Friday, April 17, 2015

BBP 3.0 - Increase the Use of Incentive Type Contracts

We continue our discussion of DoD's latest acquisition reform initiatives that are collectively referred to as Better Buying Power (BBP). The latest version is referred to as "3.0" to distinguish it from earlier amalgamations of initiatives called "1.0" and "2.0". We wonder when this will end - probably not until there's a new administration. By then we'll be up to "5.0" if the pace continues.

One of DoD's BBP 3.0 initiatives is to increase the use of Cost Plus Incentive Fee (CPIF) and Fixed Price Incentive Fee (FPIF) contracts, "where appropriate". BBP 3.0 doesn't explain when and where and under what circumstances such type of contracting is appropriate. The Department does tell us however that studies have shown a high correlation between these types of contracts and better cost and schedule performance. (By the way, if you are unfamiliar with the characteristics and differences between FPIF and CPIF contracts, we will address that subject following this series).

In both FPIF and CPIF contracts the impact of contract overruns and underruns are shared between the contractor and the Government based on a formula specified in and by the contract. In either case, there is incentive for the contractor to control costs (and schedules) because contractors can earn more profit or fee.

It is sometimes a tricky maneuver to design incentive structures that work well. The Department is cautioning its acquisition corp against setting incentive structures that substantially eliminate contractor incentives to reduce cost.

DoD expects to update its guidance for employing CPIF and FPIF contracts later this year.

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