DOT pays out unjustified award fees on cost plus contracts, says IG

The Transportation Department pays incentive fees to contractors without demonstrating that they deserve them, says an inspector general report.

The report, dated August 25 and based on an investigation conducted between June 2007 and May 2010, examines 24 cost plus award fee contracts from seven Transportation administrations, including the Federal Aviation Administration and the Federal Highway Administration. The contracts have a potential maximum value of more than $3 billion and about $170 million in available award fees. Under cost plus award contracts, vendors receive a percentage of a pre-determined incentive fee based on performance--a "fee" in this case being what the private sector calls "profit."  

Cost plus award fees are slightly different than cost plus incentive fee contracts--in the latter, vendor profit can go up or down, in large measure based on an inverse relation to how close the final cost is to the estimated total cost.

While Transportation officials generally give contractors high ratings, paving the way for them to receive award fees dependent on performance, they generally do not demonstrate how contractors meet or exceed evaluation criteria, the report states. During one rating period, civil servants extended to contractors 91 percent of the $16.5 million available award fees, but didn't adequately justify why they had done so in cases amounting to $14 million of paid out award fees, the report states.

Extrapolating to all 41 cost plus award fee contracts Transportation officials had going as of Dec. 31, 2006, auditors assert that the department has paid approximately $140.6 million in award fees without proper justification. That assertion comes with a large caveat, however--auditors assign their number a confidence rating of 90 percent, meaning that the range of statistically possible values range from $75.5 million to $216.1 million.  

Proper justification has been lacking in large measure because none of the examined contracts have clear and measurable criteria to evaluate contractor performance, auditors state. For example, the Federal Highway Administration's Adaptive Control Software contract calls for adjectival ratings such as "above standard," but performance monitors have differing individual interpretations on what that ratings language means.

Contract language in 13 of the 24 reviewed contracts also allows for vendors to be paid award fees even if they return below-average results, auditors state.

Because some Transportation administrations allow award fee payment for mere satisfactory payment, and some contracts also allow for a "base fee" contingent only on satisfactory performance, in many cases vendors are rewarded twice for the same satisfactory performance, the report asserts.

The audit also finds that duties in the award-fee process aren't properly separated, with some performance monitors also serving on the performance evaluation board. "In other words, performance monitors are reviewing their own rating," the report states.

In the department's official response to the audit, Linda Washington, assistant secretary for administration, says the report "overstates the issues," adding that Transportation disagrees with the report's assertion of $14 million in unjustified award fees and thus also auditor's extrapolation to $140.6 million. Had the department instead used cost plus fixed fee contracts in those cases, she adds, Transportation could have spent another $1.4 million more.

For more:
- download the audit report, ZA-2010-092
- download a Dec. 4, 2007 OMB memo on the "Appropriate Use of Incentive Contracts"

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