Award term contracts are hairy and offer wrong kinds of incentives

Bob Little

Is the phrase hair-brained or hare-brained? I suppose I could look it up, but what would be the fun in that? At any rate, the scheme I'm about to describe to you is both.

It's called the award term contract.

Here are its major disadvantages: First, it's anticompetitive, and second, it's silly.

It does have one advantage: It will put a smirk on your face, if it doesn't prompt an outright guffaw.

Like most silly schemes, this one seems serious at first. Who could get upset about rewarding a contractor for good performance? Actually, we do it all the time. It even has a name'payment.

But here's the scheme of the award term contract: It allows a contractor to earn 'good contractor points' that would entitle it to a new contract. Emphasis on 'entitle.'

So, at the end of a five-year base-plus-option deal, the contractor might be entitled to continue working without having to compete.

Among other things, the entitlement negates any idea of an option on the part of the purchaser.

I'll admit there is a certain charm to the idea of having a contractor earn its way to a new contract. The government will get better service than it otherwise would, because the contractor is trying to earn points, yes?

Well, actually, no. The reason is that there is no control contract to determine whether the executed work was better than it would have been. In fact, the contractor might perform worse'there's simply no way to tell. So the idea might be charming, but it's illusory. Sort of like the free lunch, perpetual motion or something for nothing.

Ah, but what if there are objective measures to determine quality? Assuming there are, why set the bar there and let the contractor choose the level of quality at which it will perform, eliminating the option to ask for enhanced performance?

It gets worse. Assume, for example, that the contractor performs its little heart out to get the new contract entitlement. What happens when it is clear that all the necessary 'good contractor points' have been earned? It's mop-up time, folks. Game's over, fans are heading to the parking lot. Send in the second team and use the first team to win those new contracts somewhere else. Then give them one to three years of just enough performance not to get a bad performance rating. Customers love that.

The idea has other problems, too. In any contract, the contractor is entitled to a fair and reasonable price for the work it does. If you consider the contract award entitlement to be a kind of deferred compensation for the old contract, what is the compensation for the new contract going to be? If the price of the new contract doesn't go up, it's suspected of not being fair and reasonable. If the price does go up, aren't you merely catching up on the fair and reasonable price in the out years?

Then there is the small matter of accountability. The administration submits a budget and receives appropriations on the basis that the appropriations are to be spent for the purposes identified in the budget request. But how do extended contracts'earned, in a way, at the discretion of the contractors'fit in? Congress will wonder about that in a mighty big way.

Finally, there's the problem of bad estimates, either too high or too low. If a contractor sees that new technology will cut its costs and generate a windfall under a new contract, it will work hard to earn the points for the new contract and the government gets stuck overpaying. If a contractor is losing money, it will be very careful not to earn the right to the new contract or will insist that the new contract be an option that belongs to the contractor. And who can foresee whether the most lucrative part of a new contract will be terminated?

This is not a good idea.

Bob Little, an attorney who has worked for the General Accounting Office and a Washington law firm, teaches federal contract law. E-mail him at [email protected].


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