Award Fee Contracts: Maximizing Performance-Based Fee in CPAF Contracts

An award fee contract (also called CPAF — Cost-Plus-Award-Fee) is a cost-reimbursement contract where the contractor's fee (profit) is based on subjective evaluation of performance rather than objective cost measures.

How award fee works:

• Base fee: Small fixed amount (typically 0-3% of cost) paid regardless of performance
• Award fee pool: Additional fee (typically 7-10% of cost) available based on performance
• Earned fee: Portion of award fee pool actually earned, based on evaluation

Example:

$10M contract with 3% base fee and 10% award fee pool:

• Base fee: $300,000 (guaranteed)
• Award fee pool: $1,000,000 (at risk)
• Maximum fee: $1,300,000 (13% of cost)
• Actual earned fee depends on performance rating

Why agencies use award fee:

• Subjective performance factors — Quality, customer satisfaction, innovation can't be objectively measured
• Motivate excellence — Contractors have incentive to exceed minimum requirements
• Flexibility — Criteria can adapt to changing priorities
• Government leverage — Withholding fee gives government control over performance

Contractor perspective:

Award fee creates uncertainty — you don't know your profit until evaluation. But it also rewards excellence. Top performers can earn full fee; poor performers earn little or nothing.

Key difference: Objective vs. subjective evaluation

Award Fee (CPAF):

• Subjective evaluation — Fee determination based on government's judgment
• Criteria — Qualitative factors (quality, timeliness, customer satisfaction, innovation)
• Determination — Award Fee Board evaluates and decides fee
• Predictability — Low; depends on evaluator perception

Incentive Fee (CPIF):

• Objective formula — Fee determined by mathematical formula tied to cost performance
• Criteria — Quantitative factors (cost underrun/overrun vs. target)
• Determination — Automatic based on actual costs vs. target
• Predictability — High; you can calculate fee based on cost performance

When agencies use each:

CPAF (Award Fee):

• Services contracts where quality matters more than cost
• R&D where innovation and technical excellence are critical
• Complex performance criteria that can't be reduced to formulas
• Long-term contracts where priorities may evolve

CPIF (Incentive Fee):

• Development contracts with cost control focus
• Production contracts where cost efficiency is primary goal
• Situations where objective cost targets can be established

Hybrid contracts (CPIF + Award Fee):

Some contracts combine both:

• Incentive fee tied to cost performance (objective)
• Award fee tied to technical/quality performance (subjective)
• Total fee is sum of both components

Which is better for contractors?

CPIF is more predictable — you control your destiny through cost management. CPAF depends on satisfying evaluators, which can feel arbitrary. However, top performers often prefer CPAF because it rewards excellence beyond just cost control.

The Award Fee Plan is the document that governs fee evaluation. It's incorporated into the contract and defines how your performance will be evaluated.

Required elements (FAR 16.401(e)):

1. Evaluation criteria:

Specific factors on which performance will be judged:

• Quality of deliverables — Technical adequacy, completeness, accuracy
• Timeliness — Meeting schedules and milestones
• Cost control — Staying within budget, efficient resource use
• Management — Communication, responsiveness, problem-solving
• Customer satisfaction — Government customer feedback
• Innovation — Process improvements, creative solutions

2. Evaluation periods:

How often fee is determined:

• Monthly (rare — administrative burden)
• Quarterly (common for short contracts)
• Semi-annually (typical for multi-year contracts)
• Annually (for very long contracts)

3. Rating system:

How performance translates to fee. Common approaches:

Adjectival ratings:

• Excellent: 91-100% of available fee
• Very Good: 76-90% of available fee
• Good: 51-75% of available fee
• Satisfactory: 26-50% of available fee
• Unsatisfactory: 0-25% of available fee

Numerical scoring:

• Each criterion scored 0-100
• Weighted average calculated
• Fee percentage based on overall score

4. Fee determination official:

Who makes the final fee decision. Typically:

• Fee Determining Official (FDO) — Senior government official (SES or equivalent)
• Award Fee Board — Group that evaluates and recommends (FDO makes final decision)

5. Rollover provisions:

What happens to unearned fee:

• Rollover allowed: Unearned fee from one period can be earned in subsequent periods
• No rollover: Unearned fee is lost forever

Rollover provisions significantly affect risk. Without rollover, one bad period permanently reduces your maximum potential fee.

6. Evaluation process and timeline:

• Self-assessment submission deadline
• Award Fee Board meeting date
• FDO decision deadline
• Feedback session

Typical award fee cycle:

Step 1: Performance period execution

You perform the work. Throughout the period:

• Document achievements, innovations, successes
• Communicate regularly with government customer
• Address problems quickly and keep customer informed
• Track performance against award fee criteria

Step 2: Self-assessment (30-45 days before evaluation)

You submit a self-assessment to the government:

• Describe performance against each criterion
• Provide evidence of achievements
• Address any issues or challenges
• Propose rating and fee percentage

The self-assessment is critical: This is your opportunity to tell your story. Don't just list activities — demonstrate value and impact.

Step 3: Customer input collection

Government collects feedback from:

• Contracting Officer's Representative (COR)
• Program manager
• Technical leads
• End users

This is why customer relationships matter. Satisfied customers translate to higher ratings.

Step 4: Award Fee Board evaluation

Board reviews:

• Your self-assessment
• Customer feedback
• Performance data (deliverables, schedules, costs)
• Prior period performance

Board discusses, debates, and votes on rating and fee percentage.

Step 5: Fee Determining Official decision

FDO reviews board recommendation and makes final determination. FDO can:

• Accept board recommendation
• Adjust rating up or down
• Provide additional rationale

Step 6: Notification and feedback

You receive:

• Written determination (rating and fee amount)
• Narrative feedback on strengths and weaknesses
• Opportunity for feedback meeting with FDO/board

Step 7: Payment

CO modifies contract to add earned fee to base fee, and you invoice the amount.

Timeline:

From end of performance period to fee determination: typically 60-90 days. Fee payment lags performance significantly.

Understanding the fee pool:

The award fee pool is divided across evaluation periods. Example for a 2-year contract with $1M award fee pool:

• Year 1, Q1: $125,000 available
• Year 1, Q2: $125,000 available
• Year 1, Q3: $125,000 available
• Year 1, Q4: $125,000 available
• (Repeat for Year 2)

Earning vs. available fee:

If you earn "Satisfactory" (50%) in Q1:

• Earned: $62,500
• Unearned: $62,500

What happens to unearned fee depends on rollover provisions:

With rollover:

The $62,500 unearned fee is added to future periods' available fee. If you earn "Excellent" (95%) in Q2:

• Q2 available: $125,000 (base) + $62,500 (rollover) = $187,500
• Earned: $178,125 (95% of $187,500)

You can "make up" poor performance in later periods.

Without rollover:

The $62,500 unearned fee is lost forever. Even "Excellent" in Q2 only earns from Q2's base pool ($125,000). One bad period permanently caps your total fee.

Rollover strategy implications:

With rollover:

• Early stumbles can be recovered
• Finish strong to earn maximum fee
• Long-term customer satisfaction matters most

Without rollover:

• Every period is critical — can't afford bad ratings
• Consistency is more important than peak performance
• Focus on meeting expectations every period, not exceeding sporadically

Partial rollover (common):

Some contracts allow partial rollover:

• "Up to 50% of unearned fee rolls over to next period"
• "Rollover capped at $X per period"
• "Rollover allowed only if rating is 'Good' or better"

Read your award fee plan carefully to understand your specific terms.

1. Know your evaluation criteria cold

• Read the Award Fee Plan thoroughly
• Understand weighting of criteria (if weighted)
• Align performance objectives to criteria
• Brief your team on what matters for fee determination

2. Document everything

• Keep contemporaneous records of achievements
• Capture customer praise (emails, meeting notes)
• Photograph/video significant accomplishments
• Quantify impact (time saved, costs avoided, quality improvements)

When self-assessment time comes, you'll have evidence ready. Memories fade — documentation endures.

3. Communicate proactively

• Regular status reports highlighting achievements
• Monthly meetings with COR and program manager
• Immediate notification of problems with mitigation plans
• Quarterly "award fee performance updates" (informal preview of self-assessment)

Don't wait for the evaluation to tell your story — tell it continuously.

4. Exceed expectations strategically

• Identify opportunities for innovation and improvement
• Propose value-added efforts aligned with criteria
• Solve customer problems before they become issues
• Demonstrate "above and beyond" efforts in visible ways

Award fee rewards excellence, not adequacy. Find ways to stand out.

5. Manage customer relationships

• Award fee is subjective — perception matters
• Build rapport with evaluators (FDO, board members, COR)
• Understand customer priorities and align performance
• Be responsive, professional, and pleasant to work with

All else equal, evaluators reward contractors they like and trust.

6. Write a compelling self-assessment

• Executive summary — Start with a strong overview of achievements
• Address each criterion — Provide narrative and evidence for each
• Use data — Quantify accomplishments (% improvement, dollars saved, defects reduced)
• Tell stories — Case studies of specific successes resonate more than generalities
• Address weaknesses honestly — If there were issues, acknowledge and explain mitigation
• Propose specific rating — Don't be shy; make the case for "Excellent" if warranted

7. Learn from feedback

• Take feedback meetings seriously
• Ask clarifying questions about how to improve
• Implement suggestions in next period
• Show continuous improvement over contract life

8. Front-load effort if no rollover

• If unearned fee doesn't roll over, early periods are critical
• Invest heavily in early performance to lock in fee
• Don't assume you can "make it up later" — you can't

1. Subjectivity and perceived unfairness

Issue: Award fee determinations can feel arbitrary. Different evaluators interpret criteria differently. Personal relationships or politics may influence ratings.

Mitigation:

• Focus on objective evidence even in subjective system
• Build relationships broadly (not just with one evaluator)
• Document everything to support your case
• Accept that some subjectivity is inherent — you can't control everything

2. Evaluator turnover

Issue: Fee Determining Official or board members change during contract. New evaluators lack institutional knowledge of your performance.

Mitigation:

• Maintain written performance history
• Brief new evaluators on your track record
• Don't assume new evaluators will give you benefit of the doubt — re-prove yourself

3. Changing priorities

Issue: Government priorities shift during contract, but award fee criteria remain fixed. What was important in Year 1 may not matter in Year 3.

Mitigation:

• Request award fee plan amendments to reflect new priorities
• In self-assessment, address both original criteria and current priorities
• Stay agile and responsive to customer needs even if criteria don't change

4. Delayed evaluations

Issue: Fee determinations take longer than scheduled. You wait months (sometimes 6+ months) for fee determination and payment.

Mitigation:

• Budget cash flow assuming delayed fee payments
• Politely follow up on evaluation status
• Don't let delayed evaluation affect current period performance

5. Grade inflation / deflation

Grade inflation: Some agencies give "Excellent" ratings routinely, making criteria meaningless.

Grade deflation: Other agencies rarely award top ratings, believing "there's always room for improvement."

Mitigation:

• Research agency's history with award fee (ask during proposal phase)
• Adjust expectations based on agency culture
• If all contractors get "Excellent," the real competition is elsewhere (recompete)

6. No meaningful feedback

Issue: Some agencies provide perfunctory feedback: "Good performance, keep it up." Not actionable.

Mitigation:

• In feedback meetings, ask specific questions
• Request examples of what "Excellent" looks like
• Seek informal feedback from COR throughout performance period

7. Disputes over ratings

Issue: You believe your rating was unfairly low.

Reality: Award fee determinations are usually final and not subject to dispute. FAR 16.405(c): "Award-fee determinations are unilateral and are not subject to the Disputes clause."

You generally can't appeal a fee determination. This is why prevention (strong performance, documentation, relationships) is critical.

How to price award fee in proposals:

1. Understand the fee structure:

RFP will specify:

• Base fee percentage (or amount)
• Award fee pool percentage (or amount)
• Total fee ceiling

Example: "Base fee not to exceed 3%; award fee pool not to exceed 10%; total fee ceiling 13%"

2. Propose competitive fee:

You can propose fee up to the ceiling, but consider:

• Government will evaluate your proposed fee
• Lower fee may improve price score
• However, fee is your profit — don't underprice

3. Assume average performance for pricing:

When calculating price, assume you'll earn some reasonable percentage of award fee (e.g., 70-80%), not full fee. Pricing on assumption of full fee may make you noncompetitive.

4. Consider rollover in risk assessment:

• With rollover: Lower risk — bad periods recoverable
• Without rollover: Higher risk — build contingency

5. Evaluate award fee vs. incentive fee vs. fixed fee:

If RFP allows choice, consider:

• Award fee: Higher profit potential if you're confident in performance; subjective risk
• Incentive fee: More predictable; rewards cost control
• Fixed fee: Guaranteed; no performance risk but lower profit

During price-to-win analysis:

Understand that competitors face same uncertainty. Award fee contracts tend to have similar fee structures across offerors — differentiation is in cost, not fee.