Kenneth Fletcher
WC Monitor
2/27/2015

The Department of Energy should incentivize contractors through performance and award fee or risk losing competition on procurements, industry executives said last week in a roundtable discussion at the seventh annual Nuclear Deterrence Summit. The discussion comes as the Department is undertaking a new contract management strategy that includes moving toward using award term to motivate more than fee and shifting more risk onto contractors. But fee is a key factor for industry, officials emphasized. “The bottom line is it is important in publicly traded companies—we have obligations to stakeholders,” Greg Meyer, senior vice president for Fluor Government Group, said. “Better fee gives you better competition, gives you better choice of contractors. So I think fee should not have the bad reputation that it seems to be getting.”

The new contract management approach comes amidst sparse competition for several major recent DOE and National Nuclear Security Administration procurements, including the M&O contract for the Kansas City plant as well as DOE Office of Environmental Management cleanup contracts for Paducah and Idaho, which industry officials have said shift too much financial risk onto the contractor. “There is a bit of a trend going on,” Meyer said. “If you look at EM, for Paducah out of 11 ID/IQ holders only two proposals were submitted. Idaho is still up in the air, but there’s one team with talk of a second one. … So the competition does seem to be going down and I think the government should be concerned about that.”

The government has an incentive to create opportunities for competition, Richard Goffi of Booz Allen Hamilton said. “In balance, the government needs to recognize that the site M&Os are big, hard and expensive. They take a lot of senior talent, they cost a lot, often requiring special capabilities that you have to take on. They take a very long time, many years,” he said. “The government needs to incentivize that and be willing to look at different models and different opportunities to make sure that they do get competition.”

‘Fee Attracts Competition’

Fee compensates for risk, Goffi said, noting that after last year’s incidents at Los Alamos and the Waste Isolation Pilot Plant contractors at both sites had their fee slashed significantly. “As publicly traded companies, it is hard to go to a board of directors and say I want to put the reputation of the firm at risk for no return. That’s a hard sell,” Goffi said. “Fee covers an allowance, so there has to be something that is an inherently allowable aspect of this. It is just the cost of governance as well as the compensational cost of bonuses.” He added: “Fee attracts competition. It’s hard to get companies to come out and invest resources to bid things that have very, very low potential returns.”

‘Death of a Thousand Razorblade Cuts’

Additionally, the fee architecture used in some procurements can be overly bureaucratic, CB&I Federal Services President Bob Cochran said. “You can die the death of a thousand razorblade cuts in measuring the minute and meaningless in order to determine fee payout [and that] is probably one of the more obvious things that needs to be changed. As a result, if you’re going to have fee and you want to align it with the mission requirements and the delivery of a product, don’t make it overly complex,” Cochran said. He added: “If we’re moving toward fee architecture that isn’t going to be satisfactory for companies and what their profit demands are, then those companies are probably going to exit the market.”

Recovery Act Fee Motivated Performance

Accelerated work done during the Recovery Act provides a good example of how fee can motivate high performance, Pete Diakun, vice president for Newport News Nuclear Energy Programs, said. “Money was used to incentivize performance above and beyond what at the time was normal performance in the Department. From a risk reward perspective there was an additional reward for taking on additional risk,” he said. Many of those contracts were structured so that a base amount of work and got a base amount of fee, but contractors would be rewarded for going above and beyond that, Diakun said.

However, whether fee or award term or other factors are most motivating depends on the work and the procurement, Honeywell FM&T President Chris Gentile said. “Fee is very, very important, but motivating factors are different across the different sites,” he said. “The national laboratories might look differently at how does fee motivate or do award terms motivate or does the scientific innovation motivate, and I think it’s different across the board.”

Industry in ‘Violent Agreement’

In the end, industry is in “violent agreement” that fee is necessary, Chuck Spencer, chief operating officer of B&W Technical Services Group, said. “If you want to get the best people from the corporations, there’s got to be a return on investments. You want the best people, but without some sort of fee structure and some sort of profit, you just won’t get it because of the competition associated with the resources,” he said.