Understanding Cost Plus Award Fee Contracts: A Detailed Overview

What Exactly is a Cost Plus Award Fee Contract?

A Cost Plus Award Fee Contract is a type of business agreement that allows the owner to pay the contractor for all the cost of a project, plus an additional fee in exchange for the contractor’s performance. In other words, under this contract, the owner partially pays the contractor based on the cost of its work, and partially based on other metrics or achievements.
The basic principle of this contract is simple: As long as you comply with the terms of the contract, you will be awarded the money required to do the work or complete the project, and you will receive a bonus (or award fee) if your work meets or outperforms the requirements of the contract at large . The award fee, or bonus, is relatively subjective – it can be determined by the owner’s opinion or standards.
However, the Cost Plus Award fee contract is a somewhat rare contract in compared to its siblings. Sometimes the basic cost-plus contract, which is a simpler version of the cost plus award fee contract, is more appropriate according to the needs of the owner and/or contractor. The difference? While both forms of contract reimburse the contractor for actual costs incurred, the cost-plus contract does not contain an award fee or bonus as is the case with the cost-plus-award-fee contract.

Benefits of Cost Plus Award Fee Contracts

The cost plus award fee contract has its advantages for both the contractor and client because it provides flexibility in terms of incentivization and project specification. For a client, the risk of under or over budget is reduced. Sometimes a bid may be won that is not within the budget, but the project is able to continue under the cost-plus budget. Regardless of the specific bidding process, this versatility means that you will maintain your budget within the realm of the possible, while also having greater flexibility in what can be delivered. The cost-plus award means that if the contractor significantly exceeds standards for quality, he can be awarded a bonus for meeting certain standards. In some cases, the total of these incentives can be tens or hundreds of thousands of dollars. Rather than this being a cost to your department, it will instead serve as an incentivizer to the contractor to maintain quality, while getting paid a fair wage for time and materials. Though there is no guarantee on either side, there is an obvious advantage of having some control over the overall project. The risk is far less that you will have to cut services or renegotiate a contract.

How Award Fees Are Calculated

Determining award fees depends on the discretion of the government. Even though the government has to provide a written report, there is a lot of discretion allowed in the process. The contract award fee plan will outline criteria used to determine the performance targets and goals that will be used to earn an award. Unlike a cost plus fixed fee contract, the government may reward or penalize companies based on performance of the contract because the cost is already known. Sometimes award fees may be determined before the award fee period has come to a close due to time delays or other issues. The government will use information from the Contractor Performance Assessment Reporting System (CPARS). Companies are able to see their past performance to judge how they might act under the contract.
Award fees can be paid for effectiveness, efficiency, and a variety of other factors. There are two components to the award fee. The first part is objective and the second is subjective. The objective component is measured by several factors. The fee is to be slightly higher than the base fee to reward the contractor but it has to be within the award fee pool. The subjective component is based on the evaluation of the designated official. Once the subjective portion of the award fee is set, the company has to prove that it has met the standard for the most of the fee. If the company is unable to show it has reached the standard, it is possible that they will only receive a portion of the award fee. For the subjective component, contractors are to attempt and meet all goals. Using quarterly and monthly reviews can help the agency to determine that a company is trying to meet the objectives.
When the contract has ended the government will use CPARS to reward or penalize the company. CPARS gives an award fee history that is used to determine past performance. The system ensures that everyone has a voice which allows for the government to evaluate the past performance of a company. While the agency gets to decide what performance means, the system helps to ensure a fair decision.

Common Issues and Solutions

Cost Plus Award Fee contracts, although incentivizing and useful for meeting project goals, can come with certain challenges. In this section, we will discuss common challenges faced when implementing a cost plus award fee contract, including disagreements over how a contractor is being measured and how to appropriately resolve performance issues, and offer solutions that can help you navigate these issues and maintain good working relationships.
A good way to avoid disagreement over which performance measures will be used for Cost Plus Award Fee contracts is to ensure that they are explicit and agreed upon beforehand. The requesting agency is usually responsible for establishing a timely schedule for the contractor to notify them of such disagreements, which must be determined prior to any comments being documented on their performance. This is referred to as the earliest price proposal submittal date. Ideally, all disagreements should be noted and discussed with the contractor prior to discounting their proposal price. Since the technical/management incentive criteria are much more apt to influence this award fee program than the past performance incentive criteria, a more formalized process to notify the contractor of any disagreements is recommended.
Although Price, Past Performance and Technical/Management Incentive criteria are usually agreed upon, sometimes they are in conflict with one another. For example, one set of criteria might be too strong, while the other might not be used enough in the Award Fee Determination Official (AFDO) assessment. Also, the past performance criteria may not apply and it can often lack enough correlation to contractor performance. To remedy these and other issues, past performance criteria should be reviewed on an annual basis to ensure that they better correlate with contractor performance and that they are consistent with other incentive criteria.
The potential for a Cost Plus Award Fee contract to allow for payments of awards that are not linked to the level of cost savings or effectiveness achieved by the contractor can also be an issue. This is a problem because sometimes Payments Under Cost-Plus-Award-Fee Contract costs more than Performance-Based contracts, if payments are not limited to the amount of cost savings or other measures of effectiveness achieved by the contractor. To remedy this, it is important to make sure that award fees are not separated from the contractor’s site overheads, if they are, then the contractor is entitled to at least 80% of the fees earned during the year.
A final challenge that the requesting agency might face when implementing Cost Plus Award Fee contracts lies in their "on-going negotiations with the contractor." Because this contract type does not require a Price Negotiation Memorandum, it is imperative that the agency provide its negotiating position to the contractor in order to avoid confusion.

Fundamental Aspects in Creating a Cost Plus Award Fee Contract

When drafting a cost plus award fee contract, there are several key elements that should be included to ensure compliance with governing regulations and successful performance. First and foremost, the SOW/PWS must include clearly defined tasks and supporting actions that concisely specify the work to be performed. This ensures that both the contractor and the government have a mutual understanding of the requirements for payment to be made. The contract should also set forth all cost and performance requirements and expectations, and what types of costs will be reimbursed. Cost elements must still be within the limits of reasonable costs and acceptable to Congress . In addition, the contract must define the award fee plan for assessing the contractor’s performance and determine how award fees may be earned. Finally, the contract should include processes for monitoring project progress and performance. The contract must also stipulate the SOW requirements but still allow the contractor flexibility in the implementation of the requirements. By using a cost plus award fee contract, the contractor should be able to achieve greater flexibility and autonomy in performing the work, while the government still has oversight and flexible management options in place.

Case Studies and Practical Applications

Because cost plus award fee contracts are often used in situations where the requirements are more difficult to define or the risk of performance deviation is higher, there are a large number of cases and real-world scenarios that get interesting when the contractor fails to perform. In a recent case, a contractor was awarded an IDIQ cost plus award fee contract for an advisory and assistance services contract with the Department of State in support of Defense Technology Security Administration. Both the PCO and the applicable source selection board strongly recommended that the contractor receive an award fee rating of very good. The Contracting Officer accepted the recommendation but reserved the right to change the final rating. After months of feedback and interaction with the contractor, the CO increased the rating from good to excellent, as she felt that the government had received significant technical innovation and outstanding support in executing critical missions.
What happened next? Imagine the surprise of the CO when the contract was subject to an audit in which the auditors questioned the award fee determination based on the methodology used to assess the performance and the lack of documentation of managers not being a "subject matter expert" in the area of performance. Why? Because as it turns out, the government had no specific documentation of the individual ratings process, including the documented rationale for assigning a particular rating. Ultimately, however, OEPA (the award fee review panel) determined that the award fee was based on subjective qualitative judgments for which the CO is given broad discretion. Further, the file provided reasonable documentation regarding the application of the methodology to the metrics. Finally, the appeal panel concluded that the CO’s decision was founded on fact and a reasonable judgment call on his part. Outcome: upheld.
In another recent example, an IDIQ cost plus award fee contract was awarded to a contractor in an environmental services project involving cleanup and restoration efforts at various sites across the United States. The contract required the contractor to submit an "award fee compensation plan" as part of its award fee proposal. This plan was to identify all employee and subcontractor costs and fees that would be included in the price of each award fee proposal if the agency had chosen to evaluate a proposal for a fixed-price award fee payment. Within three months of contracting, the contractor submitted a modified award fee plan that significantly understated the labor costs associated with the work being performed under the contract. The CO was faced with a dilemma because they viewed the contractor’s ongoing failure as a decision point for termination or Novation, but the contractor had clearly performed some award fee work and therefore the CO could not terminate the contract for convenience without reimbursement of costs incurred.
Ultimately, in an effort to resuscitate the contract and get back on track, the CO decided to procure the necessary additional labor as a stand alone contract and then bill the IPAR as an "addition" to the contract, resulting in a payment to the contractor. The contractor used the funds to pay back its vendor who was suffering, and then the contractor itself was terminated for convenience and Novated to a competitor. The outcome: the agency’s ultimate payment was only slightly higher than the CSC cost estimate for the work, and the agency recovered all costs incurred in facilitating the transition of the contract to the new party. Lessons learned? When the government gets out of the picture and requires the contractor to find creative ways to mitigate the damage, it often only strengthens the competitive position of a new contractor in the market, because they have an advantage over other bidders who do not have similar experience.

Legal Implications and Compliance

When leveraging cost plus award fee contracts, businesses must ensure that they understand the legal considerations and comply with relevant laws and regulations governing these contracts.
Federal Acquisition Regulation (FAR) – Cost plus award fee contracts are subject to the FAR, which sets forth requirements for contract formation, contract administration, and contract closeout. The applicable government general contractor and businesses awarded government task orders must adhere to the relevant FAR provisions associated with their entities and contract types.
Cost Accounting Standards (CAS) – CAS are a set of standards that govern the measurement, assignment, and allocation of costs to government contracts. The CAS may apply to cost plus award fee contracts if the contract has been awarded as part of a CAS-covered procurement (typically contracts or subcontracts exceeding the simplified acquisition threshold). For CAS-covered contracts, the business must ensure that it properly accumulates and charges costs to the government in accordance with its CAS disclosure statement and the CAS and FAR guidance.
Budgeting and Funding – Before accepting an award, the business and general contractor should work closely with the government to ensure that funding is available to cover the forecasted costs of the project. Failure to properly bid, scope, and budget a project can lead to significant losses for the business if the estimated costs are too low. In addition, the business and general contractor must adhere to any funding limitations imposed by Congress or the awarding agency. Although cost plus award fee contracts provide more flexibility than fixed-priced contracts, the government will likely scrutinize the budgets associated with these contracts.
Contract Monitoring – During the performance of the contract, the business must implement appropriate internal controls to monitor the contractor’s progress on the project . Through contract monitoring, the business can identify potential issues early on and work with the general contractor on possible solutions. Failure to implement effective contract monitoring may result in disputes among the contractor, government, and the business regarding the proper amount of fees due to the contractor on the project.
Disclosure and Transparency – On cost plus award fee contracts, cost and fee must be disclosed in accord with FAR requirements. This can include the disclosure of the contractor’s information in accordance with the subcontracts and cost restriction clauses (FAR 52.203.13 and 52.215-2). In addition, the business may be required to disclose information concerning award fees or incentive payments made on the contract to the public in accordance with FAR part 4.6 (Public Disclosure of Post-Award Contract Information). To the extent that such disclosure of sensitive information is required, the business should first address any confidentiality or sensitivity concerns with the government because premature release of confidential or sensitive information can severely damage a contractor’s business.
Compliance with Ethics Regulations – FAR Part 3.1 codifies the government’s policy of ensuring integrity in federal procurement. Government agencies have implemented ethics regulations designed to encourage responsible conduct and to protect the interests of the government. In this regard, the government has enacted regulations that govern the conduct of the government, the general contractor, and subcontractors (including businesses) under federal contracts. In addition, the government has instituted regulations to minimize the risk of abuse of government resources. Accordingly, the business must ensure that it understands the ethics regulations that apply to a federal cost plus award fee contract and works closely with the general contractor to ensure compliance.