MEMORANDUM
FOR SERVICE ACQUISITION EXECUTIVES
DIRECTORS, DEFENSE AGENCIES
DIRECTOR, DEFENSE LOGISTICS AGENCY
SUBJECT: Incentive Strategies for Defense
Acquisitions
Incentives exist in every business arrangement. The effective
application of incentives is key to building successful business arrangements
that jointly maximize value for all parties. It is essential that the
Department adopt incentive strategies to successfully attract, motivate and
reward traditional and nontraditional contractors, thus ensuring successful
performance. Incentive strategies must also maximize the use of commercial
practices to enhance our ability to attract nontraditional
contractors.
Incentives can be monetary or nonmonetary, and should be positive but
balanced, when necessary, with remedies for missing specific program targets
or objectives. They can be based on price, cost, schedule and/or performance.
Regardless of the final composition and structure of the incentive(s), the
goal is to encourage and motivate optimal performance.
Historically, choice of contract type has been the primary
strategy for structuring contractual incentives. With the exception of
competitive firm fixed-price awards, procurement incentives have predominately
been based on protected or actual costs. This practice, while effective where
costs cannot be precisely estimated, does not always ensure that contractors
maximize efficiencies regarding underutilized or inefficient operations,
practices and facilities. Such incentives can have the opposite effect of
rewarding industry for the retention of inefficient practices or underutilized
capability. When cost-based incentives are used, care should be taken to
ensure that these unintended consequences do not occur.
Alternatively, non-cost-based incentive strategies more closely
approximate commercial agreements and are based on clearly defined performance
objectives or product functionality rather than detailed requirements. Such
agreements reflect joint goals of efficiency and effectiveness, reflect
acceptable risks for all parties, and establish performance metrics. Program
teams should structure incentive strategies to attract nontraditional defense
entities, as well as to reward successful performance of traditional defense
firms. Thorough market research should be conducted to develop a better
understanding of the business strategy from both the government's and the
contractor's viewpoints, leading to behavior that jointly achieves the mutual
goals of all parties (e.g., best value acquisitions and targeting high
performance based on best business practices).
The attached guidance amplifies existing policy regarding use of
incentives in defense acquisitions. In addition, to assist the acquisition
workforce, an incentive guidebook is being developed based on work conducted
by the Army and the Massachusetts Institute of Technology. This guidebook will
be available at www.acq.osd.mil/ar in January
2001.
Attachment:
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