Award-term Contracting: What it Means and Why it Matters

What motivates contractors to work harder? Is it greater monetary compensation or the promise of more work in the future? The latter is assumed in the case of award term contracting. This relatively new form of government contracting is based on the incentive plan described in Federal Acquisition Regulation 16.405-2: (a) Description. A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of (1) a base amount fixed at inception of the contract and (2) an award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in such areas as quality, timeliness, technical ingenuity, and cost-effective management.
The difference is that instead of being awarded additional compensation for excellent performance, the contractor receives an extension on its contract without the threat of competition. Under the rules of a reward term contract, the government must extend the contract if the conditions of excellent performance are met unless the contract may be terminated due to convenience (a discontinued need for the service) or default (a lack of budgeted funds). However, in order to protect themselves, many agencies include clauses in the contracts wherein they provide other occasions where they can be given an "out." Many feel that these types of contracts should be renamed as award or incentive "option" since the contractor is not actually guaranteed the extension. The first company to receive an award term contract was McDonnell Douglas Corporation. This contract, awarded in 1997, was a task order contract for F-15C aircraft simulation services with the Air Force'sAeronautical Systems Centerat Kelly Air Force Base. The language was inspired by civilian employee Thomas Jordan. It said that McDonnell Douglas would hold the contract for a base period of seven years, with the stipulation that it could be extended to 15 years if the corporation was rated as providing excellent service. Presently, the uses for reward term contracts vary greatly: from technical services to maintenance to laundry and dry-cleaning. Agencies that use or have used this type of contract include not only the Air Force but also the National Aeronautics and Space Administration, the Naval Facilities Engineering Command and the General Services Administration, among others. It is yet to be seen conclusively whether these contracts are more effective than those offering monetary incentives only.