Review of the Use of Performance and Delivery Incentives in Contracts Awarded by the Military Services

Published by the Government Accountability Office on 1971-06-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


Dear Mr. Secretary:

        We recently      completed a revfew of the use of performance     and
delivery      incentives    in contracts  awarded by the military  services.
 _-_.-.-_ _--
        The 27 contracts      we selected for review were awarded during fiscal
years 1964-69 and were priced at $1.2 billion.                The contractors     stood to
realize    additional     payments of up to about $4-1 million        under 51 incen-
tive provisions       which we examined,        Of primary interest     to us were the
circumstances      under which the services        found it appropriate      to offer
performance      and delivery      incentives   to the contractors    inasmuch as we
had found some earlier          indications   that incentives     were being offered
when there was little         reason to anticipate      that the Government would
derive benefits       commensurate with the costs.

       It appears that 38 incentive     features,      or 75 percent of those we
examined, were included in contracts        when they may not have been needed
to obtain the performance     desired or otherwise        may not have been of
practical   benefit.    These represented     potential    payments to contractors
of about $35.8 million.

         Nisuse of performance      and delivery    incentives    resulted    from over-
reaction      in the field    to the emphasis by the Department of Defense on
inserting       incentive  features   in contracts,     ana from an absence of
critical      reviews at a sufficiently       high level to ascertain        whether
their     use was proper in the circumstances.           Generally,     analyses were
not made to ascertain         the value of the added performance           in relation
to its cost,

        As exsmples we found instances     where incentive      features     were applied
to quality    assurance or to delivery     requirements     that the contractor
already was obligated     to meet.     In other cases incentives        were used to
induce accomplishments     which the eontractors        had achieved consistently
for a number of years or in circumstances           which indicated      that the con-
tractors    could attain  the objectives     without    the incentives.

      In responding    to our draft report      the Deputy Assistant    Secretary
of Defense (Installations       and Logistics)     did not agree that our find-
ings could support a conclusion       that performance     and delivery   incentives
had been generally     misused.    He added, however, that revisions        incorpo-
rated in the October 1969 Incentive          Contracting  Guide, and other pub-
lished guidance,    should help assure appropriate        use of multiple     incen-
tive contracts.     The reply also cited the reviews made of major incentive
    .   l

            contract   awards by the military      services    and, in particular,  reviews by
            the l3wgm.m Office    for maluatisg       and S-tructurin~  of Multiple   Pncentive
            Contracts   (POESNIC) established      in April 1968, as provPding an adequate
            va,lue analysis  of incentive    provisions     included in contracts.

                   The current   guidance,   in our opinion,    ~epresen-k     an improvement
            over the earlier    publications     and the POESmC program would be a use-
            ful -km1 ia evaluating       and structuring   incentfve    contracts.     We recommend
            that the effects     of these innovations    be closely monitored       at an appropriate
            c~mmamd level to ensure that they axe resulting            Pn more judicious     use of
            incentives.     We pla,n to examine the operation        of the current    procedures
            &t a later   date.

                  Copies of this report are being sent to the Chairmen            of the House
            and Senate Committees on Government Operations    and to the          Chairmen of
            the House ad Senate Committees on Appropriations.       Copies          are also being
            sent to the Director,   Office of Management and Budget and           the Secretaries
            of the       9 Maq, and Air Force.

                                                          Sincerely   yours,

            The Hcx!xml.bEe
            The Secretary   of Defense