In an October 2000 article here at WIFCON and in the February 2001 issue of the
National Contract Management Association’s Contract Management magazine, I described a new type of contractual incentive called
award-term.1 Developed by Air Force officials and included in a government contract for the first time in October 1997, the award-term incentive is modeled after the award-fee incentive2, but instead of rewarding a contractor for excellent performance with additional fee, it rewards the contractor with additional business by extending the term of the contract.
At first, the main users of this new incentive were the military departments (especially the Air Force) and the National Aeronautics and Space Administration, which used it in contracts for support services.
Then the General Services Administration included an award-term incentive in its
Millenia Lite multiple-award task order contract for information technology
services. But at the beginning of Fiscal Year (FY) 2001 the National Contract Management
Association began offering Fast-Response seminars about award-term contracting, which was hosted by many of its chapters.
These seminars helped to spread the word about the new incentive.
In this follow-up article I will describe what I have learned about which Federal agencies developed plans to use award-term incentives in contracts in
FY 2001 and how they planned to do it. This is not a comprehensive report.
Rather, it is a very brief survey of some of the acquisitions of some of the agencies that announced their intention to use award-term incentives during
FY 2001. It provides only a glimpse of what went on during that period, not a complete picture of award-term contracting. Nevertheless, I hope it will provide readers with some insights into how agencies have used the award-term incentive and addressed issues associated with its use.
In order to find out which agencies planned to use an award-term incentive, how they planned to use it, and how they tried to resolve issues about its use, I searched the FY2001
synopses in the Commerce Business Daily
and the announcements at FedBizOps, which is the Governmentwide point of entry to business opportunities greater than $25,000
for the phrase "award term."3 The
shortcoming in this technique is that I found only those announcements in which an agency had
mentioned that it planned to use an award-term incentive. Agencies are not required to mention or describe incentive provisions in a synopsis of proposed contract action, so it is possible that award-term incentives were used in other acquisitions for which the synopses made no mention of award-term incentives and which my simple search would not discover.
Another shortcoming in my technique is that I searched only announcements of proposed contract actions and some of the solicitations associated therewith, and so I cannot confirm that award term provisions were actually used in the resultant contracts or what those contracts actually said about them.
The Award-Term Incentive
As designed by the Air Force, the award-term incentive includes elements similar to those of award-fee incentives4: (a) an award-term clause, (b) an
award-term plan, (c) an award-term board, and (d) a term-determining official.
Contracts with award-term incentives typically include a base period of performance and a number of option periods during which the
government observes and evaluates the contractor's performance and the contractor can accumulate credit toward earning a contract extension.
Such extensions are called "award terms." A true award term is not an option exercisable at the government's discretion.5
When a contractor earns an award term it becomes contractually entitled to an extension, subject only to cancellation in the event of specified contingencies, such as the lack of funds or the elimination of the
requirement, or termination for convenience.6 Performance under the first award-term begins after the completion of the last option period.
The award-term incentive gives rise to many questions, including the following:
- How is the award-term incentive any better than options to extend the term of the contract?
- Is the award-term incentive consistent with the Competition in Contracting Act?
- Does the Federal Acquisition Regulation permit the use of award-term incentives?
- What terms and conditions should an agency include in a contract that includes an award-term incentive?
- How does one set prices for distant award-term periods and what are the risks of long-term pricing?
In the absence of regulation and guidance agencies must strike out on their own when it comes to answering these and other questions about the use of award-term incentives.
What agencies planned to use award-term incentives?
My research identified 49 acquisitions in
FY 2001 in which government agencies announced plans to use award-term incentives in their contracts.
At least nine agencies announced plans to use an award-term incentive, with the military departments taking the lead.
The Air Force announced plans to use an award-term incentive in 12 contracts, the Army and the Navy each planned to use one in 10 contracts, and three other Department of Defense agencies planned to use one in a single contract.
The U.S. Coast Guard announced plans to use an award-term incentive in four contracts, NASA planned to use one in two contracts, and the Departments of the Treasury, the Interior, and Health and Human Services, and the Environmental Protection Agency each planned to use one in a contract.
In what kinds of acquisitions did agencies plan to use award-term incentives?
All of the acquisitions that I found were to be conducted on the basis of competitive
negotiation except two, which were sole-source awards. No award-term contract was to be awarded through sealed bidding.
Agencies planned to use award-term incentives in acquisitions for
commercial items and in acquisitions for noncommercial items.
They planned to use them in acquisitions that were set aside for small businesses and in those that were not.
The pricing arrangements of the prospective contracts included both fixed-price and cost-reimbursement types.
A number of acquisitions were to include both profit incentives (incentive fee and award fee) and award-term incentives. Award-term incentives were to be used in requirements contracts and in both single and multiple-award indefinite-delivery-indefinite-quantity contracts.
Nearly all of the prospective contracts were for services, especially in the category of professional, administrative and management support, which is the largest category of services in terms of dollars obligated.7
However, agencies planned to use award-term incentives in a number of other service categories, as well, ranging from research and development and complex
technical support services to simple housekeeping services, and in contracts for architect-engineering services and construction.
Some specific examples were base operations and maintenance,
custodial services, library services, medical/dental services, program and financial management support, food services, strategic arms reduction support services in Russia, war-fighting analysis and integration, packing and crating services, information technology services, protective coating services, naval vessel replenishment services, logistics support services, and grounds
Although most award-term acquisitions were for services, there were a few for supplies.
The Air Force announced its intention to include an award-term incentive in each of two
contracts for aircraft equipment and the Department of the Treasury said it planned to use an award-term incentive in a contract for uniforms for the Customs Service.
The Army initially announced plans to use award-term incentives in an acquisition of jungle/desert boots and also in an
acquisition of combat utility uniforms, but changed its mind.8
How did agencies structure the performance periods of contracts that were to include award-term incentives?
The most frequently used contract performance period structure was for one base year of performance followed by four option years with the prospect of up to five one-year award-term extensions, for a total of ten years.
A number of acquisitions were for shorter periods. There were 11 for eight years (one year plus four option years plus three award-term years).
The shortest was for a maximum total of four years. Several acquisitions were for longer periods,
including four for 15 years, one for 18 years, and one for 20 years. Several announcements mentioned the use of negative incentives, under which the government would shorten the term of the
contract in response to poor performance. While most of the prospective award-term extensions were to be one year in length, some were for longer periods of two or three years.
What did agencies say in their award-term clauses?
I was able to obtain several of the announced solicitations through the Internet; they
varied considerably in content relative to the award-term incentives. Most of them included both award-term clauses and award-term plans; the content of these contract terms varied
considerably. A Department of Health and Human Services clause was short and read as follows:
In addition to the period of performance stated in paragraph 1, the Contractor may earn extensions (hereinafter called "award terms") up to 3 additional years based upon the quality of
performance during specified evaluation periods. The evaluation periods and potential award terms are explained in the Quality Assurance Surveillance Plan (QASP), Attachment 7, paragraph 4.
Further, the contract period of performance may be reduced to not less than 1 year on the basis of performance.
The Contractor's performance will be evaluated in accordance with the QASP. The plan may be changed at any time during the contract with agreement between the Contractor and the
All decisions regarding the award term, including but not
limited to: the evaluation of the Contractor's performance, the method used to determine the award term, and the length of the award term are not subject to the Disputes Clause or review by the Board of Contract Appeals or other judicial entity.
The contract will be unilaterally modified to reflect the award term extension or reduction.
It is surprising that the clause said that the agency's award term decision was not to be subject to the provisions of the Disputes clause or to the jurisdiction of the board of contract appeals,
because a four-year-old decision of the U.S. Court of Appeals for the Federal Circuit almost
certainly nullifies that provision.9
Different Air Force offices used different clauses. One such clause read as follows:
(a) The initial five (5) year contract term may be extended or reduced, on the basis of contractor performance, resulting in a con-tract period lasting a minimum of (3) three years from the date of award to a maximum of (10) ten years from the date of contract award.
(b) Monitoring of Performance. Award term evaluation will be based on the contractor's performance during each evaluation
period. The Government will evaluate the contractor's performance as excellent, acceptable, or unacceptable.
The Government will make interim assessments every (6) six months to provide feed-back to the contractor. At the end of the Award Term period, the Award Term Review Board (ATRB) will evaluate the contractor's performance and make a recommendation to the Term
Determining Official (TDO). The TDO will make the final Award Term
Determination. There are three possible Award Term Determinations: Excellent (meets the incentive objectives and earns an award term), acceptable (conforms to contract requirements, but does not meet incentive objectives), and unacceptable (does not conform to
contract requirements). The contractor earns the award term if the TDO decides that the contractor's performance was excellent
overall. If performance is determined to be acceptable, the contractor neither gains nor loses any contract term. If performance is
determined to be unacceptable, contract performance is reduced by one year.
Contract term lost due to unacceptable performance cannot be recovered by excellent performance in out years.
If the contractor's performance is unacceptable for the first two years the
Government will initiate a new acquisition during the third year of
(c) Award Term Plan. The Award Term Plan is the basis for the [Air Force program office's] evaluation of the contractor's
performance and for presenting an assessment of that performance to the Term Determining Official (TDO).
The initial evaluation period for determining the amount of the award term to be awarded will start on the date of contract performance. The adjustment to the award will not result in a contract greater than 10 years from the contract award date.
(d) Award Term Plan Changes.
The Government may make changes to this plan prior to commencement of the period in which the changes take effect.
Changes that apply to performance during the period in which a change is made shall require mutual
agreement of the parties. Nothing in this plan shall excuse the contractor from complying with the terms and conditions of the contract.
(e) Contractor's Self Assessment.
The contractor's self-assessment shall be submitted to the PCO within (7) seven days
after the end of the evaluation period. This written assessment of the contractor's performance throughout the evaluation period should contain any information that the contractor wishes to provide to the ATRB and the TDO for use in evaluating the contractor's
performance. The contractor's self-assessment may not exceed (10) ten pages.
(f) Award Term Integrity. Although the Award Term process is subjective in nature, every effort will be made to ensure
reasonableness and fairness. Written records, inputs from other pertinent sources, and ATRB analysis will provide the necessary checks and balances to assure award term integrity.
(g) Award Term Extension. The contract period may be
unilaterally modified to reflect the TDO decision. The total contract
period including extensions under this clause will not exceed (10) years. If at any time the contract term has 1 year or less remaining, the operation of the award term feature will cease and the contract term will not extend beyond the term set at that time.
While the Air Force clause is more detailed than the one used by the Department of Health and Human Services and provides greater insight into the workings of the incentive, neither clause addresses all of the potentially important issues associated with award-term incentives.10
For example, although both clauses provide for negative incentives, neither clause adequately addresses the possibility of inconsistent contractor performance.
Under the Air Force clause it is possible for the contractor to earn two award terms by performing excellently during the first two years of the contract, then to lose one of those award terms by performing unacceptably during the third year, then to earn another award term by performing excellently during the fourth year, then to lose one by performing unacceptably during the fifth year. That sequence would end with the contractor entitled to one award-term extension immediately following a year of unacceptable performance. A good award-term clause would enable the government to cancel all award terms at no cost based on inconsistent contractor performance.
One agency's clause allowed the contractor to refuse an award term.
The pertinent part of the clause read as follows:
Refusal of Award Term.
Subject to the government's right to terminate for convenience, the contractor may earn an additional award term(s) ordering period based on quality performance, as noted in the Award Fee/Term Plan and this contract.
Each award term is three years in length and will become effective by issuance of a bilateral modification to the contract.
The contractor reserves the right to refuse an award term ordering period.
However, the contractor must notify the government, in writing, no later than one (1) year prior to the end of the ordering period that immediately proceeds the award term that is being refused.
Some clauses provided for award terms to be added to the contract by unilateral modification and some provided for it to be done by bilateral modification. Addition by bilateral modification raises the possibility of contractor refusal or some other complication.
What did agencies say in their award-term plans?
There was also a great deal of variation among agency award-term plans.
In general, the plans described the organization and membership of the government's award-term board, the contractor performance evaluation process and schedule, and the performance evaluation criteria and standards. However, the plans that I was able to obtain varied considerably in terms of
clarity and detail and ranged in length from a six-page brief to a 51-page tome. Some plans provided very little information about the organization of the government's contractor performance evaluation team, while others provided a remarkable amount of detail.11
The same was true about descriptions of the evaluation process.
Descriptions of performance evaluation criteria and standards ranged from extremely sketchy to highly detailed.
Most award-term plans identified a number of different performance criteria and
specified importance weights for them. One Air Force plan for maintenance, repair and alteration of real property identified four criteria: quality (weighted "30% of Total"), responsiveness (25%), cost/schedule management (25%), and business relations (20%), but the nine-page plan did not define those criteria or specify any standards for them.
An Army plan for systems engineering and technical support services identified five criteria: program management (30%), cost control (20%), technical (20%), schedule/deliverables (15%), and subcontract/teaming goals (15%).
It defined the "technical" criterion as follows:
The contractor's ability to obtain and retain personnel required to complete tasks; ability to complete all task order requirements; de-gree of government technical direction required to solve problems that arise during performance.
Although the plan described the "technical" criterion, it did not specify any standards for it -- i.e., it did not specify how well the contractor had to obtain and retain people, complete task
orders, and avoid the need for government technical direction in order to earn an award-term
extension.12 Nor did the plan say how the Army would establish standards during the course of
performance. This lack of information was typical of most of the plans that I was able to review.
At the opposite extreme was a plan for a contract for professional and administrative sup-port services that specified 188 performance criteria and associated standards. In order to get a sense of what that plan was like, consider just one of those sets of criteria and standards, for the task of conducting a comprehensive biannual equipment inventory, which appears in the table below:
comprehensive biannual equipment inventory
||Inventory 12.5% of equipment per quarter
||Inventory 13.75% of equipment per
||Inventory 15% of equipment per quarter
|97% of equipment items are accurately inventoried
||98% of equipment items are accurately inventoried
||99% of equipment items are accurately inventoried
Multiply this set of criteria and standards by 188 and you will get an idea of the complexity of that plan.
Presumably, the agency that developed the plan employs a small army of performance monitors who have plenty of time on their hands.
How did agencies price contracts that included an award-term incentive?
Contract pricing is the most daunting challenge in the use of award-term incentives.
It seems likely that in order to comply with the Competition in Contracting Act agencies must evaluate the prices of prospective award terms during the evaluation of proposals leading to
contract award.13 But how do you price performance that will take place more than five years after the date of contract award? How great are the pricing risks?
How can the contracting parties effectively manage that risk? Predetermined, formula-type price adjustments based on economic price adjustment clauses are unobjectionable, but other approaches to renegotiation of award-term prices may raise the question of whether the U.S. General Accounting Office (GAO) would consider such negotiations to be sole source negotiations.
The GAO has objected to renegotiation of contract option prices.14
Would it also object to the renegotiation of award-term prices?
With respect to the solicitations that I was able to review, most agencies required offerors to include prices for award-term extension in their proposals and stated that they would evaluate those prices during source selection. One solicitation said:
The Government recognizes that being contractually bound by prices listed years in advance carries a significant amount of risk for both parties. As a result, no later than 8 months prior to the beginning of any earned award term, both parties must execute a bilateral modification (indicating concurrence with the award-term pricing and conditions) in order to formally incorporate the award-term period as an additional option year.
Neither party is obligated to sign this document… . No award-term price revisions, other
than those required by law or statute (e.g., Service Contract Act), will be negotiated or considered.
What is striking about this provision is what it suggests about the contracting office's lack of imagination. Confronted by a potential difficulty, the only response that it could imagine in the event of disagreement was dissolution. Why not devise a price adjustment mechanism other than the ones provided by statute?
The award-term incentive is an unproven idea, far too new for anyone to make any claims about its effectiveness or success, and so professionals should greet award-term "success stories" with skepticism.
Nevertheless, FY 2001 witnessed increased interest in and application of the idea.
No regulations have been promulgated to govern its use and official guidance is skimpy, at best; significant issues of law, policy and practical application are unresolved.
Contracting offices that have decided to use award-term incentives in their contracts are learning as they go, borrowing from each other and improvising.
A review of some of their solicitations, award-term clauses, and award-term plans suggests that those offices have not been as thoughtful and as thorough as they might have been.
More importantly, continued expansion in the use of award-term contracts could result in a significant restructuring of some segments of the contract services market as requirements are effectively withdrawn from the market for ten to twenty years at a time.
It is not clear that such a significant restructuring would be in the best interests of the taxpayers.
Thus, if interest in and use of award-term incentives continues to grow during
FY 2002, the Office of Federal Procurement Policy should find out what is going on and determine what, if any, regulation is needed.
Wifcon.com, see "Award
Term: The Newest Incentive," October 30,
2000. In the February 2001 issue of Contract
Management, see: "Award Term: The Newest
2 Federal Acquisition Regulation (FAR) §§
3 FAR §
5.003 establishes FedBizOps as the Governmentwide point of entry.
Also see the definition in FAR 2.101.
4 For information about the structuring of award-fee incentives see
Contract Pricing Reference
Guide, Vol. IV, Advanced Issues in Contract Pricing, Section 1.4, "Structuring and Applying Award-Fee Pricing Arrangements."
5 When the incentive reward is the addition of an option, the incentive should be called award-option, instead of award-term.
6 See: Edwards, Vernon J., Award Term Contracting: A New Approach for Incentivizing Performance (Vienna, VA: National Contract Management Association, 2000), pp. 2-14 and 2-15 through 2-16 for explanations of the
distinction between cancellation of an award term and termination for convenience.
One variation of the true award term is the so-called award option, in which the contractor's reward is the addition of another option to extend the term of performance, exercisable at the Government's sole discretion.
7 Service classification code R. See FAR §
8 The acquisition was to have been conducted by the Army in support of the Marine Corps.
The announcement of the change in plans did not provide an explanation.
9 Burnside-Ott Aviation Training Center v. John
Dalton, Secretary of the Navy, 107 F.3d 854 (1997).
10 See Edwards, op. cit., pp. 3-11 through 3-13 for a discussion of the provisions that should be considered for
inclusion in an award-term clause.
11 Since award-term plans are usually incorporated into the contract, it is unclear why agencies describe their internal organization and processes in great detail, unless they intend to contractually bind themselves to those descriptions. The most important things to describe are the performance evaluation criteria and performance standards.
12 It is remarkable how many award-term plans specified performance criteria in terms of the contractor's "ability" to do something, rather than its actual achievement of something. One plan defined "responsiveness" as "the
contractor's ability to respond to Government/Customer direction, be it verbal or written… ." Although one certainly could argue that ability is demonstrated through achievement, the ability to do a thing and the actual
accomplishment of that thing are two different things entirely.
13 See: Edwards, op. cit., pp. 2-16 through 2-18 for a discussion of the pricing implications.
14 Ibid., p. 2-16; also see: John Cibinic, Jr. and Ralph C. Nash, Jr., Formation of Government Contracts, 3d ed. (Washington, D.C.: The George Washington University Law School, Government Contracts Program, 1998), p. 1,271.