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National Aeronautics and Space Administration

Recommendations and Actions

NASA01: Improve NASA Contracting Practices

BACKGROUND

The National Aeronautics and Space Administration (NASA) was established to advance scientific and technological knowledge in the areas of aeronautics and space. NASA relies heavily on contracting with U.S. industry to achieve these objectives. Like other federal government agencies, NASA operates under federal acquisition laws and regulations. Unlike many other federal agencies, however, NASA routinely contracts for large, highly sophisticated items which push the state of the art. Contracting in an environment of global competition where contractors are to perform at the cutting edge of technology has proven to be problematic.

President Clinton and Vice President Gore are encouraging agencies to "use performance-based contracting strategies that give contractors the design freedom and financial incentive to be innovative and efficient."[Endnot 1] In response, NASA is revising its procurement procedures to acquire new technologies in a more timely manner and to get the best value for taxpayers' money. Contractors must be motivated to submit workable and affordable solutions to NASA's requirements instead of attractive promises that cannot be kept.

For each procurement, NASA should ensure the selection of the appropriate contract type and the negotiation of the appropriate terms and conditions, and follow through with vigorous post-award program and contract management. Three specific areas where NASA has opportunities to implement innovative acquisition approaches are: (1) more effective use of award fee contracts with positive and negative incentives; (2) contracting for data instead of hardware; and (3) using cooperative research agreements to exploit more quickly high-performance computing techniques.

NASA spends approximately 76 percent of its procurement budget ($13.4 billion in fiscal year 1992) on cost-plus-award-fee (CPAF) contracts. While CPAF contracts can be a useful method for meeting the agency's needs, they require large amounts of NASA administrative resources to manage. The CPAF contracts have generally placed too little emphasis on cost control or reduction, and they have sometimes resulted in high fees relative to actual performance. Finally, they have been used when other types of contracts would have been more appropriate.

CPAF contracts at NASA do not provide sufficient incentives for contractors to deliver quality products or services on time and within budget. In addition, award fee evaluations have not always been tied closely to contractor performance, including performance of hardware after acceptance by NASA. As a result, performance was not considered and NASA assumed all the risk associated with delivery of products or services, including any cost overruns. According to NASA, in the past some CPAF contracts guaranteed a substantial fee payment, called a base fee, regardless of how the contractor performed. Since payment is not linked to contractor performance, this approach removes much of the leverage that NASA has to ensure that performance.[Endnote 2] More recently, NASA and other agencies have successfully negotiated a number of contracts without base fees.[Endnote 3]

Changes to the current award-fee contracting methods are being developed by NASA. These changes fall into two categories: (1) selection of contract type; and (2) improvements in how CPAF contracts are structured and managed once they are determined to be the proper type of contract to use.

In the acquisition process, one of the key decisions that has to be made is the selection of the type of contract to be used. Both the allocation of risk and the degree of government involvement in the performance of the contract are determined by the type of contract. Therefore, the first change in the new NASA award fee policy should be to re-emphasize the importance of the selection of contract type and to restrict the use of CPAF contracts to those situations where they are the most appropriate type of contract to be used.

If it is determined that a CPAF is the most appropriate type of contract, then the following changes in the process should be made: (1) evaluation and payment of award fee should be based on overall contractor performance (not on an interim activity as most current award-fee contracts are); (2) greater importance should be placed on cost control in determining the overall contractor award fee earned; (3) more accurate evaluations of actual contractor performance should be made; (4) use of base fee should be limited; (5) no payment of any fee should be made under an award-fee contract when the contractor's overall performance is unsatisfactory; and (6) positive and negative performance incentives on hardware contracts should be used to provide payments of additional fees to contractors for superior performance of an item in use by NASA, and refund fees earned where the actual performance of the item is substandard.

Currently, in cost-reimbursement research and development (R&D) contracts, the government assumes all risk of failure or substandard performance, except for that due to the fraud or willful misconduct of senior company officials. If the contractor damages an item or produces a defective item through poor workmanship, the government (not the contractor) pays to fix it. NASA published a concept paper in the Federal Register in March 1993 which outlined concerns about this allocation of risk, and ideas for sharing risks between NASA and its contractors on a more equitable basis. Public comments have been reviewed and a draft policy on contractor liability is ready for publication.

Performance-based contracting essentially focuses the contract on what the government needs, not on how the contractor meets the need. While this concept is an integral part of the award-fee improvements discussed above, it can be more fully implemented by considering the use of other types of contracts. The Office of Management and Budget (OMB) is generally encouraging NASA to move as much as feasible toward contracts that allow full implementation of performance-based approaches.[Endnote 4]

One possible application of performance-based contracting at NASA is the acquisition of data instead of the hardware needed to produce the data. NASA is hopeful that this will prove to be a more cost-effective approach to acquiring some types of data. When acquiring data, NASA can act more like a commercial customer. The contractor can be left to design, build, launch, and operate a satellite with little government oversight, thus saving both parties money. NASA can specify the types of data it wants more easily than it specifies the hardware needed to produce the data, thus simplifying the contract and associated negotiations.

The contractor assumes more risk under an arrangement of this sort and, therefore, would demand more profit. However, the total cost should be less as a result of efficiencies and innovations stemming from competition and financial incentives. In addition, there may be significant commercial opportunities offering potential economies of scale and incentives for the contractor to assume more risk.

Given the fast pace of high-performance computing technologies and the global ramifications for technological competitiveness, innovative approaches should be available to federal agencies to foster the enhancement of U.S. industrial competitiveness in these key technology areas. However, traditional contracting processes for government agencies are often not quick enough to acquire these state-of-the- art technologies in a timely manner.

To deal with this problem, NASA has developed a new solicitation instrument, the Cooperative Research Announcement (CRA). This approach awards cooperative agreements after competition among educational institutions, nonprofit organizations and for-profit companies. This marks the first time that NASA has used a solicitation of this type for cooperative agreements and the first time NASA has extended the use of cooperative agreements to for-profit companies.

Through CRAs, NASA can promote collaborative efforts on high-performance computer systems, and stimulate alliances that would foster the movement of research results into the marketplace in such a manner that U.S. competitiveness is enhanced. The use of CRAs can also promote test beds with high levels of expertise in computational aerospace. These test beds would provide opportunities for feedback among high- performance computing systems and applications designers, developers, and users. Finally, expanded use of CRAs will increase technology sharing between government and industry.

ACTIONS

1. NASA regulations should be modified to provide for greater emphasis on the selection of appropriate contract type, to make better use of positive and negative incentives to contractors through award fee contracts, and to consider increasing contractor liability for correction of defects in materials and workmanship or other failures to conform to contract requirements.

This performance-based contract policy ensures that the contractor would receive interim payments that are provisional until the end of the contract, when the contractor's performance as a whole can be evaluated, and the amount of fee the contractor is paid can be determined by its overall performance. Performance-based contracts would be used when a definitive product, such as hardware, is to be delivered under the contract. Contractors would be rewarded for a product's superior demonstrated performance, but would pay the government back a predetermined fee if the demonstrated performance fails to meet contract requirements. This policy would generally eliminate base fees in contracts. NASA would be assured of receiving high-quality products for its dollars, would place more risk with contractors, and would use contractors' performance to determine award fees.

2. NASA and other government agencies should consider contracting out for data instead of hardware.

Agencies requiring straightforward data sets can significantly cut costs and save considerable time by purchasing data instead of the hardware to produce the data. Although such data purchases do not fit all data requirements, they do represent an approach that should be more widely explored by the scientific and technical community.

3. NASA should extend the use of its CRA solicitation instrument to for-profit, as well as nonprofit and educational organizations to exploit new high- performance computing technology more quickly.

The new competitive solicitation process to fund cooperative research programs in high-performance computing should help ensure the continued leadership and competitiveness of the United States in this field. Consistent with the High-Performance Computing Act of 1991, the objective of the CRA would be to hasten the development of high-performance computing systems capable of performing computational research on "Grand Challenge" problems--those fundamental problems in science and engineering that require the applications of high-performance computing to solve (e.g., modeling global weather systems).[Endnote 5] By stimulating research on software technology, the development of software applications, and increased collaboration with government, industry, and university institutions, the CRA would promote the earliest access to leading-edge technology and encourage continued U.S. leadership in high- performance computing.

IMPLICATIONS

The use of performance incentives for award-fee contracts does not require changes to any law. The Schumer Amendment to the fiscal year 1993 NASA Authorization Act directed the NASA administrator to assess the allocation of risk between NASA and its contractors, and to identify options for increasing contractors' share of risk, including the use of positive and negative fee incentives. The performance incentives included in the award-fee policy implement current administration policy on performance-based contracting and are designed to address congressional concerns.

Industry feels that performance-based incentives are inappropriate in a cost-reimbursement environment where a lot of cost and technical uncertainty exists. However, NASA expects few, if any, contractors to not bid as a result of negative incentives and, based on past experience, no reduction in bidders has resulted from the elimination of base fees. NASA points out that the contractor's performance determines whether or not it earns a performance incentive. In addition, on R&D contracts, the contractor is guaranteed to receive full cost recovery but may have to forfeit the award fee.[Endnote 6] Negative contracting incentives are outweighed by the opportunities that the positive incentives offer for substantial awards.

NASA will work closely with contractors to implement these policies. It is anticipated that when all participants understand the details of implementation, contractors' performance will be positively influenced.

In appropriate circumstances, the purchase of data instead of hardware used to produce data can reduce the costs and the time spent by the agency. It would generally be necessary for NASA to negotiate a schedule of cancellation payments that would be made to the contractor to cover its investment in case the government prematurely cancels the contract. [Endnote 7] This is a risk the contractor cannot manage. In addition, the contractor may seek to negotiate for substantial prepayments before, for example, a satellite is even launched. In that case, should the project not be completed or should the equipment fail to provide the type or quantity of the data promised, the government may have difficulty seeking return of those payments. However, NASA can make it clear in the solicitation that offerors will not receive prepayments and that the contractor will have to privately finance design, construction, and launch--i.e., until data that meets contract requirements are delivered.

In a traditional situation where NASA awards a cost- reimbursement contract for design and construction of a satellite, the contractor is guaranteed reimbursement of costs, and NASA makes periodic payments as the work is performed. Therefore, NASA does not have the option of not paying costs if the system does not produce the data required. Of course, in a traditional situation, NASA relies primarily on oversight to ensure mission success.

When expanding the use of CRAs to include for-profit organizations, larger sums of money are involved and more is at stake. Such agreements will have to be written to ensure accountability to the taxpayer. As these agreements become more common, there may be a tendency to add regulatory constraints that would slow down the process. Should CRA objectives begin to reflect the agency's mission, critics may argue that NASA should make awards applying all the protections that accompany a procurement contract.

It is important to note that, in accordance with the Federal Grants and Cooperative Agreements Act, CRAs may only be used to "carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring property or services for the direct benefit or use of the United States Government . . ."[Endnote 8] These recommendations will control program costs, streamline bureaucratically encumbered processes, and promote the interests of U.S. industry during this crucial period of intense international competition.

FISCAL IMPACT

Savings for these recommendations are difficult to quantify. In fact, the benefit from streamlining the procurement process and revising contract structure is most likely to be cost avoidance in the future. A new award fee structure is being implemented which will emphasize cost and technical performance through the use of improved award fee procedures. All hardware contracts with estimated values over $25 million will include both positive and negative performance incentives. Superior performance in meeting cost and performance specifications will be rewarded. However, if the product fails to perform according to contractual requirements, the contractor will have to reimburse the government up to the total amount of available award fee. That amount would vary from contract to contract and cannot be quantified.

ENDNOTES

1. Executive Office of the President, Technology for America's Economic Growth, A New Direction to Build Economic Strength, President's Technology Initiative (Washington, D.C., February 22, 1993), p. 23.

2. Telephone interview with Deidre Lee, Associate Administrator for Procurement, NASA, Washington, D.C., July 1, 1993.

3. Telephone interview with Tom Luedtke, Acting Deputy Director, Procurement, NASA, Washington, D.C., July 7, 1993.

4. Memorandum from Allan V. Burman, Administrator, Office of Federal Procurement Policy, Office of Management and Budget, to Don G. Bush, Acting Assistant Administrator for Procurement, NASA, May 20, 1991.

5. High-Performance Computing Act of 1991, P.L. 102- 194, 105 Stat. 1595 (1991).

6. Letter from Anne Guenther, NASA Office of Procurement, to the National Performance Review, July 8, 1993.

7. U.S. Congress, House, National Aeronautics and Space Administration Authorization Act, Fiscal Year 1993, Section 507, P.L. 102-095 88, 106 Stat. 5107 (1992).

8. Grants and Cooperative Agreements Act of 1982, P.L. 97-258, 96 Stat. 1004 (1982).

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