[Senate Hearing 111-436]
[From the U.S. Government Publishing Office]
S. Hrg. 111-436
ELIMINATING WASTEFUL CONTRACTOR BONUSES
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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
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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
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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\
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\1\ The list provided by Senator Coburn appears in the Appendix on
page 162.
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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.
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\1\ The prepared statement of Mr. Zients appears in the Appendix on
page 47.
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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.
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\1\ The prepared statement of Mr. Hutton appears in the Appendix on
page 53.
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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.
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\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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