Performance incentives
Performance incentives must be clearly defined, objectively measurable, and balanced to motivate contractor performance without distorting overall contract objectives.
Overview
FAR 16.402-2 outlines the use of performance incentives in government contracts, focusing on how these incentives should be structured to motivate contractors to achieve or exceed specific performance targets. Performance incentives can be tied to measurable product characteristics or service outcomes, and should be carefully balanced to avoid overemphasizing any single aspect of performance. The regulation emphasizes the importance of clear, objective criteria and standards for measuring performance, as well as the need for coordination among contracting, engineering, and pricing specialists during negotiation. It also requires explicit agreement on how contract changes will affect incentives and cautions against rewarding or penalizing contractors for results dependent on government-furnished components.
Key Rules
- Performance Incentives Design
- Incentives should relate profit or fee to contractor results compared to specified targets, and may address specific product or performance characteristics.
- Positive and Negative Incentives
- Both types should be considered for service contracts involving objectively measurable tasks where quality is critical.
- Technical Performance in Major Systems
- Technical incentives are especially relevant in major systems contracts, both in development and production phases.
- Balanced Incentives
- Incentives must be balanced across technical characteristics to avoid undermining overall performance.
- Objective Criteria and Standards
- Contracts must specify test criteria and performance standards to objectively assess performance.
- Negotiation and Coordination
- Contracting officers must coordinate with technical and pricing experts when negotiating incentives.
- Contract Changes
- The impact of contract changes on incentives must be explicitly agreed upon.
- Government-Furnished Components
- Contractors should not be rewarded or penalized for performance related to government-furnished items.
Responsibilities
- Contracting Officers: Design, negotiate, and administer performance incentives with input from technical and pricing specialists; ensure clarity in contract terms and changes.
- Contractors: Understand and meet specified performance targets; participate in negotiations and agree to incentive structures.
- Agencies: Oversee proper application and administration of performance incentives; ensure technical and pricing input is integrated.
Practical Implications
- This section ensures that performance incentives are used effectively to drive contractor performance, especially in complex or high-value contracts. Clear, balanced, and measurable criteria help prevent disputes and ensure that incentives align with government objectives. Common pitfalls include poorly defined targets, unbalanced incentives, and failure to address the impact of contract changes.