§ 1816.404-276 - Performance incentives on CPAF hardware contracts.

(a) A performance incentive shall be included in all CPAF contracts where the primary deliverable(s) is (are) hardware and where total estimated cost and fee is greater than $25 million. Any exception to this requirement shall be approved in writing by the Center Director. Performance incentives may be included in CPAF hardware contracts valued under $25 million at the discretion of the procurement officer. Performance incentives, which are objective and measure hardware performance after delivery and acceptance, are separate from award fee, which is subjective and measures contractor performance. The final award fee rating is final and cannot be retroactively changed.

(b) When a performance incentive is used, it shall be structured to be both positive and negative based on hardware performance after delivery and acceptance. In doing so, the contract shall establish a standard level of performance based on the salient hardware performance requirement. This standard performance level is normally the contract's minimum performance requirement. No incentive amount is earned at this standard performance level. Discrete units of measurement based on the same performance parameter shall be identified for performance both above and below the standard. Specific incentive amounts shall be associated with each performance level from maximum beneficial performance (maximum positive incentive) to minimal beneficial performance or total failure (maximum negative incentive) in accordance with 1816.404-276(g)(3). The relationship between any given incentive, both positive and negative, and its associated unit of measurement should reflect the value to the Government of that level of hardware performance. The contractor should not be rewarded for above-standard performance levels that are of no benefit to the Government.

(c) The final calculation of the positive or negative performance incentive shall be done when performance, as defined in the contract, ceases or when the maximum positive incentive is reached. When the performance is below the standard established in the contract, the Government shall calculate the amount due and the contractor shall pay the Government that amount. When performance exceeds the standard, the contractor may request payment of the incentive amount associated with a given level of performance, provided that such payments shall not be more frequent than monthly. When performance ceases or when the maximum positive incentive is reached, the Government shall calculate the final performance incentive earned and unpaid and promptly remit it to the contractor. The exclusion at FAR 16.405(e)(3) does not apply to decisions made as to the amount(s) of positive or negative incentive.

(d) One example of how a performance incentive would work is on a contract requiring delivery of a spacecraft. In this case, the performance incentive unit of measurement could be useful months in orbit. If 12 months is the expected performance level, the 12th month could be identified as standard performance for which no incentive is earned. If 24 months is the maximum useful life for the spacecraft relative to the technical requirements, the 24th month could be identified as the maximum performance level at which the contractor would earn the maximum positive incentive. Interim measures of spacecraft life from 12 to 24 months would then be identified with fees from $0 to the maximum positive incentive. The amounts associated with these interim measures should correspond to the relative value to the Government of each additional month in orbit. A similar scale would be established for the negative incentive ranging from the 12th month for standard performance, $0, to total and immediate system failure at the start of performance, the maximum negative incentive.

(e) When the deliverable hardware lends itself to multiple, meaningful measures of performance, multiple performance incentives may be established. In addition, when the contract requires the sequential delivery of several hardware items (e.g., multiple satellites), separate performance incentive structures may be established to parallel the sequential delivery and use of the deliverables. In either case, the amounts of the maximum performance incentives and the total potential award fee, including any base fee, shall be in accordance with the structure and limitations specified in 1816.404-276(g).

(f) The definitions of standard performance, maximum positive and negative performance, and the units of measurement may be negotiated and will vary from contract to contract. Care must be taken, however, to ensure that the performance incentive structure is both reflective of the value to the Government of the various performance levels and a meaningful incentive to the contractor.

(g) In determining the value of the maximum performance incentive available under the contract, the contracting officer shall follow the following rules.

(1) The sum of the total potential award fee (including any base fees) plus the maximum positive performance incentive may not exceed the limitations in FAR 15.903(d).

(2) The individual values of the maximum positive performance incentive and the total potential award fee (including any base fee) shall each be at least one-third of the total potential contract fee. The remaining one-third of the total potential contract fee may be divided between award fee and the maximum performance incentive at the discretion of the contracting officer.

(3) The maximum negative performance incentive for research and development hardware (e.g., the first and second units) shall be equal in amount to the total earned award fee (including any base fee). The maximum negative performance incentives for production hardware (e.g., the third and all subsequent units of any hardware items) shall be equal in amount to the total potential award fee (including any base fee). Where one contract contains both cases described above, any base fee shall be allocated reasonably among the items.