Support Provider Incentives
Performance Incentives
DoD Working Capital Fund
Figure 1. Defense Working Capital Funds
Navy Working Capital Fund
Figure 2: Navy Working Capital Fund: How the NWCF Funds PBL Contracts
In the final stages of the development of a product support strategy, the PSM must identify and define the range, types, and amount of funding needed to perform the required product support consistent with the anticipated terms, conditions, and objectives of the Product Support Arrangements. At the same time, prior to the execution of the Product Support Arrangements, PSM’s should consider how funds are to be delivered to the product support providers, in the form of payments and incentives.
Once the product support strategy framework has been finalized to show the range and responsibilities of the PSIs and PSPs and the enabling Product Support Arrangements have been drafted, the PSM should work the financial aspects of the product support strategy. The PSM must assure that appropriate levels and types of funding are resourced to successfully execute the product support strategy and disburse the funds in the most effective way. The unique needs and characteristics of the system and its operational priorities drive the amounts and types of funding required. Various types of funding and appropriations across the life cycle, including Procurement, RDT&E, and Operations and Maintenance blend to deliver the required product support.
The PSM should plan and advocate for sufficient funding from the organizations to which those funds have been appropriated. This can involve actions ranging from ensuring that an adequate budget projection, commonly referred to as a “wedge,” is inserted into the Planning, Programming, Budget, and Execution (PPBE) process sufficient to effect transition of a development system to operational use with sufficient funds for support, including Procurement and RDT&E funds for known required modifications and upgrades necessary for effective sustainment of the system. Once the funds have been appropriated, the PSM should ensure the funds are made available as needed to fund the support as defined in the Product Support Arrangements. While the Warfighter advocates for the required funding, the PSM has a clear management and oversight role of the funds used for product support. The PSM should request the full amount of funding needed and provide impact statements to the Warfighter, PM, and program sponsor explaining the impact of the reduced support that resulting from incomplete funding.
A well-constructed funding plan incentivizes accountability for performance. The three operative words, each vitally important, are incentives, accountability, and performance. Performance-based life cycle product support (PBL) processes, metrics, and incentives have proven to be effective means of delivering desired product support outcomes. They must deliver performance outcomes through enhanced and sustained product and process improvements such as (but certainly not limited to) reliability, availability, maintainability, obsolescence & DMSMS mitigation, and efficient/effective supply chain management. Going forward, product support strategies must also be structured to identify, capture, quantify, track, evaluate, and analyze foundational underlying data through a rigorous and repeatable Product Support BCA process.
Support Provider Incentives
Performance-based contracting methods are intended to ensure that required performance quality levels are achieved and that total payment is related to the degree that materials and services performed meet contracted standards. For the DoD, that means a clear description of what the effort entails, performance expectations, and the incentives necessary to ensure contractor success.
With a primary focus on results, contractors are provided maximum flexibility in meeting the government's actual needs. A concise performance-based work statement enables the contractor to fulfill that need as best determined by the contractor. Specific, quantifiable performance indicators allow the contractor and the government to monitor task performance throughout the life of the project as opposed to vague statements of work that leave the contractor unclear about the project’s success. Achievement of results greater than the contracted baseline of performance may be rewarded with tangible financial incentives.
Federal Acquisition Regulations both permit and encourage contract performance incentives. When preparing statements of work, agencies shall, to the maximum extent practicable:
- Describe the work in terms of “what” is to be the required output rather than either “how” the work is to be accomplished or the number of hours to be provided;
- Enable assessment of work performance against measurable performance standards;
- Rely on the use of measurable performance standards and financial incentives in a competitive environment to encourage competitors to develop and institute innovative and cost-effective methods of performing the work.
Performance Incentives
- Performance incentives may be considered in connection with specific product characteristics (e.g., a missile range, an aircraft speed, an engine thrust, or a vehicle maneuverability) or other specific elements of the contractor’s performance. These incentives should be designed to relate profit or fee to results achieved by the contractor, compared with specified targets.
- To the maximum extent practicable, positive and negative (i.e., remedies) performance incentives shall be considered in connection with service contracts for performance of objectively measurable tasks when quality of performance is critical and incentives are likely to motivate the contractor.
- Technical performance incentives may be particularly appropriate in major systems contracts, both in development (when performance objectives are known and the fabrication of prototypes for test and evaluation is required) and in production (if improved performance is attainable and highly desirable to the Government).
- Technical performance incentives may involve a variety of specific characteristics that contribute to the overall performance of the end item. Accordingly, the incentives on individual technical characteristics must be balanced so that no one of them is exaggerated to the detriment of the overall performance of the end item.
- Performance tests and/or assessments of work performance are generally essential in order to determine the degree of attainment of performance targets. Therefore, the contract must be as specific as possible in establishing test criteria (such as testing conditions, instrumentation precision, and data interpretation) and performance standards (such as the quality levels of services to be provided).
- Because performance incentives present complex problems in contract administration, the contracting officer should negotiate them in full coordination with Government engineering and pricing specialists.
- It is essential that the Government and contractor agree explicitly on the effect that contract changes (e.g., pursuant to the Changes clause) will have on performance incentives.
- The contracting officer must exercise care, in establishing performance criteria, to recognize that the contractor should not be rewarded or penalized for attainments of Government-furnished components.
Current DoD financial budget, appropriation, and accounting rules and processes are not tailored to the fundamental concept of PBL buying a single, top-level outcome (i.e., performance). DoD funds are broken down into various types of appropriation accounts: Research, Development, Test, and Evaluation (RDT&E), Procurement, Operations and Maintenance (O&M), Military Construction (MILCON), and so forth. Within each of these appropriations funds are further separated into various “lines of accounting” depending on the functional area or product to which they have been allocated. And, each appropriation type has statutory time limits on use, e.g., Procurement funds are good for three years, RDT&E two years, and O&M one year. This creates problems because almost all of the activities funded by these different colors of money are used for the effective support and sustainment of DoD weapon systems. With traditional support strategies, this creates less of a problem, since traditional transactional support is purchased as discrete amounts of functional transactions, such as number of items repaired, supply parts purchased, or hours of engineering support, more in line with how funds are aligned. However, in PBL product support strategies, we are not buying various discrete functional transactions, but rather top-level performance outcomes.
DoD Working Capital Fund
Funding through the Working Capital Fund mechanism can be a significant financial enabler of the product support strategy. The basic tenet of the revolving fund system is to create customer/provider relationships between military operating units and support organizations, as illustrated in Figure 1.
- Customers DoD commands and organizations, non-DoD federal agencies, U.S. and foreign agencies, and DoD-authorized commercial enterprises.
- Support Providers Business Areas and related support organizations financed through DWCF that provide goods and services to the operating forces.
Figure 1: Defense Working Capital Funds
The customer/provider relationship is fundamental to the DWCF financial structure in that it increases the customer’s responsibility for properly determining support requirements and the level of performance needed from DWCF Business Areas. The result of the customer/provider relationship is a meaningful linkage between military operations and the cost to support those operations. This relationship is also essential for a successful PBL product support arrangement.
Navy Working Capital Fund
The Navy has been very successful in utilizing the Navy Working Capital Fund (NWCF) to implement PBL product support strategies as illustrated in Figure 2. The NWCF is a non-expiring, revolving fund that finances the repair and procurement of Navy Depot Level Reparables, and select consumables at the wholesale level. The structure of the NWCF allows for contracts with multiple year performance periods, a necessity for PBL product support arrangements. PBL product support contracts citing the NWCF have been executed with five-year initial performance (base) periods and multiple five-year option periods. These long-term contracts incentivize contractors to make long-term investments to improve weapons systems support and performance that would not have been otherwise supportable by the contractor’s internal investment criteria. Congressional multiyear contract authority is not required for these contracts, which greatly simplifies contract execution. Funding is applied to these long-term contracts in annual increments reducing the amount of funding that must be obligated at any given time.
Figure 2: Navy Working Capital Fund: How the NWCF Funds PBL Contracts
Industry leaders have indicated that long-term PBL product support contract commitments enable consideration of investing company funds for product improvements since the time remaining on a PBL product support contract permits reaping a return for their investments. Some WCF contracts are currently in place with contract terms of 5 or more years, while PBLs funded with appropriated fund accounts may be placed with multiple one year options.
PSMs work with users to identify estimated costs of meeting performance capabilities. These estimates will become the basis for the user to advocate funding during the budget process. A thorough PBL Product Support BCA should precede this step in the process. The Services then identify specific appropriation elements that are intended to support product support strategies. Ultimately, this approach will result in clear lines of visibility and accountability, which will in turn support improved readiness and resource management.
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