By giving Lockheed Martin the ability to receive the majority of an award fee pool even by delivering partial performance, the Census Bureau gave the contractor little incentive to excel, says the Commerce Department inspector general.

In a report dated Feb. 15 but posted online March 8, auditors chide Census for having given Lockheed Martin (NYSE: LMT) the ability to earn $48 million of a possible $65 million in incentive fees made available during the first two phases of the Decennial Response Integration System contract, even if the company's performance was "below the acceptable standards." The DRIS contract entered phase three in September 2010, the report adds.

Census awarded Lockheed Martin a $483 million cost plus award fee contract in October 2005 to design and implement DRIS system, which scans census forms, as well as to staff call centers. In September 2007, the bureau amended its DRIS contract by adding another $246.6 million worth of work to it, mostly for increasing telephone follow up with households.

Cost plus award fee contracts (a "fee" being company profit under this contract type) often tie fee payment to performance metrics. Census designed the payment structure such that Lockheed could collect 74 percent of the phase one and two incentive pool by achieving only a "partial" performance rating, the report says. The contract ratings, from best to worse, were "full," "substantial," "acceptable," "partial" and "no award fee."

With only $17 million to incent anything beyond partial achievement during the first two phases, Census has been at risk of "wasting taxpayers by using poor practices and potentially paying sizable award for subpar contractor performance," the report states.

"Census's award-fee practice of offering contractors opportunities to earn large fees for less-than-satisfactory performance establishes a culture in which the bureau expects to pay-and contractors expect to receive-most of the available award fee regardless of outcome," the report states.

In the official Census response to the audit, Michael Palensky, chief of the bureau's acquisition division, said that subpar DRIS performance never occurred and that Census has revised the rating spectrum to be "full," "moderate," "adequate" and "unacceptable." Lockheed can collect from between 60 and 70 percent of the incentive fee pool for adequate performance, according to Palensky.

The report also says the bureau's acquisition shop never correctly justified use of a cost plus award fee contract in the first place. While a contracting officer did write out a determination and finding document, the language in it was "virtually repeated verbatim" from boilerplate language included in the Federal Acquisition Regulation, the report says.   

A September 2010 inspector general report found DRIS contained security vulnerabilities.

For more:
- download the report, OIG-11-020-A (.pdf)

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