20. Lesson: Incentive Contracts
Incentive contracts are an effective management tool to ensure a successful development. Award fee contracts should be considered for R&D contracts.
Background:
Cost-plus-award-fee contracts were successfully used in Skylab as an effective means of communicating with and controlling major development contractors. This type of contract reimburses a development contractor the legitimate costs incurred for the described work plus a small fixed percentage as a fixed fee from which the contractor receives his profit. Over and above this stipulated percentage, the government provides an additional incentive fee to reward contractors for exceptional performance. The amount of award fee earned during a specified period is determined by a government award fee board which grades the performance and selects the appropriate financial reward. The amount of this fee element (the maximum percentage is fixed in the contract) is arbitrarily determined and is not subject to appeal or negotiation.
Award fee contracts are more flexible than normal incentive contracts which prespecify, in the contract, the incentive elements. They are easy to administer and can be adapted to new circumstances as they arise. Award fee contracts are written with the specific performance requirements established periodically. For example, for one period, the government may consider schedule maintenance as the most desirable performance. The contractor is notified of the goals and his management effectiveness is evaluated and, at the end of the period, a portion of the award fee is granted, as appropriate. For the next period, perhaps cost reductions will be considered the most beneficial to the government and the contractor's performance will be assessed with those predescribed goals in mind.
In this manner, the customer and the contractor both know the expected performance goals, and the successful achievement of those goals is beneficial to both sides.
These lessons learned are from SKYLAB LESSONS LEARNED AS APPLICABLE TO A LARGE SPACE STATION, A dissertation submitted to the faculty of The School of Engineering and Architecture Of the Catholic University of America For the Degree Doctor of Engineering by William C. Schneider, Washington, D.C., 1976.
Home - NASA Office of Logic Design
Last Revised:
March 07, 2004
Digital Engineering Institute
Web Grunt:
Richard Katz
