (GAO). Both Jeffrey Zients, the newly confirmed Deputy Director for Management at OMB, and John Hutton, Director of Acquisition and Sourcing Management at GAO, agreed with members of the subcommittee that too often, there is a misalignment of goals and rewards within award fee contracting, and the government must continue to rein in their use.

Used to outsource for products or services where the government cannot objectively measure contractor performance, award fee contracts are supposed to motivate a contractor to increase quality and control costs. If the contractor does not deliver, the government pays only the base fee and withholds any award fees that the two parties agreed upon during the negotiation of the contract. According to a series of GAO investigations, however, federal agencies have long supplied contractors with award fees for subpar work. This is the result, according to Hutton, of the gradual establishment of a culture of complacency within the federal procurement ranks to use inadequately scrutinized award fee contracts too often and without cause.

According to some GAO estimates, the practice of awarding unwarranted fees wastes hundreds of millions of taxpayer dollars every year. Despite this, Zients said implementation of OMB's recently released guidance on stricter use of award fee contracts, along with a renewed effort at increasing and developing procurement personnel, will go a long way toward cleaning up the current mess. During his testimony, Hutton noted the improvement that agencies identified in the May GAO report have already made toward enacting reforms advocated by his agency.

During the second panel, the procurement officials and a representative from an industry trade group demurred on the possible methods to control award fee contracts. Most of the testimony from the top procurement officials lapsed into a treatise on why their agency is different from others and therefore deserves not to lose flexibility to new regulations. Officials from the National Aeronautics and Space Administration (NASA), the Department of Homeland Security (DHS), and the Department of Energy (DOE), all supported GAO's and OMB's vision for increased scrutiny of award fee contracts but maintained that their agency missions require the broad use of the contract vehicles.

It is unclear whether some of the reforms proposed by OMB will have unintended consequences. While regulations can help procurement personnel within federal agencies make the proper decisions on contracting details, overregulation could reinforce the very attitude of complacency and noncompliance that Hutton and Zients intend to root out. Additionally, the Obama administration's new guideline for all federal agencies to cut 10 percent of contracting dollars in the coming fiscal year could exacerbate the "shell game" of lowering base fees to zero to make agencies' bottom lines provide the illusion of reducing contracting obligations. This sledgehammer solution may also reinforce government officials' predilection to "go through the motions" rather than proactively work to bring about fundamental change.

Since taking office, Obama has made contract reform a priority of his administration. With the release of a March 4 memorandum, the president set in motion a reform effort that has seen the release of the above-mentioned OMB contracting guidance; a solicitation of public comments on further contracting reform, which may influence the release of further guidance in the fall; and a request for substantially more government procurement personnel. While it will take time before the reforms bear out, the hearing showed the work that lies ahead by illustrating the often-unseen rift that can exist between an administration attempting to institute reform and the federal agencies that must navigate the practical consequences of those efforts.

back to Blog