DoD issued a final rule today affecting award-fee contracts. Specifically, (i) 40 percent of the award fee pool must now be reserved until the final award fee determination period and (ii) the Government can no longer make "provisional award-fee payments. Contractors entering into award-fee type contracts need to be aware of these measures because of the likely impact on their cash flows.
According to DoD, the purpose of making 40 percent of the award-fee pool available under the final evaluation period is to set aside a sufficient amount to protect the taxpayer's interest in the event a contractor fails to meet contractual obligations.
Contractors will continue to be paid incurred costs on cost-type contracts, completed work under fixed-price contracts with progress payments, or milestones achieved under fixed-price contracts with performance-based payments. However 40 percent of the anticipated fee could be significant and contractors should factor this into their cash flow projections.
The new rule also prohibits the prepayment of award fee prior to the end of an award-fee period. DoD believes that prepayments are inappropriate since the contractor's performance has not been evaluated and the contractor may not earn that paid award fee during that period.
The new clause does contain a provision to reduce the amount of fee reserved for the final award fee determination period from 40 to 20 percent when approved by the head of a contracting activity. Don't count on that happening.