~-17x644 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 -2-
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)