Increased Focus on Accountability: Taking Full Advantage of Incentive-Based Contracts

Nov 12, 2019
Bidsync Industry Blog

Earlier this decade, government contracts were competed primarily on a cost basis. The Obama Administration had a clear preference for fixed-price type contracts and lowest-price technically acceptable ("LPTA") evaluation schemes, and it quickly became the status quo for federal, state, and local agencies soliciting for construction, commodities and services alike. If you didn’t deliver on-time, on-budget, you would simply suffer repercussions from the government that could be detrimental to your business’ health, or at least your reputation. There were rarely incentives to do the job you were “hired” to do. But that may be changing.

 

The current Administration is trying to turn the page on how agencies choose to hold contractors accountable for their binding agreements, even proposing that government agencies employ more incentive-based contracting methods to motivate suppliers to complete projects on time and on budget, a potential win-win solution. Because scare tactics simply don’t work in many cases, and he realizes that you can catch more flies with honey. That doesn’t mean that fixed-price contract structures will be retired. Nor will the consequences for failing to meet contract terms change. But your motivation to exceed performance expectations may payoff more substantially.

 

We’re at a turning point in public sector procurement where tight budgets and quality expectations demand tighter controls on contractor performance to eliminate waste and inefficiency. To minimize pressure on their limited resources, procurement officials may increasingly seek contractors who can provide the best value and highest quality product or service – not just the best price. Therefore, your reputation becomes more important, and performance drives reputation. But first, you must understand how the government may choose to incentive performance more extensively. There are a few different ways agencies could implement this reward-based approach, but the following are likely to be the most common methods based on contracting structures outlined in the Federal Acquisition Regulations (FAR) Subpart 16.4 today:

 

 

 

Now, will incentives be viable for every type of contract? It depends. Will we see a profit-sharing model make sense every time? Definitely not. That tends to work better when fixed costs are far from possible to maintain, such as construction projects where material and labor requirements may fluctuate substantially from upfront estimates. Incentivizing office supplies, on the other hand, are a little bit more challenging. Rates are clearly defined on a per-unit basis and it’s hard for a contractor to run up costs. Thus, the procurement official may only have the option to offer a delivery incentive if warranted. But here are a few things you can do to prepare for increased incentives and maximize your potential gains:

 

 

And, remember, the government is always going to evaluate the risk vs. reward of performance-based contracting awards. Therefore, you should too. That means you need to dig deeper into the details of every solicitation moving forward. There are multiple incentive-type contracts out there, and multiple combinations of incentives that can be used simultaneously in a single contract. When you see a solicitation posted with an unfamiliar incentive structure, go to FAR Subpart 16.4 – or the appropriate state or local regulation reference site – to understand your obligations before you submit a response. Don’t assume that every incentive is going to work in your favor. You don’t want to get locked into a pricing structure that is not beneficial for your company. Pick up the phone and call the procurement official to confirm type of incentive as well as the associated terms and conditions.