[Senate Hearing 111-436]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-436
 
                ELIMINATING WASTEFUL CONTRACTOR BONUSES

=======================================================================



                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 3, 2009

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
MARK PRYOR, Arkansas                 GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
JON TESTER, Montana
ROLAND W. BURRIS, Illinois
MICHAEL F. BENNET, Colorado

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk
                                 ------                                

 SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, 
              FEDERAL SERVICES, AND INTERNATIONAL SECURITY

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 JOHN McCAIN, Arizona
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri           JOHN ENSIGN, Nevada
ROLAND W. BURRIS, Illinois

                    John Kilvington, Staff Director
               Velvet Johnson, Professional Staff Member
    Bryan Parker, Staff Director and General Counsel to the Minority
                   Deirdre G. Armstrong, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Burris...............................................     3
    Senator Coburn...............................................     4
    Senator McCaskill............................................    17
Prepared statements:
    Senator Carper...............................................    43
    Senator McCain...............................................    45

                               WITNESSES
                         Monday, August 3, 2009

Hon. Jeffrey D. Zients, Deputy Director for Management, Office of 
  Management and Budget..........................................     6
John Hutton, Director, Acquisition and sourcing Management, U.S. 
  Government Accountability Office...............................     8
Shay D. Assad, Acting Deputy Under Secretary of Defense for 
  Acquisition and Technology, U.S. Department of Defense.........    23
William P. McNally, Assistant Administrator for Procurement, and 
  Deputy Chief Acquisition Officer, National Aeronautics and 
  Space Administration...........................................    25
Richard K. Gunderson, Acting Chief Procurement Officer, U.S. 
  Department of Homeland Security................................    26
Edward R. Simpson, Director, Office of Procurement and Assistance 
  Management, U.S. Department of Energy..........................    28
Alan Chvotkin, Executive Vice President and Counsel, Professional 
  Services Council...............................................    30

                     Alphabetical List of Witnesses

Assad, Shay D.:
    Testimony....................................................    23
    Prepared statement...........................................    63
Chvotkin, Alan:
    Testimony....................................................    30
    Prepared statement...........................................    87
Gunderson, Richard K.:
    Testimony....................................................    26
    Prepared statement...........................................    75
Hutton, John:
    Testimony....................................................     8
    Prepared statement...........................................    53
McNally, William P.:
    Testimony....................................................    25
    Prepared statement...........................................    71
Simpson, Edward R.:
    Testimony....................................................    28
    Prepared statement...........................................    79
Zients, Hon. Jeffrey D.:
    Testimony....................................................     6
    Prepared statement...........................................    47

                                APPENDIX

List submitted by Senator Coburn.................................    93
Questions and Answers for the Record from:
    Mr. Assad....................................................    96
    Mr. McNally..................................................   120
    Mr. Gunderson................................................   133
    Mr. Simpson..................................................   144



                ELIMINATING WASTEFUL CONTRACTOR BONUSES

                              ----------                              


                         MONDAY, AUGUST 3, 2009

                                 U.S. Senate,      
        Subcommittee on Federal Financial Management,      
              Government Information, Federal Services,    
                              and International Security,  
                          of the Committee on Homeland Security    
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:03 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, McCaskill, Burris, and Coburn.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The hearing will come to order.
    Welcome Mr. Zients and Mr. Hutton. We are glad that you are 
here and thankful that you both are in your jobs. There is 
plenty of work to do, and I hope that you will talk about some 
of that work here today.
    We are going to be joined by several of my colleagues. I 
think Senator McCain is on the Senate floor. I am told by his 
staff he might be talking about the President's nominee to the 
Supreme Court as we speak. But I know this hearing will get a 
lot more attention than anything that is going to be said over 
on the Senate floor this afternoon--well, maybe it will. We 
will see.
    But what we are going to talk about today is real 
important, and I am delighted that this panel is here and 
delighted that our second panel has joined us, too. We look 
forward to your testimonies, and we look forward to having a 
chance to go back and forth and kick around some ideas with 
each of you.
    I think it was about a year ago that Senator Coburn, I 
believe it was Senator Sanders, and I asked the Government 
Accountability Office to examine whether agencies were giving 
away what is known as ``award fees'' to contractors and whether 
or not contractors really deserved them in many instances.
    In the private sector, those payments would probably be 
called ``bonuses.'' They are intended to help incentivize 
contractors to deliver exceptional performance. In essence, the 
award fee might be described as extra profit that the 
contractor may earn if they save our government money and 
deliver a superior product.
    The practice of aligning performance to profit is not a new 
concept, as we know. It can lead to excellent results if used 
appropriately. However, several recent controversies in the 
financial sector have shown that rewards and incentives that 
are not properly aligned with outcomes can sometimes lead to 
failure, with dramatic and adverse consequences.
    Unfortunately, government agencies have made some of the 
same mistakes that private firms we hear about in the news have 
made over the years, and much to my disappointment, it seems 
that a number of agencies--not all, but a number of agencies 
continue to struggle in figuring out how to manage award fees 
appropriately.
    I might add that some who were not doing such a very good 
job not that long ago have, I think, taken steps to maybe show 
the way for the rest of our agencies.
    In fact, the GAO has told us that agencies, some agencies, 
continue to hand out hundreds of millions of dollars to 
contractors for reasons that just do not make a whole lot of 
sense.
    In one interview I am told GAO conducted as part of its 
analysis, an Air Force official reportedly said that a 
contractor would have to do a ``pretty bad job'' just to 
receive 85 percent of the potential bonus, meaning, I assume, 
that a plain bad job might warrant 100 percent of a bonus. In 
another case, at this time at the Department of Homeland 
Security, a contractor was cited for ``egregious behavior'' and 
still received an award fee.
    Even when agencies do hold contractors' feet to the fire, 
they often give them second and sometimes third chances to try 
and earn profit despite repeated shortcomings. This practice, 
known as ``rollover,'' is meant to be used in limited 
situations when contractors are not able to deliver for reasons 
outside of their control. Unfortunately, rollover sometimes 
seems to have become a rule instead of the exception--not 
always, but in too many instances.
    What is even more troubling to me is that senior management 
does not appear to be examining the results of award fees to 
see if they are incentivizing contractors to actually perform 
well. Instead, agencies continue to hand out millions, in some 
cases billions, of dollars in bonuses, assuming that they are 
getting the best result for American taxpayers.
    For instance, GAO reported that the Department of Defense 
inappropriately paid $8 billion in award fees in 2005 alone. 
Only recently, 4 years later, have they started to analyze 
whether award fees are actually leading to improved 
performance.
    This situation has caused many of us to question how, 
during a time when households around our country are tightening 
their budgets, Federal agencies continue to award extra profit 
to companies as if it is expected and not earned. It is as if 
one went to a restaurant as a customer, and your waiter or 
waitress forgot your order, they spilled your food on you, and 
charged you for items you did not even ask for. Most of us 
would not give that person a very big tip, maybe none at all. 
But some agencies continue to give contractors who perform just 
as poorly pretty much everything they could want.
    Let me just pause and try to be clear. I am a strong 
believer that appropriate incentives, including bonuses, can 
lead to better performance. But I worry that, at the end of the 
day, agencies are not aligning contractor profitability in too 
many cases with performance. And in those cases when a 
contractor does fail to deliver, there need to be consequences.
    Agencies cannot keep giving contractors a second bite at 
the apple. We just cannot afford to give contractors money and 
get too little in return. That said, I do believe that there 
may be some possible solutions that are currently being 
discussed and others that we may want to pursue.
    For example, after GAO had exposed the fact that the 
Department of Defense contractors were continually given 
multiple opportunities to earn award fees, the use of this 
practice dropped dramatically. This has led to an estimated 
$450 million in savings in eight programs in which the rollover 
practice was once used. Perhaps this should be expanded to 
other agencies.
    I personally do not see the logic of using award fees to 
incentivize contractors when we do not know whether or not they 
work. I got the sense that agencies are using this type of 
contracting because in some cases they do not know exactly what 
they want out of the contractors let alone know how that 
performance should be delivered. So instead of taking the time 
to lay out objective cost schedules and specific performance 
measures, agencies may be using wasteful bonuses as a crutch.
    In closing, I am looking forward to hearing what our 
witnesses have to say about the ongoing efforts to get the 
issue under control and to explore some other possible 
solutions that will help to rein in wasteful contractor 
incentives.
    If Senator McCain was here, I would recognize him for his 
opening statement. He will be joining us shortly. And we have 
been joined by Senator Burris and Senator Coburn. Before you 
got here, Senator Coburn, I was talking about how you, Senator 
Sanders, and I were among the people who said these award fees 
are troublesome, and we asked GAO to do something about it. And 
I very much appreciate your leadership on this and a whole lot 
of other issues.
    Senator Burris got here just a little bit ahead of you. I 
am going to go ahead and yield to him, and then we will yield 
to Senator Coburn. But we are delighted that you are both here. 
Senator Burris, you are always good to come, and I am grateful 
for that. Thank you.

              OPENING STATEMENT OF SENATOR BURRIS

    Senator Burris. Thank you, Mr. Chairman. I would like to 
commend you, Mr. Chairman, for holding this hearing today. The 
importance of this issue cannot be overstated, especially in 
these economically challenging times. It is more important than 
ever that we end wasteful spending associated with Federal 
contracting; moreover, we need to fully embrace transparent 
practices that will assure taxpayers that their money is being 
put to good use.
    I look forward to hearing more about the use of the award 
fee contracts and the steps the GAO and the Office of 
Management and Budget are taking to ensure that this practice 
does not lend itself to wasteful spending.
    We need to ensure that Federal contractors receive payment 
only for the projects that they are hired to complete. We 
cannot continue to use taxpayers' dollars to pay for work that 
does not meet the contract requirements.
    So I will have a few questions during the question and 
answer session, and thank you very much, Mr. Chairman. I 
appreciate it.
    Senator Carper. You bet. Thank you. It is not your birthday 
today, is it?
    Senator Burris. Yes, today is my birthday.
    Senator Coburn. Happy birthday.
    Senator Carper. Happy birthday.
    Senator Burris. August 3. I will not tell you that I am X 
years old.
    Senator Carper. Around here, at your age they still think 
you are a teenager.
    Senator Coburn. You are young. [Laughter.]
    Senator Burris. I am 72 today.
    Senator Carper. You are still a teenager. Plenty of rowing 
time. Well, happy birthday. Delighted to share this day with 
you.
    Senator Coburn is probably as much as anybody I know, a 
member of the Senate who focuses on waste, fraud, and abuse, 
and I am delighted that he is partnering on a number of those 
initiatives. Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Mr. Chairman, thank you so much for holding 
the hearing, and I thank GAO for their report.
    Americans think we do not get it up here. I am going to 
enter into the record a list of bonus payments that were paid 
under CPAF across almost every agency, but let me just 
highlight a few.
    Medicare and Medicaid paid out more than $312 million last 
year for quality care bonuses to nursing homes that provided 
below-average care and had significant past health and safety 
violations.
    The Department of Defense paid $8 billion in unwarranted 
bonuses to contractors for weapons programs that had severe 
cost overruns, performance problems, and delays between 1999 
and 2004.
    NASA paid Boeing a bonus of $425 million for work on the 
Space Station that ran 8 years late, cost twice what was 
expected, and Boeing estimates an additional $76 million in 
overruns by the time the contract is completed. Yet we paid 
$425 million in bonuses.
    The Department of Commerce selected Northrop Grumman in 
2002 to build a $6.5 billion satellite system supposedly to 
save the American people $1.6 billion. It was supposed to be 
launched in 2008. It has not happened. The project's budget has 
doubled to $13.1 billion, and Northrop's performance has been 
deemed unsatisfactory, yet from 2002 to 2005, we gave them $123 
million worth of bonuses.
    In 2007, Harris Corp. developed a handheld device to 
collect data for the 2010 census that failed to work properly 
and was $198 million over budget. In spite of that, we gave 
them $14.2 million in bonuses.
    The Federal National Mortgage Association, a sponsored 
mortgage enterprise better known as Fannie Mae, suffered $59 
billion in losses last year and requested $15 billion in 
taxpayer assistance, yet it plans to pay $4.4 million in 
bonuses to its top executives.
    In 2006, more than $3.8 million in bonuses were paid out to 
senior officials at the Department of Veterans Affairs, months 
after a $1 billion shortfall threatened to imperil the care of 
thousands of injured veterans returning from combat in Iraq and 
Afghanistan.
    In 2006, the Department of Treasury abandoned a $14.7 
million computer project intended to detect terrorist money 
laundering. The failed project was 65 percent over its original 
budget, but the vendor, EDS, was awarded $638,000 in bonuses.
    The repair and restart of a Tennessee Valley Authority 
Nuclear reactor cost $90 million more than the Federal utility 
budget was, but TVA paid the primary contractors on the 
project--Bechtel Power and Stone and Webster--an extra $42 
million in bonuses and other fees.
    I will just add the rest of them to the record, if I may, 
Mr. Chairman.\1\
---------------------------------------------------------------------------
    \1\ The list provided by Senator Coburn appears in the Appendix on 
page 162.
---------------------------------------------------------------------------
    Senator Carper. Without objection, they will be added.
    Senator Coburn. I look forward to your testimony. I know 
that OMB is aware of these problems. I have a lot of confidence 
in OMB that they will get it right.
    Senator Carper. Thanks, Dr. Coburn.
    One of the things Dr. Coburn and I have talked about for 
any number of times is the idea that we have OMB--part of OMB's 
job is to manage and to manage effectively in a cost-effective 
way. Part of the job of GAO is to help us to make sure as a 
watchdog that agencies are doing their jobs, doing it in a 
cost-effective way.
    Part of our job is to provide oversight, and we like to in 
this Committee, and this Subcommittee especially--which Dr. 
Coburn has chaired from time to time, and I get to chair it now 
for a little while. But one of the things we try to do is to 
work with OMB, to work with GAO, to work with the Inspectors 
General, as misspending, inappropriate spending is identified, 
wasteful spending is identified, for us to put a spotlight on 
that. And what we try to do is to spotlight bad behavior, and 
we like to spotlight good behavior, in an effort to hold up to 
other agencies those agencies that are doing the right thing, 
behaving appropriately, and set themselves out as an example.
    So here today I think we will have the opportunity to hold 
some folks up, to say we appreciate what you are doing, and to 
maybe say to some others, let us see what you can learn from 
those that we hold up.
    Our first witness today will be the Hon. Jeffrey Zients, 
the Deputy Secretary for Management and the government's first 
ever Chief Performance Officer. We are delighted that he has 
taken on this responsibility. It seems like, what, about a 
month ago that you were confirmed and assumed this 
responsibility. But we are happy to have you on board.
    Mr. Zients comes to government with an impressive resume, 
having worked for over 20 years as a management consultant and 
entrepreneur. He also co-founded the Urban Alliance Foundation, 
a nonprofit that helps economically disadvantaged young people 
obtain year-round internships and job training.
    And our second witness on this panel, no stranger here, is 
John Hutton, and he is the sourcing manager for the Government 
Accountability Office. Mr. Hutton, I am told, began his career 
in GAO in--this says 1878. Could it have been then? [Laughter.]
    Maybe it is a typo--1978. He has led reviews on topics 
ranging from reconstruction in Iraq and Afghanistan, places we 
all have been, to U.S. efforts to combat the AIDS virus.
    Again, our thanks to both of you for your work and for your 
stewardship, and I am going to call on Mr. Zients to lead us 
off and then Mr. Hutton to follow. Your entire statements will 
be made part of the record. Feel free to summarize as you wish. 
Thanks.

  TESTIMONY OF HON. JEFFREY D. ZIENTS,\1\ DEPUTY DIRECTOR FOR 
          MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

    Mr. Zients. Thank you, Chairman Carper, Senator Coburn, and 
Senator Burris. I appreciate the opportunity to appear before 
you today to discuss award-fee contracting along with 
strategies for eliminating waste and maximizing the value 
achieved from these contracts. I have prepared a full statement 
for the record and, with your permission, would like to insert 
into the record and highlight a few key points.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Zients appears in the Appendix on 
page 47.
---------------------------------------------------------------------------
    Senator Carper. You have our permission.
    Mr. Zients. Thank you.
    As you mentioned, I was confirmed last month as the Deputy 
Director for Management at OMB and Chief Performance Officer of 
the Federal Government. It is my responsibility to help lead 
efforts to improve government performance--in other words, to 
make sure that taxpayer dollars are being used effectively and 
efficiently, a task that is critical in any Administration but 
is especially critical during these difficult economic times. I 
believe that a sound acquisition system can play an important 
role in driving down costs and increasing the value the 
taxpayers get for their dollars.
    As demonstrated by the President's March 4 memorandum on 
government contracting, the Administration is committed to 
creating an environment that can support such a system, which 
is currently used for more than $500 billion in annual 
spending.
    Last week, OMB issued an initial set of guidance to help 
agencies improve the effectiveness of their acquisition 
practices and the results achieved from their contracts. These 
efforts are designed to save the taxpayers at least $40 billion 
a year.
    The President's memorandum identifies an agency's selection 
of contract type as a key area in need of immediate and 
increased attention to achieve better results from our 
contractors. The selection of an award-fee contract can be an 
effective way to both achieve strong performance from a 
contractor and mitigate the government's risk in circumstances 
where requirements may be difficult to define and to measure 
objectively.
    To get the benefits of an award-fee contract, agencies must 
focus on three areas:
    First, fees must be linked to cost, timeliness, and quality 
of the contractor's performance.
    Second, the amount of fee an agency pays must be 
commensurate with the level of demonstrated performance.
    And, third, an agency must not pay an award fee when 
contractor performance is unsatisfactory.
    OMB's Office of Federal Procurement Policy laid out these 
basic tenets of award-fee contracting in a 2007 policy 
memorandum. Unfortunately, agencies have not consistently 
achieved good results from their award-fee contracts, in part 
because these tenets have not yet been incorporated into the 
Federal Acquisition Regulation (FAR). As a result, OMB is 
taking two steps to significantly improve government-wide 
implementation of award-fee contracting.
    First, we are working with the FAR Council to expand the 
existing FAR rules. The new rules will require that an agency 
effectively determine that an award-fee contract is the 
appropriate contract type for the agency's requirements and 
circumstances. The new rules will also provide evaluation 
standards to help agencies differentiate between levels of 
performance and the corresponding percentage of available award 
fees that could be earned. Equally important, the rules will 
prohibit award fees for contractor performance that is judged 
to be unsatisfactory. Finally, the rules will provide clear 
guidance on the use of rollover.
    Second, we will bring more agency management attention to 
bear on award-fee contracting activities in coordination with 
the five agencies that represent at least 95 percent of the 
total dollars spent on award-fee contracts. Most of those 
agencies are represented in your second panel.
    One area where we will increase management attention is on 
monitoring of internal practices and data collection. We will 
work with the agencies to put appropriate mechanisms in place 
to determine if award fees have been made in accordance with 
their approved award-fee plan. We will further work with 
agencies to compare award-fee determinations to the agency's 
evaluation of the contractor's overall performance. This cross-
check will help managers ensure that fee determinations track 
with performance evaluations and that contractor performance is 
being evaluated by the agency in a consistent manner.
    Finally, we will look at how current data collection on 
award-fee contracts can be improved. One option we are 
considering is the centralized collection of award-fee 
determinations into the same system that serves as the central 
repository for contractor performance information. This 
consolidation would have the added benefit of providing an 
additional source of analysis for agencies to consider in 
future source selections.
    In addition, we will focus management attention on training 
the acquisition workforce, which is central to achieving good 
results from award-fee contracts. For this reason, it is 
critical that the rollout of our new guidance be supplemented 
with tailored training that reinforces the skills that are 
essential to achieving cost-effective quality performance under 
award-fee contracts.
    In summary, we have begun an aggressive effort to address 
well-documented weaknesses with award-fee contracts and to 
create an environment that enables continual improvement. 
Ultimately, these reforms will lead to a government that is 
using its funds wisely and with care and delivering for the 
American people.
    I appreciate the Subcommittee's leadership on this subject 
and welcome the opportunity to work with you as we improve our 
use of award-fee contracting and strengthen the overall 
acquisition system.
    Senator Carper. Good. Thanks, Mr. Zients.
    We are going to have questions. When we get to questions, 
Mr. Hutton, I will telegraph this picture: I am going to be 
asking you to comment on the steps that Mr. Zients just 
outlined. But you are recognized to make your statement now, 
and your full statement will be made a part of the record. 
Thank you again.

TESTIMONY OF JOHN HUTTON,\1\ DIRECTOR, ACQUISITION AND SOURCING 
       MANAGEMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Hutton. Thank you, Mr. Chairman and Members of the 
Subcommittee. I am pleased to be here today to discuss our 
recent report on use of award-fee contracts.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hutton appears in the Appendix on 
page 53.
---------------------------------------------------------------------------
    From 2004 through 2008, agencies have spent over $300 
billion on contracts which include award fees. In 2008, over 95 
percent of those dollars were spent at five agencies: 
Department of Energy, Departments of Health and Human Services, 
Defense, Energy, and Homeland Security, and NASA. I think that 
was six, but I repeated one.
    In 2007, OMB issued guidance to chief acquisition officers 
and procurement executives that emphasized several actions we 
had recommended in 2005 aimed at improving award-fee practices. 
My statement today is based on our May 29, 2009, report on 
award-fee contracts, and specifically I would like to discuss 
how agencies are addressing OMB's award-fee guidance: First, 
what agencies have done to revise or develop policies and 
practices reflecting that guidance; second, the extent agency 
practices for using award-fee contracts are consistent with 
that guidance; and, third, the extent agencies have collected 
and shared information on award fees to help evaluate the 
effectiveness.
    So what have agencies done? DOD and NASA have revised or 
clarified guidance that supports better use of award fees and 
are generally consistent with the OMB guidance. For example, 
DOD's guidance now reserves for exceptional circumstances the 
practice of offering contractors a second chance at unearned 
fees; emphasizes the linkage between award fees and desired 
outcomes; defines the level of performance used to evaluate 
contractors; and prohibits payment of award fees for 
unsatisfactory performance. NASA's guidance now requires a 
documented cost/benefit analysis to support the use of an 
award-fee contract.
    Efforts to incorporate OMB guidance into departmental 
guidance at DOE, HHS, and DHS have varied. Although acquisition 
professionals at each of these agencies told us that they would 
benefit from additional guidance on using award fees, some were 
unaware of the contents of the OMB guidance.
    Are agency practices consistent with the OMB guidance? On 
the one hand, we found that agency practices for using award-
fee contracts were not always consistent with the OMB guidance. 
At HHS, for example, a contractor received an award fee based 
in part on process-oriented criteria such as requiring a 
contractor to have appropriate staffing levels, whereas OMB 
policy calls for linking fees to demonstrated efforts.
    At DOE, one office developed a scoring system without 
defining the terms used, resulting in inconsistent application 
that could allow for payment of as much as 84 percent of an 
award fee for not meetings expectations.
    But, on the other hand, DOD, the agency at which our 
initial work was done in 2005, has in some cases applied its 
revised guidance and realized some benefits. Of the 50 DOD 
contracts we reviewed, 40 were for programs included in our 
2005 work, and we estimate DOD will pay $450 million less in 
award fees from fiscal years 2006 through 2010 on eight of 
those cases to which the new guidance has been applied. In 
other instances, through adopting more discreet criteria, a 
program was able to better evaluate contractor performance.
    Have agencies collected data evaluating effectiveness and 
shared information about the use of award fees? In most cases, 
the answer is no. Of the five agencies we reviewed, only DOD 
collects data on award-fee contracts, and no agency has 
developed methods for evaluating the effectiveness of an award 
fee as a tool for improving contractor performance.
    As for sharing information, other than a Community of 
Practice established by DOD, no formal networks exist for 
agencies to exchange best practices, lessons learned, or other 
strategies. Instead, information is shared through informal 
networks, if at all. This lack of more formal exchanges has 
created an atmosphere in which agencies do not know whether 
fees are being used effectively, and one in which poor 
practices go unnoticed and positive practices were isolated.
    So what should be done? In our report, we recommended that 
DOE, HHS, and DHS update or develop guidance on using award 
fees which would provide instructions and definitions on 
developing criteria to better link award fees to acquisition 
outcomes; using award fees in combination with incentive fees; 
determining when rolling over unearned fees may be justified; 
and establishing evaluation factors to motivate contractors 
towards excellent performance and prohibiting payments of award 
fees for unsatisfactory performance.
    In addition, we recommended that DOD emphasize consistent 
application of its revised guidance and, where feasible, review 
contracts awarded before the guidance was in effect to identify 
additional opportunities for improvement.
    Finally, we also recommended that the five agencies 
establish an interagency work group to identify how best to 
evaluate the effectiveness of award fees and develop methods 
for sharing information on successful strategies.
    The agencies concurred with our recommendations and noted 
that an existing Federal Acquisition Regulation work group and 
an Interagency Incentive Contracting Work Group could be 
leveraged as mechanisms to implement our recommendations.
    Mr. Chairman, this concludes my oral statement, and I look 
forward to addressing any questions you or other Members of the 
Committee may have.
    Senator Carper. Thanks, Mr. Hutton.
    Mr. Zients mentioned near the--well, actually at the 
beginning of his testimony, I think he laid out maybe three 
major things that were promulgated by OMB. I think it was in 
2007.
    Mr. Zients. Yes.
    Senator Carper. And the last one, I believe, was that award 
fees should not be awarded when performance was unsatisfactory. 
I think that was the third point. I do not recall exactly the 
other two.
    But to go back to the 2007 guidance that OMB provided, and 
then if we fast-forward to what Mr. Zients said here today that 
should be done, is being done, how does it work together as a 
package in terms of getting us closer to better practice that 
we would all applaud rather than disdain or despair? I just 
want you to comment on what he laid out, like the road ahead.
    Mr. Hutton. Sure. Mr. Chairman, I do point out that when 
OMB issued their memorandum back in 2007, I believe, it 
reflected a lot of the key findings in our work that we did at 
DOD back in December 2005, and it really----
    Senator Carper. You didn't think they were listening. They 
were paying attention.
    Mr. Hutton. Well, sir, I do point out that DOD actually, 
once that report was issued, quickly modified their guidance. 
That was one positive step taken. You had OMB coming from 
behind later with additional guidance to make it apply to other 
Federal agencies.
    But Congress itself several times has pushed DOD to clarify 
their guidance, put more detail in their guidance, as well as 
ask that the FAR be amended to incorporate many of the things 
that we pointed out based on our 2005 work. And I think this is 
clearly an example, sir, where you said at the outset, GAO put 
a spotlight on some of the issues on the use of award fees back 
in 2005, and I think this is a clear case where putting a 
spotlight brought a little heat, and the heat brought some 
change so far.
    Senator Carper. Let me just back up a little bit. Do you 
believe that the guidance that OMB now provides is appropriate? 
Are there some aspects of it that----
    Mr. Hutton. For DOD's guidance?
    Senator Carper. Well, for DOD or really broadly, the 
guidance broadly for the awarding of award fees.
    Mr. Hutton. I think OMB's guidance, again, hits many of the 
key things, but what our work has shown, even this most recent 
report, is that the word has not gotten down to everyone 
throughout all the different agencies. As we have pointed out, 
some of the agencies like HHS and DOE in some cases have not 
incorporated all those attributes of the OMB guidance into 
their own guidance yet. So I think there is further room for 
improvement.
    But even within an agency--and DOD has taken some steps 
where we have seen some improvement--it is not across the board 
yet, but they certainly were initial steps.
    So you have to ensure that those steps are taken and pushed 
down across the agency down the contracting activities.
    Senator Carper. So from what I am hearing from you, OMB's 
guidance is generally pretty good, gotten better over time. 
Some of the agencies, including DOD, maybe NASA, are doing a 
better job of adhering to that guidance and have improved.
    We have the obligation to try to back you up when you point 
out activities that are really undefendable, that you continue 
to bring attention to them, and in some cases to embarrass or 
shame, in other cases to encourage agencies to do the right 
thing.
    What is the role of the Inspectors General in all this? Do 
they have any role at all in terms of trying to make sure that 
when OMB promulgates this guidance and you are out there as a 
watchdog, what is the role of the IGs in this, the Inspectors 
General?
    Mr. Hutton. Yes, sir. GAO has looked more broadly across 
government, but some of the IGs have done some studies looking 
at specific contracts where they went in and actually evaluated 
the agency's use of award-fee contracts. I know the NASA IG 
issued a report not too long ago, and I believe DOD has done so 
as well.
    So the IGs can play a role where they look at some of these 
contracts and see to what extent the processes and guidance are 
being executed.
    Senator Carper. Why do you think some--and this is for 
either of you. Why do you think the Department of Defense has 
actually made rather remarkable improvement, not perfect but a 
remarkable turnaround, and maybe NASA--and we have several 
other agencies, and I think one of you said in your testimony 
that 95 percent of these award fees were made by just five 
agencies, which is actually helpful because we do not have to 
worry about the rest, at least not with regard to this concern. 
But why is it that a big agency, a hard-run agency like the 
Department of Defense has made what, I think, most would say is 
pretty good improvement, and we have a couple of other agencies 
that are part of the problem here that have made relatively 
little? Why is that?
    Mr. Hutton. Well, if I could speak first, in terms of DOD, 
I think we highlight some key cases where you have seen these 
improvements being made. But as our report also pointed out, it 
has not gone throughout the organization. But I think 
leadership and embracing the GAO findings is one major step to 
seeing that change is made.
    Senator Carper. Mr. Zients, any comment on that?
    Mr. Zients. Yes, picking up on that, and then also earlier 
on the OMB guidance.
    Senator Carper. Please.
    Mr. Zients. My understanding is that incorporating this 
into the FAR and expanding the FAR rules will lead to much 
greater adoption. So this process which we are almost finished 
with, so within 30 to 60 days we should be publishing what most 
likely will be the interim final set of rules, will really 
ensure that this is front and center in all decisions around 
award fees, and it will be very clear, much more granular, if 
you will, guidance and rules about what should and should not 
be done.
    So I think going forward, now that we have it in the FAR in 
a more detailed fashion, this hopefully will help to mitigate 
this as a problem.
    Senator Carper. One of you said in your testimony, you 
talked about training of the men and women whose job it is to 
oversee contracts and to make sure we are doing the right thing 
with respect to acquisition. And I think one of our other 
witnesses in the second panel talked about the lack of 
training, and the fact that some of the folks who are tasked 
with these responsibilities in their agencies are not well 
prepared, are not trained to do this part of their jobs well.
    Would you care to tell us what needs to be done to better 
ensure uniformity of training and preparation of acquisition 
oversight?
    Mr. Zients. My perspective is that we have a set of 
workforce challenges, writ large here, in terms of--probably in 
terms of the number of people, and certainly in terms of 
training and capabilities that we really need to focus on. So I 
think when you talk about an area like this where clearly there 
have been some shortcomings, the idea of tailoring training to 
award-fee contracting, starting with is it the appropriate 
contract type to begin with, all the way through what is an 
appropriate award linked to actual performance, that whole 
value chain, if you will, is going to be an area that we need 
to target in training and support workforce development in.
    So I think it is part of a much larger issue that we have 
on workforce capabilities and training and number of people, 
but I think given the importance of this problem consistent 
with the guidance, we should be focusing in on some tailored 
training.
    Senator Carper. All right. The Department of Health and 
Human Services did not send a witness today to our second 
panel, and I am disappointed with that. But are either of you 
in a position to tell us how they are doing relative to the 
challenges that they face in this regard?
    Mr. Hutton. Mr. Chairman, our work has shown that HHS is 
one of the agencies that probably has some of the least 
specific detailed guidance at the various contracting 
activities, less than perhaps DOD, DHS, or DOE. Pretty much I 
think they are reliant on the FAR, and as the OMB witnesses 
indicated, the FAR is going to be expanded and provide more 
detail as to how to better utilize this type of contracting 
apparatus. While that is helpful, I think HHS should still look 
at their guidance and the extent to which their folks are well 
grounded in the key principles that we have pointed out in our 
work, as well as OMB has pointed out in their memorandum.
    Senator Carper. I will say this and then pass it on to Dr. 
Coburn and then back to Senator Burris. But my guess is that 
somebody at DOD a couple of years ago, fairly senior at DOD, 
maybe even a Deputy Secretary said, if we are going to run this 
agency the right way, we have got to do something about these 
award fees. And we all have heard of the term ``trickle down,'' 
but my guess is that much like turning a battleship or an 
aircraft carrier like they have to over at DOD, somebody high 
up has to say, ``Let us get to work on this.'' And it is 
important that we have people trained to do the day-to-day work 
on acquisition and contracting, but it is also helpful to have 
people that are in charge of agencies to say this is important 
as well.
    Dr. Coburn.
    Senator Coburn. Thank you, Mr. Chairman.
    Thank you for your testimony. I want to go a little deeper 
and into background really to ask how we got here. If you think 
about what we are using on award fees, it is usually on things 
that we have never done before. If you look at NASA or you look 
at DOD or you look at the case of the Census Bureau trying to 
buy a handheld computer, the hole I see in that is that we have 
no capital at risk by those people who are bidding these jobs. 
I would think, Mr. Zients, that you would probably agree, given 
your background, that when you have no capital of your own 
invested, you have no incentive to be under budget or on time. 
I just wonder, can you give me a little history of how we got 
here to where we are now, anything that we want to do new, all 
the risk is taken by the Federal Government, even though the 
company providing the services is going to handsomely profit 
from that.
    Why shouldn't they have risk? Why shouldn't they have 
capital at risk?
    Mr. Zients. I think, appropriately implemented, these 
contracts actually can achieve what you are discussing in that 
if unsatisfactory performance is the result and, therefore, 
there is no award fee, that should be a contract that the 
contractor does not make any money from.
    The problem is if you have unsatisfactory performance and 
you are actually paying healthy award fees, then the government 
is not protecting itself. But the structure of the contract 
could be used to protect the government so that if performance 
is not strong--and, again, one would prefer to have objective 
measures of the performance up front and have incentives as 
opposed to bonuses, if you will. But if that is not feasible 
given the newness of the work, as you described with NASA or 
DOD, then these fees should not be paid when performance is not 
strong and the contractor should suffer as a result--in 
essence, having lost the capital opportunity that you describe.
    Senator Coburn. Let me go a little further. The President 
said he would like to competitively bid everything, even the 
things that we are trying to do that have not been done yet. 
What is wrong with having a competitive bid on that and then 
holding the contractor accountable--if they cannot do it, they 
lose. If they do it, they win. We know what the price is up 
front. What is wrong with that? What is wrong with that 
scenario, where we put some of the risk onto those that are 
going to benefit from having the contract?
    Mr. Zients. I could not agree more on increasing 
competition. I think, where possible, we want fixed-price 
contracts. There probably are some situations where you cannot 
do a fixed-price contract and you have to do a cost 
reimbursement contract. In those situations, you want to be 
able to tie it as best you can to objective measures up front.
    If you cannot--and we should be now down to a pretty small 
subset, I would hope--then award fees could be the right way to 
incent good performance. But then you would absolutely have to 
tie performance to what percent of the award fee you are 
paying.
    Senator Coburn. Right. We spend $64 billion a year on IT 
contracts, and a large percentage of those, 30 percent or so, 
are totally nonperforming. The reason for this is we do not 
know what we want or we change what we want as we start it. I 
know the CFOs are going to be involved with this, and I 
appreciate the Obama Administration working on this.
    How do we get it to the point on these things we have not 
done where the bureaucracies do not change routinely or 
regularly the requirements so that we are chasing a moving 
target instead of saying, OK, this is it, this is what we are 
going to get, and then after we get this, then we will have 
another contract for MOD? The fact is that what happens on all 
these IT contracts is we just keep changing the goalpost.
    You all have done a wonderful job at looking at the 
problems with the system we have today. I am not sure this 
system works. As Mr. Hutton said, when is rolling over unearned 
award fees justified? If I was behind it, it never would be. 
That is like saying my dog ate my homework, but I come back 
tomorrow and get an A even though I did not perform the first 
day.
    I have questions with how we actually are doing this, how 
we are looking at it. I know there are areas where we cannot 
say we can get a fixed-price contract. I understand that, and I 
agree with setting incentives and parameters and good 
measurement indicators. But I think we need to move towards 
capital risk. If you look at the major contractors for the 
Federal Government, you go read their 10-Ks, they are doing OK. 
As a matter of fact, they are doing more than OK. They are 
making a ton of money off the taxpayers of this country, and 
they are providing the needed service. I am not unhappy that 
they are making money, but I am unhappy that we do not have a 
system that puts their capital at risk which will drive 
innovation on their part. If they do not have capital at risk, 
it does not.
    So, Mr. Hutton, when is it OK in rolling over unearned 
award fees? Why should they ever be rolled over?
    Mr. Hutton. Well, sir, I think as the latest guidance and 
the DOD guidance mentions, it would be really exceptional 
situations, and while that is not defined, I think one 
consideration is if there was--the contractor did not have an 
opportunity to earn a fee because of some event that did not 
occur at that point in time when everyone expected it to, and 
the award fee was tied to a particular event. But that is a 
decision that--I think a judgment that the government agency 
might have to make. I am not saying that is the best answer or 
the only way, but it really would be an exceptional situation, 
if in anything.
    Senator Coburn. My problem is that gives the contractor an 
out, and what you want to do is have them come in with a 
contract saying, ``There is no out for me on this. We have got 
to perform.'' It is the age-old story on venture capitalists. 
When a project is not going good, do you know what the first 
thing is they do? They fire half the people at the venture 
capital that they have, and it does not matter which half they 
fire. You know what happens? It either gets well very quickly, 
or they withdraw all the funding.
    I think we have taken an attitude we have done it this way, 
and we should probably take another look at this. Possibly an 
exception that only OMB can approve for rolling over award fees 
and saying, yes, this is something totally unforeseen, this is 
not a lack of effective innovation on the part of the 
contractor, not a problem with us in terms of purchasing.
    I would like to see those very much limited, and it will 
change behavior. The fact is that right now in the contracting 
community, award fees are pretty easy to get, we ought to go to 
the incentive that you are talking about, Mr. Zients, with 
clear guidelines so that there is no question but the key is 
how you contract what you are asking for in the first place. 
Mr. Zients.
    Mr. Zients. Yes, I was going to say on rollovers, I think 
there is one of two paths. One is outright ban. If it is not an 
outright ban, then it has to be truly, to your point, an 
extraordinary event. An extraordinary event would need to have 
a process associated with it that verifies----
    Senator Coburn. We are talking through OMB.
    Mr. Zients. That verifies it is extraordinary.
    Senator Coburn. Right. Thank you, Mr. Chairman. Sorry I 
went over.
    Senator Carper. No. That is quite all right.
    We have been joined by Senator McCaskill from Missouri. 
Welcome. We are delighted to see you and thank you for your 
interest and stewardship on these and other issues.
    We have also been joined in the audience by Dr. Jerome 
Lewis from the University of Delaware, who, as it turns out, 
was one of my professors when I was a young MBA student a long 
time ago. So we are delighted he and his wife, Linda, and their 
daughter, who I think just recently graduated from the 
University of Delaware, are all here.
    With that having been said, now let me recognize Senator 
Burris for his questions.
    Senator Burris. Thank you, Mr. Chairman.
    Senator Coburn, just for my information, did you have dates 
on those numbers that you read off? Were those 2005, 2006, or 
2007?
    Senator Coburn. Some of them were all the way up to 2007, 
but I think one of them was all the way up to 2008.
    Senator Burris. Thank you, Senator.
    Senator Coburn. But we will have them submitted for the 
record.
    Senator Burris. OK. Thank you, Senator.
    For Mr. Hutton, what is the biggest concern that GAO came 
away with after their May 2009 report? And what are GAO's 
recommendations for turning them around?
    For example, you said in your testimony that GAO has found 
that the agencies did not have a mechanism for evaluating the 
effectiveness of the award fee as a tool for improving 
contractor performance and achieving desired outcomes?
    Mr. Hutton. That is right, sir. That was one of our 
recommendations that gets at the heart of the issue, if you are 
using this as a vehicle, how do you know that the way you are 
using it is actually incentivizing the contractor to perform in 
the direction that you would like the contractor to perform.
    But to take it back to the first point about what are our 
biggest concerns, I think in part that we have seen the cost-
plus-award-fee contracts being used in a way that is not in the 
best interest of the taxpayer. In a number of cases, we found 
that, one, we talked earlier about having unsatisfactory 
performance and getting nothing or something. But we found that 
even in cases where they perform satisfactorily, one could get 
up to 85, 90 percent of the award fee. And in those situations, 
what is left to really incentivize a contractor's performance? 
You are only leaving like 10 percent. That is not much of an 
incentive, I would not think, if you are paying them, say, up 
to 90 percent for satisfactory.
    I think our report points to the weights being applied 
right now across some of the key agencies that tend to have 
this type of contract the most is one of our biggest concerns. 
But, also, I think the guidance still needs to be improved at 
the agencies, and I think the OMB guidance that reflected a lot 
of the commentary that we had in our 2005 report is really 
getting at the key things that need to be done:
    Do not pay an award fee for unsatisfactory performance. 
Rollover is to be only on an exceptional basis. And, quite 
frankly, I mentioned earlier a possible scenario. I mean, 
really what we have asked is for the agencies themselves to 
figure out when it would make the most sense because we are a 
little hard-pressed to find examples where it might make sense.
    So I think implementation has been a big issue for us and 
the fact that you are not going to get satisfactory resolution 
of this until some of these other agencies enhance their 
guidance as well. DOD has shown, in some cases where they have, 
you do see results.
    Senator Burris. And that leads me to Mr. Zients. In terms 
of DOD, was it able to make significant improvements after 
implementing the recommendations made by GAO in 2005? And what 
is the appropriate timeline for other agencies to get on board 
with these practices? And what kind of oversight can we, in 
Congress, provide? Are there circumstances that warrant 
penalties in reference to this?
    This goes to some of the work I actually have done in the 
private sector, which is to take the best practices of one 
organization and apply them to others. And I think by DOD's 
leadership on this, we know that change can happen, and it can 
happen pretty quickly.
    So I think what we need to do--we are benefited here in 
that there are five agencies that represent more than 95 
percent of the dollars. So by having those five agencies work 
closely together to share best practices, best processes, I 
believe that we can quickly improve this situation. I think DOD 
and NASA and maybe some others have some practices that we need 
to ensure that we codify and teach and implement as soon as 
possible.
    Senator Burris. Do you see what role can we, in Congress, 
have for developing penalties for those other agencies?
    Mr. Zients. I think holding accountable, the way you are 
today, is the right way to do this. And, again, it is a very 
focused effort. It is five agencies that represent more than 95 
percent.
    Senator Burris. Well, being a former fiscal officer of a 
State, and now, of course, out of the Federal Government, when 
you do that, there are certain penalties that you must pay if 
you are--I do not know whether or not those are Federal rules 
or not. But having dealt with the State contracting 
arrangement, certainly you cannot overspend those line items 
or, if you do, then you have to do some legal transfer of 
funds. I am just wondering how some of this mechanically takes 
place with the overspending when we are appropriating those 
funds for those agencies.
    Mr. Zients. Yes, it is a terrain that I do not know a lot 
about, but I can look into and report back on it.
    Senator Burris. OK. I am done, Mr. Chairman. Thank you very 
much.
    Senator Carper. I think we are fortunate to have a couple 
of members of this panel who have actually been auditors for 
their State, Attorney Generals for their State, and the 
expertise that you bring to the Senate is very much appreciated 
and valued. Thank you. Senator McCaskill, welcome.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Thank you, Senator Carper.
    Mr. Hutton, can you give us some historical perspective 
about how we drove in this ditch in the first place? It is 
amazing to me that there is a sentence in a GAO report that 
reads as follows: ``The Department of Defense now prohibits''--
underline ``now prohibits''--``payment of award fees for 
unsatisfactory performance.''
    Now, where I come from, that would be a head scratcher. How 
did we get to the point that we began paying award fees for 
unsatisfactory performance? How did that happen?
    Mr. Hutton. Well, it is difficult to kind of generalize, 
but one thing that we noted just in our recent work is that at 
some level it becomes the way we do business. And I know at one 
particular location a contractor--I think it was an Air Force 
contract--had been getting fees, and one time the government 
said, ``No, we are not going to give you a fee this period, and 
we are not going to roll it over to the next evaluation 
period,'' and the contractor came back and said, ``Well, you 
know''--and kind of very calmly said, ``Can you roll it over?'' 
And they said, ``No.''
    And so I think in part there is a culture change with 
respect to how this particular contract vehicle is being 
applied.
    Senator McCaskill. Well, it is interesting to me--I mean, 
and this culture change would never have happened in the 
private sector. There never would have been a habit developed 
over the years that we pay for bad performance, we pay a bonus.
    I remember my first encounter with this. It was in the 
Armed Services Committee, and there was a very long hearing 
where I kept like going, ``Huh?'' It was an amazing revelation 
to me that there had been time after time--and we actually 
drilled down in that hearing, and there was actually a formula 
they were using. And I even tried to get to, well, what decides 
who this formula is? And it became pretty obvious to me that it 
was just one of these regulations that had been put in place 
that no one was taking seriously. They were going through the 
motions of doing some kind of contract evaluation, but at the 
end of every evaluation, there was the same outcome.
    So it was like this mentality that there is this paperwork 
we have to do, but once we get through the paperwork, we keep 
doing what we always have been doing.
    Are you saying based on the report that you have issued 
that has changed at the Department of Defense or that they have 
simply put more regulations in place?
    Mr. Hutton. I think they have improved their guidance, and 
I think based on some initial steps and for the contracts we 
looked at, and programs, we did see in some cases the ship, so 
to speak, starting to turn.
    But I must underscore that our work also showed, though, 
that the job is not done, and I think it takes sustained 
leadership, it takes having a qualified and trained workforce 
in sufficient numbers and making sure that the contracting 
activities are executed as the guidance would suggest.
    Senator McCaskill. And one of Mr. Assad's many challenges 
is that, as your report found out, DOD, in terms of contracting 
makes an octopus look like it does not have very many legs. And 
all the different contracting commands are not in sync. They 
are not following the same guidelines. They are not observing 
the same rules and conduct based on--I mean, just within the 
Air Force, you have different contracting commands that are not 
even doing the same thing.
    I am curious. In your work, did you find a contract where 
they had denied a performance bonus?
    Mr. Hutton. An award fee? Yes.
    Senator McCaskill. You did.
    Mr. Hutton. I would probably have to get back for the 
record for some specific examples, but, yes, I do believe we 
had some where a contractor got zero for that particular 
evaluation.
    Senator McCaskill. Well, that is really good news because 
that has been typically a needle in a haystack type of deal, 
that there is actually someone who has been denied.
    As you have prepared for your very challenging job, Mr. 
Zients, are you aware of any contractor who has successfully 
sued for a performance bonus after they have been told no?
    Mr. Zients. It is not something that I have looked into, 
and so I do not know either way.
    Senator McCaskill. Are you aware of any, Mr. Hutton?
    Mr. Hutton. Senator, it is my understanding that the use of 
award fees is a unilateral situation with the government, that 
the government looks to try to incentivize in certain areas. It 
is a unilateral decision on the government whether they pay 
them a fee or not. And a contractor may come back and maybe 
say, ``I have some more information that might have you think 
differently about your evaluation.'' But it is a government 
decision.
    Senator McCaskill. Well, would there be something that 
would be too radical about saying that we are not going to do 
any more award fees in government unless it is based on 
objective criteria? Mr. Zients.
    Mr. Zients. My instinct is that there are situations where 
they probably do apply and actually apply when implemented 
correctly to protect the government's interest.
    Senator McCaskill. Can you give me an example where it 
would not be based on objective criteria?
    Mr. Zients. Something that is very research, early stage, 
focused where, if you did a fixed-cost contract, it would, let 
us call it, 100 percent; whereas if you focus it this way, you 
might pay, just to illustrate, 85 percent and put a piece at 
risk, so that if the contractor underperforms, you end up at 85 
percent rather than at 100 percent. So you actually are 
protecting the government's interest.
    If, however, the potential is 20 or 25 percent in my 
example and you routinely pay 20 or 25 percent independent of 
performance, then you have not protected the government's 
interest.
    So when applied correctly, by putting some of this at risk, 
if there is unsatisfactory performance or only satisfactory 
performance, the government should have protected its interest 
by paying less than they would have under a fixed-fee contract. 
And, again, I think you want to minimize the use of these and 
only apply them to situations where you cannot define the 
objectives up front and measure them. And I think we have to be 
careful because it is often easy to say you cannot measure 
things and then default to a contractor of this type. So we 
need to make sure that these are only used in those situations 
where you truly cannot define objectively up front.
    Senator McCaskill. Mr. Hutton.
    Mr. Hutton. If I could just add to that some of our past 
work has also indicated that you have to go through a thought 
process, a risk assessment as to whether this type of vehicle 
is going to give the government better opportunities to enhance 
the contractor's performance. But you also have to consider 
things like administrative costs, or do they outweigh the 
benefit of using that particular type of vehicle.
    We have done some work in Iraq where a cost-plus-award fee 
was used for certain types of contracts, and there was 
difficulty even having the award fee boards meet and be able to 
discuss whether the contractor has performed enough. So you 
have to kind of understand the environment you are working in. 
You have to do a cost/benefit, administrative versus benefits, 
but also you have to have sufficient people that are properly 
trained and overseeing a particular contract if you are going 
to use this type of vehicle.
    So there are a lot of different things that one must 
consider, and I think that, as the OMB representative has 
mentioned, what they are trying to do is focus on that initial 
decision point as well and bring in a little more rigor as to 
whether this is the right vehicle or not.
    Senator McCaskill. Well, and I get if it is fixed costs, we 
could withhold some to make sure we get full performance before 
we pay the full contract. But in the hearing I sat through the 
day that I thought the top of my head was going to pop off my 
body because I was so frustrated and angry at what I heard----
    Senator Carper. I would have liked to have been there for 
that. [Laughter.]
    Senator McCaskill. It was unbelievable. I mean, it was just 
unbelievable, this hearing about the contractor's performance 
and what they had been paid as bonuses. These were cost-plus 
contracts. So under what circumstances, if it is not a time 
consideration--because we are getting help on the cost here if 
it is cost-plus. Under what circumstances would there be an 
award?
    Mr. Zients. These are cost contracts that have an award 
bonus component to them. So if the award bonus is not linked to 
performance, i.e., we are paying it independent of performance, 
then we should all----
    Senator McCaskill. Kind of dumb.
    Mr. Zients [continuing]. Be very angry.
    Senator McCaskill. Yes.
    Mr. Zients. That does not mean that there is no place for 
these types of contracts. I think it is probably more limited 
use than we have today, and then they have to be implemented in 
a way where the award fee is tied to the contractor's 
performance, not paid in situations where the contractor's 
performance is unsatisfactory.
    Senator McCaskill. I think the best example--and I am not 
aware, Mr. Chairman; maybe you talked about this. But I know 
that there have been a number of hearings about it. The best 
example I can think of that should outrage the American public 
is the company that wired the showers that killed our soldiers. 
They got a performance bonus for that contract. They managed to 
kill American soldiers, and we bonused them up.
    And if there is any day you get discouraged about how 
important your work is, Mr. Zients, that we have to change the 
way we do contracting in this country, on behalf of the public, 
think about that example and it will keep your passion where it 
needs to be.
    Thank you, Mr. Chairman.
    Senator Carper. You bet. Thanks so much for joining us and 
for your passion on this.
    Have you all had a chance to look at the testimony from the 
second panel?
    Mr. Hutton. No, sir.
    Mr. Zients. Yes.
    Senator Carper. You probably will not be here for the 
second panel but if you have any comments that you would like 
to share with us with respect to anyone's testimony, we would 
welcome that.
    Mr. Zients. I would just repeat what I said before, which 
is that it is very focused, five agencies. I think that there 
are varying degrees of progress overall. And there are, 
inevitably, some best practices and some worse practices, and 
we should make sure that we take advantage of the fact that it 
is only five agencies, figure out what is working, and make 
sure that we teach that and spread that as quickly as possible, 
figure out what is not working, and teach that and make sure we 
eliminate that as fast as possible.
    Senator Carper. All right. In my opening statement, I 
mentioned an Air Force official that said a contractor would 
have to do ``pretty badly,'' to receive less than 85 percent of 
the award fee up for grabs. Then I think beyond that, one 
Department of Homeland Security official gave a contractor an 
award fee despite saying the contractor's actions were 
egregious and ``wasted taxpayer money.''
    My staff tells me that agencies pay contractors, on 
average, more than, I think I said, 85 percent of the award 
fee, and this suggests to me, and maybe to you, that agencies 
still expect--not all agencies, but some agencies still expect 
that they will be giving the contractor an award fee in almost 
every period. The only difference is whether contractors get a 
couple more dollars or not. Are agencies using award fees the 
way they were intended?
    Mr. Zients. No, given that performance is not uniformly at 
the far end of expectations. The 85 percent would correlate 
with across-the-board strong performance, and that is clearly 
not the case. So tying these award-fee percentages more 
directly to the actual performance is essential.
    Senator Carper. Why do you all think that this behavior 
continues to persist at a number of big agencies, big 
departments? Mr. Hutton.
    Mr. Hutton. Well, our work at DOD clearly put the spotlight 
on DOD back in 2005, and they changed their regulations. I 
think it is a situation, as our work found, that some of the 
people at the agencies had not even seen the OMB guidance that 
went out in 2007, so there is definitely an issue there. Is the 
word getting down to the hundreds of contracting activities? So 
I would say that is a major factor.
    But I think the work that we have just done in 2009 has 
raised the issue more broadly, and we indicate that these five 
agencies are 95 percent of the dollars. But I think this type 
of forum where we are discussing these issues, you are going to 
have another panel where the agencies are up here, and I think 
there is ample opportunity to ask some pretty hard questions 
about what they are doing in response to our recommendations 
and what kind of efforts they have underway to improve the 
guidance, and then ensure through leadership that these new 
guidelines are executed across the board and the government is 
in a better position.
    Senator Carper. All right. If you look at the Department of 
Defense, sometimes we think of the Secretary as a person who 
basically is making sure that the railroad, if you will, is 
running on time or on schedule. I think the Deputy Secretary is 
probably more responsible for that than the Secretary, and the 
person who was Deputy Secretary of Defense in 2005, I do not 
believe was the same person who was the Deputy in, say, 2007, 
2008. And the person who is the Deputy today is not the same 
person who was Deputy then--and so what we have in a lot of 
these senior jobs is a fair amount of turnover. Maybe someone 
is Deputy Secretary, a fairly senior position, who is maybe 
responsible for this area, and he or she is gone within a 
couple of years, and we have somebody new coming in. They may 
not even know of the concerns that have been raised.
    So it is the kind of thing I think we have to be 
unrelenting and be very persistent and consistent.
    Mr. Zients. I think that is right. I also think we need to 
make sure we hardwire these changes so that they last through 
changes of leadership. I mean, setting that tone at the top, 
Chairman Carper, I think is absolutely correct. But once we 
have change, we have to hardwire it in through better 
information systems, better rules through the FAR, and better 
training and education so that as we do have the inevitable 
churn of senior positions, we do not step backwards in any way.
    Senator Carper. All right. I talked to one of my colleagues 
the other day, and we talked about how over the last 8 years we 
have increased our Nation's debt by, I think, more than we 
actually increased it in the first 208 years of our Nation's 
history, and we are on track this year to run the biggest 
single-year budget deficit we have ever run. And it is just 
real important for us. Taxpayers expect us to be good stewards 
of their money, and it is real important that we look closely 
at the kind of behavior we are discussing here today.
    OMB cannot do it by themselves. GAO cannot do it by 
themselves. The IGs cannot do it by themselves. We cannot do it 
by ourselves. But to the extent that we are working on this 
together, making sure that we have clear guidelines from OMB, 
making sure that we have buy-ins from the agency heads, making 
sure that we have the appropriate training for folks that are 
managing these contracts, making sure that, to the extent that 
there are best practices from one agency or the other, that we 
have an opportunity to share it among this relatively small 
group of agencies that together collectively award--what?--95 
percent of the award fees, and then making sure that we are 
doing our job in terms of oversight, recognize those that are 
doing a better job, and taking to task those who are not.
    The word ``FAR'' has been mentioned again and again as an 
acronym in this hearing. It reminds me, Senator Burris, of an 
old Kenyan saying: ``If you want to go fast, go alone. If you 
want to go far, go together.'' And we want to go far in terms 
of making reductions in inappropriate award fees, and in order 
to do that, we are going to have to go together.
    We appreciate your presence here. We would just ask you to 
continue efforts, in some cases to redouble your efforts. Along 
with everything else that you are doing, this is important 
work. Thank you very much.
    I am going to ask our second panel of witnesses to come to 
the witness stand as soon as Mr. Zients and Mr. Hutton have 
taken their leave. Thank you, gentlemen.
    [Pause.]
    Senator Carper. Well, we welcome each of our witnesses on 
our second panel.
    Our first introduction is going to be for the Hon. Shay 
Assad.
    Mr. Assad serves as the Director for Defense Procurement 
and Acquisition Policy at the Department of Defense. Mr. Assad 
is also a Navy veteran. I understand you served aboard a couple 
of Navy destroyers. He was a Naval Academy graduate in 1972. 
Those are great credentials. I say that as an old naval flight 
officer, Navy ROTC, Ohio State, and I was on active duty at the 
same time that you were. We thank you for your service, both 
your previous service to our country and your current service.
    Our next witness is William McNally, Assistant 
Administrator for Procurement at NASA. Prior to his work with 
NASA, Mr. McNally served a distinguished 26-year-old military 
career in the U.S. Air Force, working much of that time on 
military procurement issues. Have you ever been to Dover Air 
Force Base?
    Mr. McNally. No, sir.
    Senator Carper. All right. The best Air Force base in the 
world, as it turns out, at least for the last 10 months. We are 
very proud of our Air Force base. It was the first airlift base 
to ever receive that kind of recognition, the Commander-in-
Chief's Award.
    We thank you very much for your previous service with the 
Air Force and your continued service today.
    Our third witness is Richard Gunderson, Acting Chief 
Procurement Officer for the Department of Homeland Security. 
And previously, Mr. Gunderson served, I am told, as Assistant 
Administrator for Acquisition at the Transportation Security 
Administration, providing support to one of the largest and 
most complex acquisition programs in the Department of Homeland 
Security. Thank you for joining us.
    Our fourth witness is Edward Simpson, Director of the 
Office of Procurement and Assistance Management for the 
Department of Energy, and you have been there, I am told, since 
1979. Is that right?
    Mr. Simpson. Yes, sir.
    Senator Carper. Since 1979, and have been working since 
that time in a variety of contracting and procurement-related 
positions for the agency.
    Our final witness today is Alan Chvotkin, Executive Vice 
President and Counsel for the Professional Services Council. 
Prior to his current position, Mr. Chvotkin worked as Vice 
President of Government Services at AT&T. Mr. Chvotkin, 
welcome.
    Your entire statements will be made part of the record. 
Please try to sum them up in about 5 minutes. If you go a 
little over, that is all right. Thank you all for coming today.
    Senator Burris. Mr. Chairman.
    Senator Carper. Yes, Senator Burris.
    Senator Burris. Just for my information, I would like to 
know their longevity, whether or not they are new in their 
positions or how long have they served in their respective 
positions.
    Senator Carper. That is a great question, and as you begin 
your comments, if you would just note that, just very briefly, 
and incorporate that in the beginning of your comments, we 
would be grateful. Thank you.
    Please proceed, Mr. Assad.

TESTIMONY OF SHAY D. ASSAD,\1\ ACTING DEPUTY UNDER SECRETARY OF 
  DEFENSE FOR ACQUISITION AND TECHNOLOGY, U.S. DEPARTMENT OF 
                            DEFENSE

    Mr. Assad. Chairman Carper, Senator Burris, Members of the 
Subcommittee, I have been the Director of Defense Procurement 
since April 2006, so that is when I came on board to DOD, DPAP.
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    \1\ The prepared statement of Mr. Assad appears in the Appendix on 
page 63.
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    Chairman Carper, Members of the Subcommittee, my name is 
Shay Assad. I am the Director of Defense, Procurement and 
Acquisition Policy (DPAP). I am also serving as the Acting 
Deputy Under Secretary of Defense for Acquisition and 
Technology. I want to thank you for the opportunity to appear 
before you to participate in today's hearing examining whether 
Federal agencies are effectively using cost-plus-award-fee 
contracts to successfully incentivize contractor performance. 
The Department recognizes it is important to both the 
warfighters and taxpayers that we effectively motivate 
contractors to deliver systems and services that meet or exceed 
our performance expectations.
    Over the past few years, there has been a real sea change 
within the Department in the way award fee contracts are 
employed. Spurred by the General Accounting Office report 
published in December 2005, we started making changes in 2006 
and 2007 and made the necessary improvements to our award fee 
practices and have realized significant savings as a result. We 
have implemented the statutory provisions enacted by the 
Congress which require, first, to link award fees to 
acquisition outcomes; second, to define the circumstances and 
standards for paying out award fees based on contract 
performance; and, third, to ensure no award fee is paid for 
contractor performance that is less than satisfactory. We must 
align contractor profitability with performance.
    As Secretary Gates has testified earlier this year before 
the Senate Armed Services Committee, we must write contracts 
that incentivize proper behavior. To the extent we continue to 
use cost-plus-award-fee contracts, we are now focused on 
outcomes and results and not on process.
    One important safeguard is the requirement we established 
that all cost-plus-award-fee contracts must be justified by a 
determination and finding signed by the head of the contract 
activity. By elevating the approval to this level, we ensure 
that senior leadership have thoughtfully considered what should 
be selective use of cost-plus-award-fee arrangements.
    The Department has incorporated into the acquisition 
strategy approval process and into its peer reviews the 
requirement for a thorough review of incentive arrangements, 
particularly award-fee criteria. In the pre-award time frame, 
we look to ensure acquisition strategies are structured such 
that objective criteria will be utilized whenever possible to 
measure contract performance. In fact, most pre-award peer 
review teams begin by engaging the program manager to 
understand the key measures of success to ensure that 
appropriate incentives are built into the contract. In the 
post-award time frame, our peer review teams look to ensure 
award and incentive fees paid were consistent with policy.
    The Department is, without doubt, moving away from the use 
of pure award-fee contracts and is seeking instead to use 
incentive contracts that include a mixture of incentive and 
award fees when necessary.
    In our analysis of the 2000 and 2008 award-fee data we have 
collected, there were only 30 new award-fee contracts issued in 
2007 and 10 in 2008. In contrast, between 2004 and 2006, each 
year at least 65 award-fee contracts were awarded. In those 
limited cases where cost-plus-award-fee contracts are 
appropriate, where only subjective evaluation criteria are 
possible, or where it is not feasible to have predetermined 
objective criteria before award, award fees must be linked to 
desired outcomes.
    Again, thank you for the opportunity to address the use of 
cost-plus-award-fee contracts. I would be happy to address any 
questions that you may have. Thank you.
    Senator Carper. Thanks very much, and when we get to the 
Q&A, I am going to be asking you--you talked about the 
declining awarding of award-fee contracts over the last couple 
of years, and one of the questions I will be asking you is: Is 
there anything that those relatively few contracts awarded in 
the last couple of years have in common? Why are they 
appropriate and the others were not? Thanks.
    Mr. McNally, please proceed. Thank you.

TESTIMONY OF WILLIAM P. MCNALLY,\1\ ASSISTANT ADMINISTRATOR FOR 
  PROCUREMENT, AND DEPUTY CHIEF ACQUISITION OFFICER, NATIONAL 
              AERONAUTICS AND SPACE ADMINISTRATION

    Mr. McNally. Yes, in answering the question about my time 
at NASA, I came to NASA in October 2005 to be a special 
procurement adviser for the exploration system that was just 
starting, and in August 2007, I assumed the position I 
currently have as the Assistant Administrator for Procurement 
at NASA.
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    \1\ The prepared statement of Mr. McNally appears in the Appendix 
on page 71.
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    Thank you for the opportunity to testify before the 
Subcommittee regarding NASA's use of cost-plus-award-fee 
contracts to incentivize excellent contractor performance. NASA 
is unlike civilian agencies. Our programs and projects involve 
space exploration systems, science and aeronautic research, and 
space operations, and they have one thing in common: They are 
high risk. This is because NASA is pushing new boundaries of 
technology and science.
    There are many challenges involved in managing and 
performing high-risk programs, projects, and missions. They are 
full of uncertainty and challenges, and they involve high-risk 
acquisitions. NASA utilizes award-fee contracts in many of 
these high-risk acquisitions.
    NASA uses award-fee contracts when key elements of 
performance cannot be objectively measured. In this situation, 
most elements of contractor performance can only be evaluated 
using subjective criteria.
    To ensure these criteria are measured accurately, the 
actual award fee earned by the contractor is determined by a 
rigorous process. A Performance Evaluation Board, made up of 
many functional disciplines, is established to evaluate the 
contractor's performance. This board submits an evaluation 
report to the fee-determining official who determines the fee 
for a particular award-fee period. Under NASA procurement 
policy, a contractor will not be paid any award fee or base fee 
for less than satisfactory overall performance.
    NASA's policy requires an approval process be completed 
before an award-fee contract can be used. A key part of this 
process is the preparation of a cost/risk benefit analysis that 
compares the additional costs of administering an award-fee 
contract against the expected benefits.
    NASA's policy requires that award-fee contracts contain 
clear, unambiguous, and measurable evaluation criteria that are 
linked to the cost, schedule, and technical performance 
requirements of the contract. The linking of award-fee 
evaluation criteria to acquisition outcomes ensures that the 
contractor has the incentive to control cost while providing a 
high-quality supply or service to the government in a timely 
manner.
    NASA has implemented tracking of award fee as part of its 
Baseline Performance Review process. This review is an 
independent, monthly assessment of selected NASA programs and 
projects. It updates NASA's senior leadership about 
contractors' performance as measured against the approved 
baseline for the acquisitions. As part of this review, the 
award fee ratings on selected programs and projects are 
explained and discussed relative to the contractor's current 
performance level. This review is done to ensure that there is 
consistency between the performance of the projects and 
programs with the associated award-fee scores.
    NASA is part of an interagency working group that will be 
evaluating the effectiveness of award fees as a tool for 
improving contractor performance and achieving desired 
outcomes. This working group is also developing methods for 
sharing information on successful incentive strategies. We are 
actively participating on this interagency working group and 
are looking forward to implementing the eventual 
recommendations from this group.
    Again, thank you for the opportunity to appear before the 
Subcommittee today. I would be pleased to respond to any 
questions you may have.
    Senator Carper. Thanks so much for your testimony and 
comments. Mr. Gunderson, please proceed.

TESTIMONY OF RICHARD K. GUNDERSON,\1\ ACTING CHIEF PROCUREMENT 
         OFFICER, U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Gunderson. Chairman Carper, Senator Burris, and Members 
of the Subcommittee, thank you for the opportunity to appear 
before you to discuss the Department of Homeland Security 
contracting program and, in particular, its use of award-fee 
contracts.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gunderson appears in the Appendix 
on page 75.
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    Senator Burris. Excuse me, Mr. Gunderson. How long have you 
been there?
    Mr. Gunderson. I have been the Acting Chief Procurement 
Officer since this January, and previous to that, I came to the 
Department as the Deputy Chief Procurement Officer last May, 
May 2008. So I have been at the Department level now for about 
15 months, 16 months.
    Senator Burris. Thank you, sir.
    Mr. Gunderson. As the Acting Chief Procurement Officer, I 
am the lead executive responsible for the management, 
administration, and oversight of the Department's acquisition 
programs. In that capacity, I oversee and support 10 
procurement offices within DHS. The mission of my office, in 
conjunction with the respective contracting offices, has been 
to provide the needed products and services to meet the DHS 
Mission, and to do so in a way that represents sound business 
and demonstrates that we are good stewards of the taxpayers' 
money.
    The threats we face are variable, and as a result, the 
acquisition program must be able to adapt and identify a 
variety of solutions. Similarly, the contracting officers must 
assess each procurement requirement and determine the 
appropriate type of contract. Based on various factors, 
including the complexity of the required product or service, 
the contracting officer selects the contract type that 
recognizes the performance risk and motivates the contractor to 
successfully meet the program's objectives to include cost, 
schedule, performance, or a combination thereof.
    One of my priorities is quality contracting, which is 
focused on making sound business decisions that enable us to 
accomplish our critical mission. The Office of Chief 
Procurement Officer includes a policy and legislation branch, 
which is responsible for the development and establishment of 
procurement policy for the operational contracting activities.
    The Homeland Security Acquisition Regulation and the 
Homeland Security Acquisition Manual were published in 2003 and 
have been updated to reflect current statutory regulatory and 
Office of Federal Procurement Policy and DHS mandates. These 
two documents provide the foundation for procurement policy 
that is adhered to by each of the 10 contracting organizations.
    My office also participates in Federal procurement 
policymaking through its participation on various committees, 
include two OFPP working groups directly addressing the subject 
of today's hearing: The Contract Type Working Group and the 
Incentive Contracting Working Group.
    With respect to our policy on award-fee contracts, current 
HSAR and HSAM guidance are effectively consistent with OFPP 
guidance. This includes an emphasis on criteria related to 
cost, schedule, and performance, successful performance, and 
exception-only use of rollover.
    Developing and issuing policy is not effective unless the 
workforce is aware and understands the implementing guidance. 
We accomplish this through a multi-layer approach, including 
the Policy Working Group, communications through the 
contracting community, and through discussions with the head of 
the Contracting Activity Council.
    We utilize the full variety of contract types prescribed in 
the FAR in support of our diverse acquisition program. The 
preponderance of our awards is firm fixed price. This includes 
nearly 70 percent of our awards and 50 percent of our dollars. 
However, not all requirements are suited to fixed-price 
contracts. In those instances where it is difficult to 
determine objective performance measures, award-fee contracts 
provide a business strategy that enables the government to 
identify areas of emphasis and establish an award-fee pool that 
will motivate the contractor to succeed in meeting the 
government's requirements.
    In these situations, typically the contract fee structure 
includes a base fee and award fee portion that together 
comprise the total potential fee to be earned by the 
contractor. If the government's evaluation of the contractor's 
performance is positive, a percentage of the award-fee pool 
will be awarded on the criteria and respective weightings of 
the criteria as defined in the contract's award-fee plan. As a 
result, under a properly structured award-fee contract, a 
contract that performs significantly above satisfactory may 
earn at least the same or perhaps more fee than it would have 
earned if the contract had only used a fixed-fee structure. 
Conversely, a contractor that performs below satisfactory will 
earn only a base fee, which is significantly less than what 
they would have earned if it had been a fixed fee.
    The award fee is both a positive and negative incentive 
whereby the contractor may earn slightly more or substantially 
less than what a fixed-fee contract would have paid if the 
procurement had lent itself to that type of business strategy.
    DHS is committed to awarding quality contracts that deliver 
mission and capability and represent sound business judgment, 
including compliance with Federal procurement regulations, 
policies, and guidance.
    I thank you for the opportunity to testify before the 
Subcommittee about our use of award-fee contracts, and I am 
glad to answer any questions you or the Members of the 
Subcommittee have for me.
    Senator Carper. Mr. Gunderson, thank you. Mr. Simpson, you 
are recognized. Please proceed.

    TESTIMONY OF EDWARD R. SIMPSON,\1\ DIRECTOR, OFFICE OF 
   PROCUREMENT AND ASSISTANCE MANAGEMENT, U.S. DEPARTMENT OF 
                             ENERGY

    Mr. Simpson. I have been at the Department of Energy since 
1979. As noted, I have been in my current job, which is the 
Director of Procurement and Assistance Management, since 
February 2006, and I also serve as the senior procurement 
executive for the Department of Energy other than the National 
Nuclear Security Administration, which has a separate 
contracting authority.
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    \1\ The prepared statement of Mr. Simpson appears in the Appendix 
on page 79.
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    Senator Carper. Who was the Secretary in 1979, do you 
remember?
    Mr. Simpson. No.
    Senator Carper. Thank you very much. Mr. Simpson, please 
proceed.
    Mr. Simpson. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to come before you today to 
present the Department of Energy's views and perspective on the 
recent U.S. Government Accountability Office report entitled 
``Federal Contract: Guidance on Award Fees Has Led to Better 
Products, But Is Not Consistently Applied.'' I am pleased to be 
here today to address how the Department is effectively using 
cost-plus-award-fee contracts to incentivize excellent contract 
performance and how DOE has implemented the Office of 
Management and Budget December 2007 guidance on the appropriate 
use of incentive contracts.
    DOE is the largest Federal civilian contracting agency 
based on fiscal year 2008 contract obligations of approximately 
$25 billion. A central element of DOE's contracting structure 
is a cadre of special contracts called ``Management and 
Operating Contracts,'' which have their origins in the 
Manhattan Project and have endured under DOE and its 
predecessor agencies. These contracts for the management and 
operation of government-owned national scientific, engineering, 
and research facilities are unique in all of government and 
require a special authorization by the Secretary of Energy.
    Many of the scientific and research facilities are also DOE 
Federally funded research and development centers, a special 
designation applied to these facilities because of their 
criticality to DOE's mission. The laboratory contracts for 
these facilities were the focus of GAO's review of DOE. Because 
of the broad mission and work scope of these contracts, they 
are cost-reimbursement contracts. In addition, DOE also awards 
and administers thousands of other contracts that represent the 
full range of fixed-price and cost-reimbursement type contracts 
for goods and services typically acquired by most Federal 
agencies.
    In its study, GAO noted two particularly positive aspects 
of DOE's administration of cost-plus-award-fee contracts. 
Specifically, GAO concluded that for two of the four 
fundamental practices recommended in the OMB guidance linking 
award fee to acquisition outcomes and limiting the use of 
rollover, DOE's supplemental guidance is in accordance with 
OMB's guidance.
    GAO also noted that DOE should strengthen its policy for 
the other two practices OMB recommended, emphasizing excellent 
performance and prohibiting payments for unsatisfactory 
performance.
    DOE will address GAO's concerns immediately. Shortly, we 
will issue policy that more strongly emphasizes contractor 
performance results and prohibits payment for unsatisfactory 
performance in language that is unambiguous and consistent with 
OMB's guidance.
    DOE's policy for the use of award fee in its major 
contracts adheres to Federal Acquisition Regulation 
requirements. There is, however, a need for consistency and 
rigor in the use of award fee. We should incentivize the 
contractor to performance excellence. I fully support the GAO's 
recommendation that DOE ensure it has established evaluation 
factors, definitions of performance, associated fees, and 
evaluation scales that motivate excellent performance and 
prohibit award fee for unsatisfactory performance.
    In closing, the Department's procurement policy assures it 
is effectively using cost-plus-award-fee contracts to 
incentivize excellent contract performance and is in line with 
the OMB guidance released in September 2007. We will strengthen 
that policy by issuing amplifying guidance that addresses the 
concerns raised by GAO and recognizes that our major programs' 
award-fee requirements need to be tailored to their different 
mission portfolios and contract objectives. Specifically, we 
will issue expanded guidance on choosing the right contract 
type, defining terms and rating categories, defining standards 
of performance for each rating category and the fee paid for 
meeting the standards, and ensuring that the fee is not paid 
for unsatisfactory performance.
    We are committed to work with and participate in any 
interagency working group to be established to determine how to 
best evaluate the effectiveness of award fee as a tool for 
improving contractor performance and achieving desired program 
outcomes and to develop methods for sharing information and 
successful strategies.
    This concludes my formal remarks. I would be happy to 
respond to your questions.
    Senator Carper. Good. Thanks, Mr. Simpson. Mr. Chvotkin.

  TESTIMONY OF ALAN CHVOTKIN,\1\ EXECUTIVE VICE PRESIDENT AND 
             COUNSEL, PROFESSIONAL SERVICES COUNCIL

    Mr. Chvotkin. Thank you, Mr. Chairman. Good afternoon. I 
have been at Professional Services Council (PSC) for 9 years. 
Before that, I spent 10 years at AT&T in their Government 
Markets, and prior to that I spent 10 years as senior counsel 
in Rockford-based Sundstrand Corporation, which is now part of 
United Technologies.
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    \1\ The prepared statement of Mr. Chvotkin appears in the Appendix 
on page 87.
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    Senator Burris. Good company.
    Mr. Chvotkin. Thank you. Thank you, Mr. Chairman, for the 
invitation to testify before the Subcommittee today.
    The Professional Services Council is the leading national 
trade association of the government professional and technical 
services industry. Our association members employ hundreds of 
thousands of Americans in all 50 States.
    Mr. Chairman, performance matters. Both government agencies 
and contractors need to understand the contractual 
relationships and requirements imposed and the compliance 
obligations being undertaken. It is also appropriate to look at 
the business relationship between the government and the 
contractor--including the contract type--to understand the 
performance obligations.
    Unfortunately, there are many fallacies about award-fee 
contracts. One common myth is that the award fee is equal to 
``more contractor profit''; this myth really ignores the 
incentive nature of award-fee contracting when used properly.
    A second is that the award fee is paid even for a 
contractor's ``satisfactory'' performance of a contract. This 
myth ignores the key elements of the government-established 
award-fee plan that structures the outcomes to be achieved and 
the methodology for evaluating the contractor's performance and 
often fails to recognize that, prior to recent legislative and 
regulatory changes, ``satisfactory'' performance often meant 
that the contractor ``fully performed'' according to the award-
fee criteria--not merely complied with the basic contract 
requirements.
    But there are also many truths about award-fee plans and 
award-fee contracting. First, these are difficult contracts for 
agencies to write and for contractors to compete for. The 
challenge for the procuring agency is to describe the minimum 
performance of the contract and then to describe the 
appropriate ``motivational'' objectives--whether they be 
quality, timeliness, technical, cost management, or others.
    Second, the metrics selected as the evaluation criteria in 
the award-fee plan must be directly related to the objectives 
to be accomplished and must accurately measure the intended 
performance objectives.
    Finally, there must be governmental personnel knowledgeable 
about the motivational objectives to be achieved and the 
metrics selected and used. A contracting officer doesn't 
normally have these skills, and this is yet another example of 
the skills shortage that is too often evident, with real 
implications, in the acquisition workforce.
    There is another important factor to put on the table when 
addressing the current uses of award fees. The Federal 
Acquisition Regulation provides that an award-fee contract 
should have two key components: A base fee fixed at inception 
and an award fee that a contractor may earn.
    According to the Federal budget scoring rules, when an 
agency provides for a base fee, the agency must score that 
amount as an obligation at the time the contract is awarded. 
Thus, over the past several budget cycles, as agencies tried--
or were directed--to minimize their contractual spending, they 
significantly shifted funds away from traditional base-fee 
amounts--essentially adopting a zero base-fee approach--and 
allocated more funds into the award-fee portion of the contract 
that would be obligated only after the government's fee-
determining official made the award-fee decision. Simply put, 
budget rules helped drive contracting practices, and the recent 
use of award fees masks the significant and intentional 
contractual and performance differences between base and award 
fees and between satisfactory contract compliance and stretch 
objectives.
    Finally, once the award-fee plan is established, it must be 
adhered to by all parties. The government has a responsibility 
to fairly evaluate the contractor's performance against the 
metrics in the award-fee plan, make a fair and justifiable 
determination of the contractor's accomplishments, and pay 
accordingly. Too often we hear about agencies delaying their 
review of the contractor's award-fee submissions or failing to 
make any award-fee determination, and failing to make payment 
according to the award-fee schedule. By breaking faith with the 
contractor over the award-fee plan, the agencies put 
contractors--particularly smaller and mid-tier firms--at 
greater financial risk.
    In conclusion, cost-plus-award-fee contracting is an 
appropriate contract type, and agencies should have the 
flexibility to select this contract type--as with every other 
contract type--to best meet the buying activities' requirements 
and to select the best acquisition method available. PSC 
supported the Office of Federal Procurement Policy's December 
2007 guidance, but agencies must also have the flexibility to 
implement that guidance in a manner that takes into account 
their specific requirements and market needs.
    The five agencies identified in the GAO report should 
ensure that the OFPP December 2007 guidance is implemented. 
Except for the regulations already in process to implement 
existing law, however, we should give these agencies an 
opportunity to take the administrative actions they talked 
about today, implement their own guidance in new contracts, and 
give the acquisition process a chance to work.
    Thank you again for the invitation to address this 
important matter. I look forward to any questions the 
Subcommittee may have.
    Senator Carper. Mr. Chvotkin, thank you for your testimony 
and for giving us a little different perspective on an 
important issue.
    The next question I am going to ask--and I am going to ask 
this of each of our panelists on this panel. I am going to ask 
you to go back to what the two witnesses in the first panel had 
to say and just take a minute and tell us if there is anything 
that they may have said that you disagree with strongly or have 
a different perspective on. Think about that for a moment.
    One of the departments that we had asked to participate 
today and invited to participate today is the Department of 
Health and Human Services, and I am just wondering if any of 
you can share with me who might have been an appropriate person 
to come from HHS, maybe the Chief Procurement Officer. But do 
you all have any idea who might have been an appropriate 
witness from that department? Mr. Gunderson.
    Mr. Gunderson. They have, I believe, a management type 
level. I know in the Department of Homeland Security we have an 
Under Secretary for Management.
    Senator Carper. Do they have a Chief Procurement Officer at 
HHS?
    Mr. Gunderson. They do.
    Senator Carper. Do you know who that is?
    Mr. Gunderson. Nancy Gunderson.
    Senator Carper. No kidding. Your daughter?
    Mr. Gunderson. No.
    Senator Carper. OK. That is a great coincidence. But, 
actually, she is your wife.
    Mr. Gunderson. Yes.
    Senator Carper. You could have worn both hats. Next time, 
she could just come and testify for both agencies. [Laughter.]
    I say that with tongue in cheek, but that is, I thought, 
just a great coincidence that we had one family representing 
both departments in similar work. That is good.
    All right. Back to our first panelist, is there anything 
that our two panelists said on the first panel that you would 
like to just revisit, Mr. Assad, and that you may have a 
different take on?
    Mr. Assad. Mr. Chairman, not really. I was fundamentally 
aligned, frankly, with what the GAO's findings were back in 
2005, which is why we kicked off the change that we did within 
the Department.
    Senator Carper. All right. Thank you.
    Mr. McNally, anything you would take issue with?
    Mr. McNally. No, Chairman. Two issues that I will bring up 
that are really critical are to establish consistent policy, 
which we are going to be working on with this interagency 
working group and set up guidelines in the Federal Acquisition 
Regulation. Then comes practice with what agencies actually do 
with the guidance that they have. And the one thing that I 
would ask is that agencies be allowed to practice the 
appropriate type of contract based on their missions, like at 
NASA with our high-risk missions that we continue to be allowed 
to do the appropriate type of contracts based on those 
missions.
    Senator Carper. OK. Thank you.
    Mr. Gunderson, anything you would take issue with from the 
first panel you would like to mention?
    Mr. Gunderson. Not that I take issue with. I do think that 
one of the larger challenges will be in the area of trying to 
figure out a way to determine or evaluate the effectiveness of 
these contracts, and I think that is something that we will 
have to put our heads together to find out how we can do that.
    We can collect a lot of data, but what the data truly show 
us is going to be a difficult thing to get through.
    Senator Carper. We find out in some other programs, and I 
think maybe even in cyber terrorism, we find in some cases our 
Federal agencies collect a lot of data, but the question is 
what they do with it to make us safer from--less vulnerable to 
those kinds of attacks.
    Mr. Simpson, anything you would like to speak of, or any 
differences, different perspectives?
    Mr. Simpson. We agree with the recommendations by GAO. I 
guess in looking at the regulatory framework that is under 
development, there is always a risk in creating such a 
prescriptive regulatory framework that you ultimately do 
develop a one-size-fits-all. And, at its essence, a contract is 
a business relationship, and agencies do need the flexibility 
to manage those business relationships with rigor.
    The other issue that would concern me here is we establish 
yet another overly burdensome reporting system that our front-
line contracting officers have to actually fulfill those 
requirements, and they are already burdened with a number of 
other responsibilities.
    So I think the information is good to get, but I think we 
do need to be careful that we are not creating more work on 
already a stressed workforce.
    Senator Carper. All right. Thank you. Mr. Chvotkin.
    Mr. Chvotkin. I am not sure I would know where to start or 
how much time I have.
    Senator Carper. Just keep it fairly short--take about a 
minute.
    Mr. Chvotkin. Yes, sir. The GAO report hints at the 
answer--that there is a difference between performance of the 
core requirements and the incentives that an agency is trying 
to achieve through an award-fee process. Yet, when they 
continue to talk about satisfactory performance and mix 
contract performance with performance against an award-fee 
plan, they mask the real differences and the intention of the 
whole contractual relationship in an award-fee structure.
    I agree with Mr. Zients: Performance matters. The selection 
of the contract type is critical. Award fees have an 
appropriate place, but it is evidence that, of all of the 
Federal agencies, only five are using 95 percent of them. So 
blunt objects spread across all Federal agencies may not be 
what is necessary. Your point earlier, Mr. Chairman, and Mr. 
Zients' as well, that four of the five agencies are sitting 
right here, and one of them--DOD--has already implemented a lot 
of the 2007 OFPP requirements and further regulations. So we 
may not need more laws or more regulations to accomplish the 
objectives for 95 percent of the government and it may not be 
worth the effort to try to get that last 5 percent.
    Senator Carper. All right. Thank you.
    One of the things I think we discussed with, I think it 
was, Mr. Zients in the first panel was this idea of creating, I 
guess, an informal mechanism to share best practices. I think, 
Mr. McNally, if I heard your testimony correctly, you suggest 
that maybe there already is such an entity, that NASA is 
participating in it, and it is already beginning to work. Would 
you just clarify that for me?
    Mr. McNally. Yes. There is an interagency working--I have a 
member of my staff who is on it--and right now they are 
actually waiting to look at the Federal Acquisition Regulation 
change to then decide what further practice and guidance should 
be put out to supplement the regulation.
    But one of the things that was brought up earlier is even 
internally in some agencies there is the challenge of getting 
out best practices to do different buying centers and commands 
to talk to each other. And with our technology that we have 
available today, there is no reason why we shouldn't share best 
practice within our agencies, but also across the government.
    As mentioned earlier, if 95 percent of award-fee dollars 
are with five agencies, we should be getting together and 
sharing best practice, not just on award fee, but also on 
performance incentives as well.
    Senator Carper. Good. Thank you. My time has expired. 
Senator Burris, you are recognized. Please proceed.
    Senator Burris. Thank you, Mr. Chairman.
    The reason I asked for the time periods is because I was 
assuming that most of the gentlemen here from the four agencies 
were relatively new at their positions and that you will begin 
to undertake these major changes, and hopefully we will see 
some major improvements once you all begin to wrestle with or 
begin to implement some of the suggestions, even those that are 
coming out of this hearing this afternoon.
    But, Mr. McNally, I was a little concerned. Mr. Assad gave 
a number of how many award fees DOD had been dealing with. You 
gave us a percentage of 70 percent of firm-fixed, which was 
about 50 percent of your appropriated dollars. Do you have a 
number of how many contracts that were award-fee base 
contracts, not a percentage but a number?
    Mr. McNally. Yes. In 2008, we had 183 contracts that were 
active award-fee contracts.
    Senator Burris. Out of how many?
    Mr. McNally. Out of 2,120 contracts.
    Senator Burris. OK. So that is 70 percent that you say were 
fixed?
    Mr. McNally. In the same time frame, as far as actions, 68 
percent were firm-fixed-price actions, contract actions.
    Senator Burris. Now, under the highway structure, I recall 
in Illinois when we repair all of our expressways--and none of 
those are done with Federal dollars--there are bonuses that are 
paid for early completion of projects.
    Now, I just wonder, in any of these arrangements in your 
agencies, are there any penalties involved--by the way, in 
those contracts there are also penalties involved, which you 
can imagine is evidently fixed into the bidding price when you 
get the penalties fixed in--mixed in with the bonuses, so you 
have got probably an offset. That is why you see some of the 
contractors having the incentive to finish those construction 
jobs a little bit early, especially to try to help the 
motorists try to get out of the way so we can have somewhere to 
go and not get tied up in all that traffic.
    But I just wondered whether or not there are any types of 
penalties that are put into any of these contracts that you all 
deal with for mis-performance, non-performance, late 
performance, or inadequate performance? Are there any types of 
penalties that are put on these contractors?
    Mr. Assad. Senator, I think you would see very few award--I 
would be surprised if there were more than a handful of award-
fee contracts that had ``penalties'' associated with them. We 
are looking across the Department at the appropriate use of 
what you would familiarly call ``liquidated damages'' or 
penalties for late completion. And we are looking at that right 
now in terms of is that an appropriate mechanism to use on some 
contracts.
    Senator Burris. Anyone else? How about you, Mr. Gunderson?
    Mr. Gunderson. I would just agree that in an award-fee 
contract scenario, I have not seen the use of an actual 
penalty. But in the area of an incentive-fee contract, which 
evaluates objective measures such as schedule, cost, or 
performance, you can see scenarios where the contractor not 
only can make money, but they can actually lose money and eat 
into the costs that they are getting.
    Senator Burris. You mean take away from what would be their 
profit so they will end up on the----
    Mr. Gunderson. It would actually be on the negative side if 
they performed so poorly. But that is an objective scenario.
    Senator Burris. How about you, Mr. Simpson? Does your 
agency have any type of penalty for failure to perform or 
inadequate performance?
    Mr. Simpson. Yes, we do, sir. We have a contract clause 
entitled ``Conditional Payment of Fee,'' and it is linked 
specifically to environmental safety and health and security 
matters that provides a graded approach based on severity of 
the infraction; regardless of what the contractor earns during 
the rating period against its performance rating plan, the fee 
determination official can take a portion or all of the fee 
away based on the severity of the infraction for that rating 
period for violations of safety, health, and certain security 
aspects.
    Senator Burris. In terms of the budgeting, how does DOD 
cover the cost overruns? If you get a budget line item on a 
missile program or a jet fighter program and the program 
started going into millions of dollars of cost overruns, do you 
use supplemental appropriations? Do you transfer funds out of 
other line items? How do you cover these in your budgets when 
you run into these situations?
    Mr. Assad. Senator, that is problematic. In fact, what 
happens is other well-performing programs are sometimes hurt 
because funds have to be transferred from one program to 
another. We come back to Congress and ask for their permission 
to do that. At other times, we have to come back and request 
additional funds for contract performance.
    So contract overruns, especially in significant amounts, 
are particularly problematic.
    Senator Burris. We heard Senator Coburn read off a list of 
cost overruns, which has happened recently. Did any of those 
apply to your agencies? Mr. McNally, any of those in your 
agency?
    Mr. McNally. Yes. He mentioned the International Space 
Station contract with Boeing.
    Mr. Assad. And I believe he mentioned a contract back in 
2004 and 2005 from the Department of Defense.
    Senator Burris. Did you all have to come back to Congress 
to get more money or did you shift money around? Or were you 
all there when that took place?
    Mr. Assad. I was not there, Senator.
    Senator Burris. OK. How about you, Mr. McNally?
    Mr. McNally. I was not there during that time either.
    Senator Burris. Good time not to be there, right? 
[Laughter.]
    How about you, Mr. Gunderson?
    Mr. Gunderson. I did not hear a DHS contract listed.
    Senator Burris. OK. How about you, Mr. Simpson?
    Mr. Simpson. I did not hear him mention DOE.
    Senator Burris. So you did not have any of those cost 
overruns in your agencies? Is that what you are saying?
    Mr. Simpson. No, sir. I am not saying we do not have 
contracts with cost overruns.
    Senator Burris. OK, but you did not hear them mentioned by 
Senator Coburn, in other words.
    Mr. Simpson. Right.
    Sentor Burris. Mr. Chvotkin.
    Mr. Chvotkin. Senator, just a word of caution on cost 
overruns, because, again, the implication is that all of that 
falls on the contractor side for the cost overruns, and while 
the GAO reports about cost overruns and some of the items on 
Senator Coburn's list had big numbers, many of those are as a 
result of program changes, or schedule changes that the 
government makes. Some of them are quantity changes or 
requirements changes, and so there is a mutuality of 
responsibility, and not all of that falls on the contractor. 
But I am certainly not suggesting that contractors have no 
accountability and no responsibility for performance.
    Senator Burris. If there is a fixed-price contract and 
there are cost overruns, does the contractor have to eat that 
cost overrun?
    Mr. Chvotkin. Yes, sir. On a fixed-price contract, the 
contractor performs according to the requirements and they bear 
the full cost of performing that contract according to the 
requirements for that stated price.
    Senator Burris. I am not talking about change orders or 
anything, where the agency may give a direction, but that loss 
is then absorbed by the contractor.
    Mr. Chvotkin. Yes, sir. And 70 percent of all of the 
Federal Government's contracts are awarded on a fixed-price 
basis--70 percent according to the OMB numbers.
    Senator Burris. Thank you, Mr. Chairman.
    Senator Carper. Thank you, Senator Burris, and thanks a lot 
for being with us and for your attention to these issues as 
well. Given your background and experience, it is very helpful 
to have you and Senators like Senator McCaskill and Senator 
Coburn. It is very valuable. Thank you.
    Let me return to the issue of rollovers again where 
contractors are given, a couple of them, one, maybe two, maybe 
three bites out of the apple, and just to go down the line, 
just start with Mr. Assad. What is your agency's experience 
with rollovers over time? Has it become less frequent, about 
the same, or more frequent in the last several years?
    Mr. Assad. It is definitely trending to be less frequent in 
terms of use of rollover.
    Senator Carper. All right. Mr. McNally.
    Mr. McNally. NASA's policy and practice prohibits the use 
of rollover for----
    Senator Carper. And how long has that been the case; do you 
know?
    Mr. McNally. I do not know. I will have to provide that for 
the record.
                       INFORMATION FOR THE RECORD
          NASA's policy on prohibiting the use of rollover on award fee 
        service type contracts was established on October 8, 1993.

    Senator Carper. Since before you arrived?
    Mr. McNally. Before I arrived, yes, sir.
    Senator Carper. All right. Good. Mr. Gunderson.
    Mr. Gunderson. I share the same concerns from the 
Subcommittee and the GAO with respect to the use of rollover, 
and I actually recently issued guidance which said it would 
only be used if approved by me.
    Senator Carper. Mr. Simpson.
    Mr. Simpson. DOE has a similar provision on the use of 
rollover that requires my approval to use a rollover fee. But 
it should not be used to give the contractor a second bite at 
the apple in terms of getting rewarded for reworking 
unsatisfactory or sub-par work.
    There may be appropriate uses of rollover if there are 
accelerated or new requirements, and it is in the agency's 
interest to use that fee to motivate the contractor to 
performance, but it should not be used to give the contractor 
an opportunity to earn fees that was already lost for work 
already done.
    Senator Carper. We have had the hearings in this room 
before in talking about, among other things, cost overruns in 
IT projects. And one of the things we have learned, and Senator 
Coburn alluded to the handheld device that has been developed--
that was asked to be developed for the census next year. But 
one of the things we have learned is that sometimes agencies, 
in outlining what their needs are, are not very clear at the 
outset. They maybe do not have a real good idea what they need 
from a contractor, and so their demands or objectives, 
initially stated, are modified as time goes by, and you have a 
contractor who might be chasing an objective that continues to 
change.
    I am wondering if sometimes agencies use award fees when 
they have not done the kind of job they should have initially 
in scoping the project that they are asking for--or seeking to 
bid, and they change the scope of that project, and then try to 
find a way to compensate the contractor for chasing that moving 
target.
    Does that sort of thing go on? Or is that conjecture on my 
part?
    Mr. Assad. Senator, that is not conjecture at all. I think 
that is one of the fundamental reasons why you are seeing a 
significant reduction in the use of award-fee contracts in the 
Department of Defense, is because there are numerous contracts 
that you can go back and look at historically, and you see that 
particular situation that you are describing, in fact, 
occurred. And so what we are doing is stepping back from these 
things and insisting that proper contract planning and a real 
outstanding understanding of the risk structure before we get 
under contract.
    But what you have described is the reason why, in fact, the 
use of an award-fee contract in the Department of Defense will 
be the exception rather than the rule.
    Senator Carper. OK. Anybody else want to make a comment on 
that?
    Mr. McNally. Yes, Mr. Chairman. What I would like to say is 
there are probably three important frameworks of setting up a 
contract.
    First is to identify what is your true requirement, and at 
NASA, what we have set out in that area, we call ``zero base 
requirements.'' In other words, we identify what outcome we 
want, and then only put requirements in that support that 
outcome. We are not spending money on requirements that are not 
really needed.
    The second thing is to have the available resources, stable 
funding to support what you want to do and what you want to 
buy.
    And the last thing, of course, is to select a vendor who is 
going to do the work that you set out within the contract.
    So, to me, those are some of the three important things on 
any acquisition.
    Senator Carper. I have also heard over time that a fourth 
criteria would be to have folks at the agency who are capable 
of effectively monitoring the work of contractors and 
evaluating that work.
    A couple more questions, and then we will excuse this 
panel. Thank you for bearing with us for this long into the 
afternoon. But while we were reading some of the testimony and 
speaking to my staff earlier, it seems that a number of the 
agencies have a different opinion on when a contractor should 
be awarded a fee and how much. I think I quoted earlier, I 
think it was an Air Force spokesperson who talked about 
awarding an award fee despite stating that some of the work by 
the contractor was, I think, egregious, or at least well below 
par.
    Why do you believe some contracting officials maybe are 
still awarding contractors monetary incentives, even though the 
project is just average or, in some cases substandard? Why does 
that still go on?
    Mr. Assad. I think the issue is, Senator, that folks get 
wrapped up in measuring process and interim success rather than 
keeping their eye on the ball as to what is the final outcome 
of this contract. What are we buying for the taxpayers or the 
warfighters? And are we getting what we contracted for? Do we 
believe it is going to happen?
    Folks get hung up on the instant award-fee period and what 
was accomplished there and really do not tie that work to what, 
in fact, is going to be completed in the end, which is why we 
are really pushing people towards those award fees must be tied 
to contract outcomes.
    Senator Carper. Thank you for saying that. I welcome that 
comment. Mr. McNally.
    Mr. McNally. Well, as I mentioned in my opening statement, 
one aspect is a rigorous process, and at NASA what we utilize 
is a Performance Evaluation Board that follows NASA guidance 
and guidelines on how to conduct and how to evaluate the 
contractor's performance and tie it once again back to the 
contract requirements and the evaluation criteria that is 
within the contract. So it is key, once again, to have good 
guidance out there, but then follow up with the practice.
    Then, the other thing that I mentioned in my opening 
statement is that at NASA we have a monthly Baseline 
Performance Review that is looking at the performance of our 
various projects and programs, and then going back and looking 
at the scores of award-fee contracts to make sure that the 
performance that is going on within a program or project also 
is measured by how it compares to the award-fee scores. If 
there is any disparity, senior management gets involved asking 
those kinds of questions about why there is a difference.
    Senator Carper. All right. Mr. Gunderson, any response to 
my question?
    Mr. Gunderson. The only thing I would add is that when you 
look at all the factors being considered, one of the examples, 
I think, that was brought up earlier referred to some egregious 
communication or performance on a DHS contract, yet they still 
received some award fee. And in that situation, if you look at 
all the factors that had been laid out within the contract and 
the respective weightings, there was actually very positive 
performance in a number of other areas such as increasing the 
operational availability of equipment and outstanding 
progress--many strengths that were identified as well. And, 
yes, there was a negative finding by one evaluator that cited a 
challenge area. In the end, they decided that there was overall 
sufficient performance to grant a certain level of award fee.
    But what also should be noted is that in subsequent periods 
the contractor failed to take heed of the concerns that were 
identified in the two subsequent periods; no award fee was 
awarded to that contractor because they did not address the 
concerns we noted.
    Senator Carper. Mr. Simpson, your response to my question?
    Mr. Simpson. Yes, sir. I will not repeat what has already 
been said. I do agree with the comments that have been made.
    I do think the other element here that gets us into that 
type of situation is that we do not use enough objective 
measures mixed with the traditional subjective measures. I 
think that is still an area in the award-fee disciplines that 
agencies have not worked at hard enough and how to work 
objective measures in with the subjective ones.
    Senator Carper. All right. Senator McCain has been tied up 
on the floor, as I said earlier, with other issues that are 
before the Senate. And I asked the staff if they had a question 
that he would like to have asked had he been here, and they 
have given me one, so I will just ask this. This, I think, for 
you, Mr. Chvotkin.
    The note says: ``Please ask Mr. Chvotkin his thoughts on 
whether his member companies use award-fee type contracts. And 
if so, would these companies think the problems we highlighted 
today could be addressed by the member companies. Last, what 
would they do about it?''
    Mr. Chvotkin. Mr. Chairman, many of our companies are using 
award-fee contracts. Again, these are established by the 
government as part of the business relationship, and certainly 
contractors have a responsibility and accountability in the 
bidding process to make sure that the award-fee plan, the 
structure of the contract, the elements of the incentives, and 
the measurements and the metrics, are appropriate. So when 
there is a lack of clarity, firms have an obligation to come 
forward with that. Too many times the goal is to win the 
contract and then worry about it during performance, and these 
become difficult performance issues.
    The issue between base fee and award fee and making it 
clear that it is not a bonus is important to spell out, as is 
how an agency is going to evaluate an award fee.
    So, we absolutely use them in the discussions today. Our 
member companies are active in all four of these Federal 
agencies, and we watch those award-fee issues very carefully. 
That is why I said that this is an important discussion about 
what can be raised during the solicitation process and then, 
once awarded a contract, to make sure that performance is 
primary and that the elements in the award-fee plan are 
followed.
    Senator Carper. All right. There are probably going to be 
some of my colleagues who were here--and some who were not--who 
will want to submit some questions for the record. If you could 
have your responses back within 2 weeks after you receive our 
questions, we would appreciate that very much.
    I was kind of reflecting on a couple takeaways for me on 
what we have heard from this panel, and from our first panel. I 
always think about what are my takeaways, what should be the 
takeaways for all of us.
    One is the notion that it is real important for us to get 
it right from the beginning, and that is, to clearly outline 
the agency's objectives. For agencies to clearly communicate 
what their objectives are. For instance, what do agencies need 
from a contractor in the first place.
    Second, and I am not sure who said it; maybe it was Mr. 
Assad. But I think you talked about measuring outcomes not 
process, and I think that was a theme that a couple of you 
touched upon.
    I think one of you--I do not remember--was it our friend 
from NASA? But talked about cost/benefit analysis, using clear 
measurable criteria as an important point.
    We need clear guidelines from OMB, and I think they are 
endeavoring to provide better guidelines as time goes by. We 
need training for those whose job it is to manage contractors 
to make sure they have what they need to do their jobs well and 
to protect the interests not just of the agency, but of the 
taxpayers, too.
    Sharing of best practices for those agencies that are doing 
a better job in one way or the other, to make sure those 
agencies that have not come along as quickly benefit from what 
others are doing better.
    I think one or two people talked about aligning payments to 
contractor performance, and elevating roll-over approval. For 
example, when we are going to give contractors more than one 
bite out of the apple, maybe that decision should go up to a 
fairly high level.
    Those are just some of the ideas. I suspect that folks who 
might have been joining us this afternoon during the course of 
this hearing, this is pretty dry stuff. But having said that, 
people get exercised when they think that their tax dollars are 
not being wisely spent. I know I do, and I know that others in 
my State do. In fact, people across the country do. We do not 
have much appetite for that. We would not have much appetite 
for that if we were running substantial budget surpluses. But 
as it turns out, we are running substantial budget deficits. We 
have done that for much of the last 8 years. And every little 
bit helps. In this case, we are talking about billions of 
dollars that may have been misspent. And my hope is that as 
time goes by, we are getting our hands around that and our 
heads around that and being able to reduce the inappropriate 
awarding of these fees.
    Hopefully, based on the work that OMB is doing, GAO, some 
of the IGs, you, your counterparts, and those of us who serve 
on this Subcommittee, as time goes by will do an even better 
job. And the purpose of this hearing was to try to make sure 
that happens.
    We have sort of a history in this Subcommittee of not just 
focusing on an issue once and then going away, but continuing 
to focus on it so that secretaries and deputy secretaries of 
departments, will know that this is important, and they will 
know that we are here to put a spotlight on behavior that we 
want to hold up as a good example and just as well as we would 
put a spotlight on behavior which is inappropriate.
    So thank you very much. Thank you for the good work that 
you are doing, and we thank those who are in your departments 
who are supporting good work. For those who are not, we say we 
need them to do better, and taxpayers need for them to do 
better. We expect that.
    And we hope that the Departments that were unable to come 
today will have a chance to share some of their thoughts with 
us outside of a Subcommittee hearing. We will just maybe have a 
private meeting with one or two of them to see how they are 
doing.
    The last thing I would comment on and this is not your job, 
but we have a lot of senior positions, and some positions that 
are not so senior within various Federal departments, that 
require the Administration to nominate somebody, and to go 
through Senate approval. And in a lot of instances that makes 
sense. In some cases it does not. And in some cases we have 
folks who are on one side of the political aisle or the other 
that will hold up a nominee for really no valid reason except 
to try to make a point. And that is unfortunate, and as a 
result, we have in this Administration much like we had in the 
last Administration, a long period of time when we do not have 
the right folks in their jobs.
    A fellow was here a year or so ago, and he testified for 
the Department of Defense, a fairly senior acquisition person, 
worked for John Young, who was a very senior guy, and he worked 
for Bob Gates in the Secretary's office. But I asked this 
fellow who worked for John Young in the Department of Defense, 
the Secretary's office, I said, ``How long have you been in 
your job?'' And I think he said, ``A year and a half.'' And I 
said, ``What kind of turnover did you get from your 
predecessor?'' And he said the position had been vacant for 3 
years. And I said, ``How about your direct reports? How many 
direct reports do you have?'' He said, ``I have six.'' And he 
said, ``I had only two on board. There were four vacancies when 
I assumed my new position.'' That is just unacceptable.
    So these are issues that we need folks, not just in the 
kind of stuff we have talked about here today, but more broadly 
as well. But thank you for helping us to flesh out the picture 
and get our heads around these challenges just a little bit 
better.
    And, again, if you would respond to any follow-up questions 
that we submit in writing within 2 weeks, we will be grateful.
    With that having been said, this hearing is adjourned. 
Thank you all.
    [Whereupon, at 5:13 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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