Big Rewards for Defense Firms

By Charles R. Babcock
Washington Post Staff Writer
Monday, April 17, 2006

In late February 2004, the Army announced that it was canceling plans to build a radar-evading helicopter called the Comanche, a project that was nearly three years behind schedule and more than $3.5 billion over budget. Those problems, however, didn't stop an Army panel a few weeks later from granting the Boeing Co.-Sikorsky Aircraft Corp. partnership running the program a $33.9 million "award fee" for their work on the helicopter, part of more than $200 million in such fees paid to the partnership over four years.

Award fees are meant in theory to motivate defense contractors with extra money for performance. But a recent Government Accountability Office study found that the fees are often paid regardless of whether a project is on schedule and within its budget.

Instead of encouraging efficiency, the GAO found, award-fee payments have become routine in some major weapons contracts, built into company expectations and paid almost as a matter of course.

Current practices "undermine the effectiveness of fees as a motivational tool and marginalize their use in holding contractors accountable," the GAO concluded. Defense contractors are paid award fees for work that is simply "acceptable, average, expected, good, or satisfactory."

An estimated $8 billion was paid in award fees from fiscal 1999 to 2003, when many of the projects involved were over budget and behind schedule. Bethesda-based Lockheed Martin Corp., for example, collected $1.5 billion in award fees on three major programs, the F/A-22 Raptor jet fighter, the F-35 Joint Strike Fighter, and the Space-Based Infrared System High satellite, despite cost, schedule and reliability problems, the GAO found.

Defense industry officials say award fees are sometimes the only way companies can profit from high-risk contracts that might never reach full-scale production -- and are of particular importance to companies that bid on large weapons systems.

Government officials say they are tightening the rules for awarding them. Late last month, the Pentagon issued new guidance that said that award fees must be tied to identifiable outcomes as much as possible and that the contracting officials should limit the common practice of rolling over fees from one period to the next, effectively giving companies a second chance to earn them.

Shay D. Assad, a former Raytheon Co. executive who is the Pentagon's new director of defense procurement and acquisition policy, said in an interview Friday that it was clear that defense officials have been granting award fees on the basis of "process performance and behavior" -- a category the GAO said included things such as whether reports were filed on time.

Instead, he said, they should concentrate on "events . . . that are going to be correlated to the outcome" of the contract.

The GAO began looking at corporate award fees after Marvin Sambur, who was the Air Force acquisition chief, attended a New York investor conference in 2003 and heard defense industry executives talk cavalierly about receiving high award payments.

"I was amazed," Sambur said in a recent interview, likening the executives' attitude to that of students expecting an "A" in class "just for showing up." He then found that the Air Force was paying contractors about 90 percent of the possible fees, no matter what their performance, so he said he set out to tighten Air Force policies.

The GAO study was requested by John Ensign (R-Nev.) and Daniel K. Akaka (D-Hawaii), members of the Senate Armed Services Committee, in response to Sambur's concerns.

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