One of the cornerstones of economics is that incentives matter.
Federal contracting tries to account for this by including incentive bonuses in their contracts to encourage timeliness and performance. Given that the federal government spends $500 billion annually on federal contracts, it makes perfect sense to incentivize performance through monetary awards.
Unfortunately, what makes sense in theory has been warped in practice. Instead of providing targeted, goal-oriented awards for high performing contractors, many agencies are providing bonuses no matter what.
When a bonus is no longer linked to performance its no longer an incentive. It’s a participation trophy. These trophies hurt the taxpayer twice – once for the wasted tax dollars and again for receiving a sub-quality or behind schedule product.
Let’s take a look at some of these participation trophies.
Some agencies award bonuses despite the contractor clearly not meeting their goals.
For instance, NASA has contracted with Boeing on the Space Launch System. At $8.9 billion, Boeing is expected to spend double the amount of the initial budget while delivering the project two and half years behind schedule. The Office of Inspector General said that these problems “can be traced largely to management, technical, and infrastructure issues driven by Boeing’s poor performance.” Yet, in the six evaluations that NASA has conducted since 2012, they have found Boeing’s performance to be either “excellent” or “very good.” As a result, NASA has paid Boeing $323 million in bonuses, 90% of the available pot.
The Department of Energy’s $30 billion budget is predominantly comprised of massive contracts that include performance incentives. A recent report found that the department awarded 94% of available incentive fees totaling $3.4 billion over the last decade. The Department of Energy even provided 85% of the available bonus to a contractor that had to settle charges with the Department of Justice for illegal lobbying charges.
In some cases, the agencies don’t even bother tracking the metrics that the bonuses are based on.
A particularly egregious example of this is on DoD’s F-35 contract with Lockheed Martin. With a total budget that has surpassed $1 trillion and a development time of two decades, the F-35 is years behind schedule and billions over budget. The DoD set up incentive bonuses based on the number of hours the F-35s are available to fly. But they put Lockheed Martin in charge of collecting the data and did not verify if the information is correct. A recent report found that Lockheed was inflating their data and received $10.6 million in unwarranted bonuses.
The Navy also fell into this habit. In six contracts examined by the Government Accountability Office (GAO), the Navy provided $700 million in “extra incentives for things that shipbuilders should have been doing anyway.” The same report found that shipbuilder received their bonuses even if the ships were delivered late and over budget. A Navy contracting official even admitted that they have not measured how incentives affect their shipbuilding portfolio.
The Navy is not the only agency that does not evaluate how their bonuses work.
The National Security Agency (NSA) has doubled the amount of performance-linked bonuses it has paid this past decade. The $636 million bonuses were awarded despite the fact that they do “not evaluate the effectiveness of award fees…and cannot determine if award fee contracts have led to improved contractor performance or achieved desired program outcomes.”
Similarly, the National Oceanic and Atmospheric Administration (NOAA) provided $43.8 million in bonuses to its contractors that were found to provide “little incentive for contractors to excel in executing their contracts.”
Fortunately, there is someone in Washington that wants to put the performance back into performance bonuses.
This week, Senator Ernst (R-IA) introduced the Bogus Bonus Ban Act. The bill would require agencies to ensure that any new contracts actually link award fees to defined outcomes. The bill would also establishing government-wide standards for the structure and approval process for these bonuses incentives to ensure there is the oversight in place to prohibit the types of lax and unwarranted bonuses that were described above.
The bill would also let taxpayers see how their money is being used by requiring all bonuses be tagged and posted on USASpending.gov – the website used to track federal spending. Armed with this information, citizens and watchdogs alike can make sure that our tax dollars are being used for a purpose, not given for simply showing up.
Most importantly, the bill would prohibit bonuses from being awarded to contractors who deliver products or services that are over budget, behind schedule, or unsatisfactory.
With a nearly $1 trillion deficit and hundreds of billions in wasted money every year, we can no longer afford to hand out participation trophies. We need to make sure that incentives actually incentivize good work. Eliminating bogus bonuses would be a great start.
