A new Defense Department report analyzed contractors’ cost and schedule performance over more than a decade to see what motivated them to produce better results. (STAFF/AFP/Getty Images)

Competition was the main theme of the Defense Department’s second annual report on acquisition performance, released earlier this month. Declining budgets may be pushing defense contractors to look for work outside the government, but the Pentagon’s emphasis remains on promoting competition, according to Frank Kendall, the undersecretary of defense for acquisition, technology and logistics.

The report analyzed contractors’ cost and schedule performance over more than a decade to see what motivated them to produce better results. Here are some takeaways:

The carrot-and-stick approach works

Companies respond better to profit incentives than the promise of a fixed margin at the end of the contract, according to the report. That means if a contractor meets cost and schedule requirements, the margins they can achieve should be increased to reward good performance. Similarly, it should be reduced if the contractor does not perform well, the report said. This continuous carrot-and-stick approach is a better incentive than trying to determine a margin level that suits both parties best, the report said.

“Assessing the acceptability of a particular margin [...] is less important than whether we are rewarding good performance and penalizing bad performance,” the report said.

Another way to use margins to drive competition, the report said, is to offer better returns on future contracts to make companies perform well in the present.

Fixed-price isn’t always the best fix

In the report, Kendall noted that fixed-price contracts were not a “one size fits all” solution to budget problems. These types of contracts are increasingly being used by the government to cut costs.

“Defense acquisition is complicated and varying. There are no simple ‘schoolhouse’ solutions that should be mandated,” he wrote.

Instead, the government should understand the risks involved in each contract to determine what type works best, Kendall said.

That’s a view industry members agree with.

Risk awareness and risk capability are “a real serious gap in acquisition today,” said Stan Soloway, president of the Professional Services Council. “Contract types and strategies have to be tailored to each circumstance.”

More competition does mean better performance

Contracts that had at least two bidders performed better in terms of cost, price and schedule, according to the report. Sole-source modification contracts also performed better than new sole-source contracts. These findings buttress the government’s ideas for spurring competition, the report said.

Despite the competitive environment in contracting, Kendall told reporters in a press conference that he was “disappointed” the government was not being more aggressive.

“We are not increasing our level of competition, direct competition,” he said. “I think that’s partly the result of the budget situation we’re in.”

Leadership matters, but it’s not clear how much

It’s not all about margins and costs. The program manager has a role to play in how well a contract is executed. The department’s analysis addressed the issue of whether the length of a program manager’s tenure affects contract performance. One issue that contractors have raised in the past is that program managers leave too soon to be able to oversee an entire project.

“Qualitatively, it has been asserted that having a stable person as [manager] should lead to better program performance,” the report said, although it did not cite a specific source.

But the analysis didn’t find a quantitative relationship between the length of a manager’s tenure and contract performance measures, such as cost growth.

“We do not yet know why [program manager] tenure does not correlate more strongly with program outcomes,” the report said. But the department stressed that it would continue to explore the effects of leadership on performance.

“We are convinced that superior management quality does matter — and matters a great deal,” it said.