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CHAPTER 5PERFORMANCE MEASUREMENT AND ASSESSMENT

WHAT ARE THE BASICPRINCIPLES AND OBJECTIVESOF PERFORMANCEMEASUREMENT ANDASSESSMENT?

WHY IS PERFORMANCEMEASUREMENT ANDASSESSMENT IMPORTANT?

This chapter informs contract administrationteam members about the functions, roles,and responsibilities and differing uses forperformance assessment based on results. The purpose of Contract Administration is topromote outstanding contractor performancein an effective and efficient manner. DOE G 120.1-5 states that performancemeasurement provides measurable results sothe Department can demonstrate progresstowards goals and objectives. Progress ismeasured by providing specificmeasurement results that aggregate toDepartment of Energy (DOE)-widemeasures. Performance measurement alsodetermines the effectiveness of each contracttowards meeting the Department’smission, vision, and goals.

The Department gathers and maintainsinformation on contractors’ performance androutinely uses this information, as well aspast performance information available fromother sources. Use current information toassess contractor performance when making:

• Extend or compete decisions,

• Evaluations of offerors,

• Exercise of option decisions, and

• Fee determinations, etc.

1. Performance measurement andassessment improves the managementand delivery of products and services,improves communications, helps justifyprograms and their costs, anddemonstrates accountability of Federalstewardship of taxpayer resources.

2. Business systems performance andoversight adhere to the Department’smission.

3. Partnering of the ContractingOfficer’s Representative (COR) andContracting Officer (CO) enhances theproper management of performanceobjectives and measures.

4. Assessments determine whetherperformance measures and incentiveshave been met.

5. Evaluation of current and pastperformance increases the likelihood ofsuccessful future contract performance.

6. Cost reductions achieve measurablecost savings without adversely impactingperformance.

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WHAT IS A GENERALDESCRIPTION OF THEPROCESSES UNDERPERFORMANCEMEASUREMENT ANDASSESSMENT? A. How is the Department’s StrategicManagement System tied to performancemeasurement?

The Government Performance and ResultsAct of 1993 changed the way thegovernment manages, measures, and fundsitself. It now focuses greater oversight andaccountability on achieving program goalsand other improvements -- instead of theprocesses, resources, and practices used. The Government Performance and ResultsAct is also the foundation for the FederalAcquisition Streamlining Act in linkingprogram needs and budgets to contracts and

contract performance. The GovernmentPerformance and Results Act requires theDepartment to submit, as part of the annualbudgeting process, its five year strategicplan, indicating the performance goals andprogram activities to be achieved, how theywill be accomplished, and how it will bemonitored and measured. It also requires thedepartment to later report back on a previousyear’s performance, discussing progressmade against the plans and measures earlierselected.

The Department implemented theGovernment Performance and Results Act in1996 with the Department’s StrategicManagement System. It provides theframework by which the GovernmentPerformance and Results Act and otherfinancial and management legislatedrequirements are satisfied. See Figure 5-1.

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The goal of DOE’s Strategic ManagementSystem is to:

• Ensure operational planning drivesresource allocation,

• Provide for regular evaluation ofresults, and

• Provide feedback.

Performance measures are the mainelements in all recent management andprocurement reform initiatives. Theyestablish the link between Departmentplanning, budgeting, contracting, andevaluating.

In the new federal results/performancemeasures construct, performancerequirements are to flow:

• From more general DOE Strategic Plangoals and objectives;

• Through all Departmentalorganizational levels;

• To more specific contract requirements,performance measures and incentives.

DOE’s Strategic Plan determines the 5-yeardirection the Department will take towardachieving stated goals. The strategic goalsare long-term, broad, and outcome-oriented. Program offices and Field/OperationsOffices flow down, as applicable, many ofthe Department’s goals into their ownstrategic plans.

Annual Performance Plans state thedelivered results expected during the fiscal

year. In planning, performance is defined interms of measurable results. The measurescontained within annual plans will clearlylink to the strategic goals, objectives, andstrategies contained in the Strategic Plan.

Budget Formulation allocates fiscal andpersonnel resources against priorities. It is critical that the performance commitmentsmade in the Department’s planning andbudget formulation processes be clearlycommunicated, understood, and agreed to byProgram Offices, Field Offices andContractors. Information on the BudgetFormulation process may be obtained underorder DOE O 130.1, “Budget Formulation.”

Budget Execution uses the Department’sappropriated funds to deliver goods andservices to customers. The work ispredominantly accomplished throughperformance-based contracts administeredby DOE Field organizations. Information onthe Budget Execution process may beobtained under order DOE O 135.1, “BudgetExecution - Funds Distribution andControl.”

Program Evaluation includes performancemeasurement and tracking, analysis, andreporting of what is delivered. Measuringand tracking provide the data for analysesnecessary for management to make informeddecisions for the current fiscal year as wellas future plans and budgets. Reporting is thedocumentation and sharing of performancemeasurement and evaluation informationwith customers and stakeholders to supportdecision-making and for improvement. Performance reviews at multipleorganizational levels provide feedback toensure progress and accountability.

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Ultimately, performance measurementprovides a path of accountability betweenthe Department’s long-term vision and theday-to-day activities of individual Federaland contractor employees.

B. What are Best Practices for aPerformance Measurement System?

Many approaches to performancemeasurement are being tried in both theprivate and public sectors. One of theDepartment’s laboratories has suggested thatWorld Class Performance MeasurementSystem best practices might include thefollowing:

• Balanced approach to performancemeasurement and the infrastructure tosupport its implementation;

• Extensive use of comparative data toevaluate performance, set performancetargets, and keep measures current withnational standards;

• A metrics weighting system thatprovides the organization with a morecomprehensive analysis of performance;

• Robust processes in place to ensuremeasures are kept current withchanging business needs; and

• Ongoing review and refinement ofmetrics used to indicate achievement ofobjectives with leading indicatorsemphasized.

Also, it is important to remember, whencreating performance measures arising out

of various requirements, directives, andpolicies, that a balanced approach needs tobe maintained. It is very possible that (indeveloping performance measures fromcontract performance requirements,directives, or policies) performancemeasures could be developed which conflictwith other directives, policies, etc. Careshould be taken to step back and view therequirements as a whole in order to ensurethat resulting performance measures arebalanced and work in concert with eachother.

In June 1997, the National PerformanceReview published the “Serving theAmerican Public: Best Practices inPerformance Measurement.” The reportDocuments the team’s findings and is usefulfor leaders and managers in identifying andapplying best-in-class performancemeasurement and performance managementpractices. The study findings include:

• Leadership is critical in designing anddeploying effective performancemeasurement and management systems;

• A conceptual framework is needed forthe performance measurement andmanagement system;

• Effective internal and externalcommunications are the keys tosuccessful performance measurement;

• Accountability for results must beclearly assigned and well-understood;

• Performance measurement systemsmust provide intelligence for decision-makers (not just compile data);

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• Compensation, rewards, andrecognition should be linked toperformance measurements;

• Performance measurement systemsshould be positive, not punitive; and

• Results and progress toward programcommitments should be openly sharedwith employees, customers, andstakeholders.

Where can I read more of the NationalPerformance Review report, “Serving theAmerican Public: Best Practices inPerformance Measurement?”

This report may be reached at the followingweb page which is also listed in AppendixB:

http://www.npr.gov/library/papers/benchmrk/nprbook.html

Other National Performance Review (NPR)reports may be accessed at the NPR’s webpage listed in Appendix B of this ReferenceBook.

C. How are performance measures andtheir associated incentives developed?

1. Planning starts with the DOE StrategicPlan and flows through several plans,including Program Strategic Plans and Annual Site Plans. Planning occurs fromDOE Headquarters down through theField/Operations Offices. Planning takesplace across all programs and functionalareas. Contractors are involved in planningfrom the ground up at the sites. The

Field/Operations Offices meld theDepartment’s and contractor’s planning intocontractual language and into the processesneeded to administer those contracts.

Communication, coordination andpartnering across programs and functionaloffices is essential in order to achieveobjectives. Planning not only includesprogrammatic objectives(e.g., WasteManagement, Research, etc.) but alsosocioeconomic objectives (CommunityRelations, Equal Employment Opportunity,Labor Relations, etc.) and administrativeobjectives (Procurement System, PropertyControl, Accounting System, etc.).

It is important to have all interested partiesrepresented in the planning process. Partiesshould represent the breadth of knowledgefrom programmatic to administrative and thedepth of knowledge from Headquarters tosite contractor.

Establishing the specific performancemeasures and metrics is within the purviewof the government. Nevertheless, thecontractor should also be involved to ensurerealistic objectives. DOE’s goal is todevelop performance measures for each sitecontractor which are realistic, specific,succinct, objective, results-oriented,measurable, and verifiable. Planningincludes:

• Development of specific requirementsassociated with the appropriate baselineand budgeted funds;

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• Establishment of performance measuresand metrics for those requirements, asappropriate;

• Identification of those performancemeasures to be incentivized; and

• Assignment of weights to thoseperformance measures indicating theirrelative importance to one another.

The desired performance level (theperformance objective) determines theweighting of performance measures that willresult in:

• Measurable progress toward the DOEend-goals for the site as reflected in thebaseline;

• Resolution of corrective actions; and

• Accomplishment of all otherrequirements for site operation.

The development of site specificrequirements and the identification of theperformance measures that should beincentivized should occur prior to thecommencement of the period in which theyare performed (normally a Fiscal Year) andshould be done well in advance, if possible. Further guidance is addressed in AcquisitionLetter (AL) 98-08 “Performance-BasedContracting Guide”, Chapter 5.

2. Performance measures may be objective,subjective, or some combination thereof. Inmoving toward performance based/resultsoriented contracts, the goal is to generallymaximize objectivity to the extent it makessense. Objective performance measures tend

to be specific in nature and lend themselvesto measurement and validation againstquantifiable measures. Subjectiveperformance measures tend to be those which cannot have quantifiable measuresreadily developed, or which are subject tochange beyond the control of the contractor. Care must be taken not to force a subjectiveincentive into an objective form.

3. When incentives are used, they aregenerally placed on the “critical few”objectives and measures related to a keymission. However, during DOE’s earlyexperience with developing andimplementing performance objectives,measures, and incentives, DOE found thatcontractors tended to strongly focus onincentivized objectives and measures to thedetriment of other less critical, butnecessary, functions. As a result, it isnecessary to structure measures andincentives in such a way that non-critical(but necessary) work receives an appropriateamount of attention.

One approach used at Rocky Flats is toutilize a “gateway” approach. Under the“gateway” approach, when a milestone ismissed (and fee is forfeit), fee may not beearned under subsequent related milestonesuntil the missed milestone is completed. This provides a strong incentive to ensurethat work under missed incentives isaccomplished before fee can be earned underand subsequent related incentives. Moreinformation on the “gateway” approach isavailable in the “Performance-BasedContracting Guide” attached to AcquisitionLetter 98-08.

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The use of Department of EnergyAcquisition Regulation 970.5204-86,“Conditional Payment of Fee, Profit, orIncentives,” affords the Departmentflexibility to emphasize critical requirements(through the direct association to fee) whilenot ignoring the significant number of otherrequirements which still must be performed. This also allows the contractor to reasonablyallocate its resources. This clause isdiscussed further in the “Environment,Safety and Health,” Chapter 2.

4. Several considerations when developingincentives include:

• The inclusion of cost incentives if otherincentives (e.g., performance, schedule,etc.) are included.

• The adequacy of the contractor’s systems and the ability of those systemsto segregate and track costs andtechnical performance.

• The degree to which the performancemeasures and/or metrics can be defined.

• The definitiveness of the baseline.

• The importance of the task to theachievement of the program.

• The degree of additional benefitobtained by the government if thebaseline performance level is exceeded.

• The degree to which additionalincreases in the level of performance ofa performance measure become harderto obtain and thus more costly.

• The degree to which the attainment of alevel of performance of a performancemeasure is within the contractor’sability.

• The degree to which the DOE obtainsbenefit from the performance of aperformance measure in an incrementalversus a continuous fashion.

• The degree to which continuedincentives are important.

• The degree to which offering incentivesfor some performance measures may beto the detriment of others.

Further discussion of these considerations isin AL 98-08.

5. Objective cost incentives can lead tomore efficient performance, but only to theextent that several conditions are met:

• The work performed must be definedand estimated.

• A cost baseline must be established

• The contractor must have an accountingsystem that accurately allocates andtracks costs.

• A method of sharing cost savings oroverruns must be agreed to.

Subjective cost incentives should beavoided. Such goals as:“...perform in a costefficient manner...” or“...reduce costs 10%below the previous baseline...” withoutfurther definition are hard to verifyeffectively.

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6. The Department of Energy Performance-Based Measurement Process /Performance-Based Incentive Process is structurallyrelated as shown in Figure 5-2. It wasdeveloped for the Department’s OversightPilot in 1995. A more detailed descriptionof each step is listed in DOE G 120.1-Guidelines for Performance Measurement.

D. What are the roles of the ContractingOfficer’s Representative (COR) andContracting Officer (CO) as partners onthe contract administration team ?

Contract performance assessments areperformed in essentially all contractfunctional and compliance areas. They areused to determine:

• What was contracted for has beendelivered,

• How much the contractor is reimbursed,and

• The amount of total available fee paid.

Contractors prepare and submitdocumentation to indicate that theperformance items are complete.

CORs perform valuable roles in contractadministration. Verifying performance isjust one such role. Surprisingly, neither theFederal Acquisition Regulation (FAR) northe Department of Energy AcquisitionRegulation (DEAR) cover the appointmentof CORs or specifics about theirresponsibilities or authority. The definitionof a contracting officer at FAR 2.101

provides among other things, that the termincludes:

“authorized representatives of thecontracting officer acting within thelimits of their authority as delegated bythe contracting officer.”

Although the FAR does not state for whatdisciplines CORs would be needed, it doesstate at FAR 1.602-2(c) that contractingofficers shall request and consider the adviceof

“specialists in audit, law, engineering,transportation, and other fields, asappropriate.”

The functional areas for which CORs areneeded depend on the requirements of thecontract. The only Headquarters (HQs) levelguidance on CORs is contained in DOE O541.1. This order states the minimumrequirements for an individual to become aCOR. Individuals “must have completed aminimum of 24 hours of formal education inbasic Government procurement or contractadministration or have at least one year’sexperience as a COR at a Federal agency.” It further states that COR appointments shalldesignate in writing the name, position ofthe individual, and instructions listingactions the COR may and may not take for the CO.

Operations/Field Office guidance usuallyhas the CO:

• Designate CORs,

• List their duties and limitations, and

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• Provide the contractor a copy of thedesignation letter.

The COR functions as the “eyes and ears” ofthe CO, monitors technical performance andreports any potential or actual problems tothe CO. They review contractor submittedreports for completeness, verify compliancewith performance requirements in thecontract, and validate completion. The CORidentifies performance in writing andprovides written reports to the CO, includingany performance deficiencies. This COR

and CO communication and partnership isessential to achieving contract objectives.

The Office of Federal Procurement Policy(OFPP) “Guide to Best Practices forContract Administration” (October 1994),(see Appendix B) identifies a number ofFederal Government weaknesses in contractadministration relating to CORs:

• Lack of Training on COR duties;

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• Lack of well defined relationshipbetween CO and COR;

• Undefined limitation of COR authority;

• Undefined COR roles andresponsibilities; and

• Inadequate surveillance and monitoringof contracts by CORs.

That OFPP Guide also recommends anumber of best practices addressing theweaknesses. It is suggested that it may beprudent to consider how these best practicesmight benefit individual contractingorganizations. Below is a condensation ofthose best practices:

• Establish COR trainingrequirements. While DOE O 541.1does address minimum qualificationsincluding training, manyOperations/Field Offices additionallyrequire CORs to have a specific CORtraining course as well as individualtraining given by the CO. It is prudentto ensure that CORs involved inperformance measurement be wellversed in the mechanics of theassociated performance-basedincentives. It is noted that a number ofprivate firms and Government agenciesoffer COR training. Additionally, a freeon-line COR training course is availablefrom the Federal AcquisitionInstitute.(see Appendix B).

• Develop a COR and CO partnership. The CO and COR(s) should, to themaximum extent possible, endeavor to

keep each other informed ofdevelopments which might affect theother’s responsibilities. Where multipleCORs exist, emphasize the importanceof a contract administration plan, whichsets forth a strategy for the interactionof CORs and the other contractadministration team members.

• Define COR roles and

responsibilities. Letters of designationshould define roles and responsibilities. “Technical Direction” clauses, definingthe responsibilities and limitations ofCOR authority should be inserted intothe contract to alert all parties.

• Better define the COR’s limits ofauthority. It is vitally important thatall parties, including the contractor andCOR, be fully aware of the limits of theCOR’s authority. This can limit therisk of inadvertent constructive changesto the contract resulting fromunauthorized directions by the COR.

• Develop a contract administrationplan. The plan can better define theCOR’s roles and responsibilities,provide a strategy for coordinationamong the contract administration teamincluding multiple CORs, and providethe methodology for the measurementof performance including cost andquality.

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The Defense Acquisition UniversityIntermediate Contracting CON 202 coursematerial, suggests a contract administrationplan include the following key elements:

• A list of terms and conditions related tocontract administration;

• Contract milestones;

• Contractor reporting requirements;

• A list of deliverables;

• The quality assurance level;

• Inspection and acceptance criteria andprocedures;

• Internal control measures;

• Steps to take in case of conflicts ofinterest arise;

• Names, roles authorities, andresponsibilities for contractadministration team members; and

• Milestones for reports from teammembers.

Whether or not a formal written contractadministration plan is executed suchplanning is absolutely critical to successfuladministration of the contract.

E. What tools are available to determinewhether all contract functional andcompliance areas of performanceobjectives, measures, and incentives havebeen met?

Performance measurement is mandated bythe Government Performance and ResultsAct of 1993 and is central to otherlegislation and initiatives. Other benefits ofutilizing performance information include:

• Drive continuous improvement;

• Improves communication;

• Factual data for management decisionmaking;

• View of historical level of performance,including trends;

• Basis for comparison to others; and

• Help demonstrate stewardship totaxpayers.

In 1996 DOE’s G 120.1-5 “Guidelines forPerformance Measurement” was designed toassist DOE’s Federal and contractoremployees in developing organizationalperformance measurement systems. Thesesystems tie into Departmental initiatives. The vision is that all organizations withinthe Department have performancemeasurement systems to support their ownplanning and evaluation activities. FieldElements have systems in place to measureperformance to include a structured programfor performing assessments with qualifiedassessors.

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Acquisition Letter (AL) 98-08,“Performance-Based Contracting Guide”was issued in 1998, to assist all Departmentpersonnel involved in developingperformance measures and incentivesrelating to performance-based managementcontracts (PBMCs). The assessmentprogram includes field verification ofperformance objectives, measures, andperformance-based incentives, peer reviewsand program reviews, as appropriate. Thedegree to which performance-basedcontracting is implemented is dependentupon DOE and the contractor havingadequate resources and infrastructure tosupport it. The infrastructure includespersonnel and management, accounting, andestimating systems. The fee paid to contractors should reflect thecontractor’s performance during theevaluation period. The performanceassessment conducted to make feedeterminations should closely parallel thepast performance evaluation for the sameperiod. The basic principles underlying theDepartment’s fee policy at DEAR970.15404-4-1 are:

C Amount of available fee should reflectthe financial risk assumed;

C When work elements cannot be fixedprice, incentive fees (including awardfees) should be tied to objectivemeasures to the maximum extentappropriate; and,

C Award fees should be tied toobjective/subjective measures and to aspecific portion of the fee pool, to themaximum extent appropriate.

All PBMCs awarded on a cost-plus-award-fee basis must set forth in the contract, or thePerformance Evaluation and MeasurementPlan, a site specific method of rating thecontractor’s performance of the contractrequirements and a method of feedetermination, if applicable, tied to themethod of rating. The PerformanceEvaluation and Measurement Plan may,consistent with the contract statement ofwork, be revised during the period ofperformance as stated at DEAR 970.5204-54(d).

In order for the Contractor to receive allotherwise earned fee, fixed fee, profit, orshare of cost savings under the contract in anevaluation period, DEAR 970.5204-86requires the Contractor to meet theminimum requirements for Environment,Safety & Health (ES&H) Program,catastrophic event, specified level ofperformance, and cost performance. Formore information on this topic, please referto Chapter 2.

DEAR 970.15404-4-2, “SpecialConsiderations Laboratory Management andOperations” lists considerations for the COto consider in determining whether any feeis appropriate and includes:

C The nature and extent of financial orother liability or risk assumed or to beassumed under the contract;

C Proportion of retained earnings utilizedto fund the performance of work relatedto the DOE contracted effort;

C Facilities capital or capital equipment

acquisition plans;

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• Other funding needs includingcontingency funding, working capitalfunding, and provision for fundingunreimbursed costs deemed ordinaryand necessary;

C The utility of fee as a performance

incentive; and

C The need for fee to attract qualifiedcontractors, organizations, andinstitutions.

In the event fee is considered appropriate,the amount of fee may be established as atotal available fee with a base fee portionand a performance fee portion. Base fee, ifany, shall be an amount in recognition of therisk of financial liability assumed by thecontractor and shall not exceed the cost riskassociated with those liabilities or theamount calculated in accordance with the feepolicy, whichever is less. The total availablefee, except base fee, shall normally beassociated with performance at or above thetarget level of performance as defined by thecontract. (See DEAR 970.15404-4-2)

F. How is performance assessment usedin making future award decisionsincluding options and extend/competedecisions?

Field Elements establish local procedures forthe collection and maintenance ofinformation on contractor performance. DOE G 120.1-5, “Guidelines forPerformance Measurement,” providesguidance and useful information onperformance measurement. Localprocedures identify responsibilities of

technical, program, and contracting officesfor collecting, maintaining, disseminating,and using past performance data. Programoffices assign a technical official for thetechnical and past performance requirementsrelated to the source selection process. They provide input with the CO and, whereappropriate, the end user with respect to theevaluation of contractor past performance. Contracting activities collect, review, andutilize information on contractorperformance and share this information withthe Office of Management Systems (MA-52)and other Federal contracting activities. Thepast performance data is used in makingfuture award, exercise of option, andextend/compete decisions.

The Office of Federal Procurement Policy iscurrently updating its publication, “A Guideto Best Practices for Past PerformanceInformation.” Among the areas that OFPPwill be emphasizing in the update are:

• Two way communication is vital to aproductive relationship;

• A past performance information systemshould record contractor performance inquality, cost, and schedule performance,and in business relations;

• When recording past performanceinformation, try to keep the recordsimple and focus on information thatwill answer the question: “Would I dobusiness with this contractor again?”

• Agencies are encouraged to make pastperformance information an essentialconsideration in the award of negotiatedacquisitions.

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• The goal of effectively using currentand past performance information isobtaining high quality products orservices at the best value for thetaxpayer.

Once OFPP has updated this best practicesguide it will be available at the followingweb site which is also listed in Appendix B:

http://www.ec3.org/InfoCenter/09_LinkSites/FederalURLs/Fed_OFPP.htm

Effective work performance under theDepartment’s PBMCs is facilitated by theuse of a relatively long contract term of upto ten years. This term usually consists of abasic term not to exceed five years and anoption to extend for up to five years. Considerations to be addressed in the CO’sextend or compete decision involve ananalysis of whether it is in the Government’sbest interest based on:

C Information collected through theperformance assessment process;

C The extent PBMC provisions arepresent, or can be negotiated into thecontract; and

C The impact of a change in contractor on

the Department’s discharge of itsprograms.

Because of the significance of PBMCs to thefulfillment of the Department’s mission,there is a need to balance the benefits ofcompetition with the benefits of relativelylong-term contract relationships. TheDepartment’s policies in DEAR parts 917and 970 accommodate both objectives by

establishing competition as the norm andprovide for a contract period of up to tenyears. Although competition is the norm,under certain circumstances there may be aneed to continue the contract with theincumbent contractor beyond the originalcontract period of performance. As part ofthe extension approval, the requiredjustification for other than full and opencompetition, pursuant to the statutoryauthorities identified in FAR 6.302, must besupported by the pertinent facts andcircumstances and subjected to a rigorous,rational examination. This ensures that theneed to maintain a relationship with anincumbent contractor beyond the originalcontract term meets the statutoryrequirements and is in the best interests ofthe Department.

G. How do you implement CostReduction?

The Cost Reduction clause at DEAR970.5204-87 is used if cost savingsprograms are contemplated. The goal of acost reduction incentive is to achievemeasurable and verifiable cost savings froma defined baseline without adverselyimpacting the performance of the work. Itprovides for incentives for quantifiable costreductions associated with contractorproposed changes to a design, process, ormethod that has established cost, technical,and schedule baselines. Cost reductions arealso defined, and subject to a formal controlprocedure. Proposed changes must be:

C Initiated by the contractor, C Innovative,

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C Applied to a specific project orprogram, and

C Not otherwise included in an incentiveunder the contract.

Such cost reduction incentives do notconstitute fee and are not subject to statutoryfee limitations.

Another way to effect cost reduction is tonegotiate specific cost-plus-incentive-fee,fixed-price incentive, or firm-fixed-priceincentive arrangements. Field Elements takethe lead in developing and implementing themost appropriate pricing arrangement or costreduction incentive for the requirements. Pricing arrangements which provideincentives for performance and cost controlare preferred over those that do not. FieldElements ensure that the necessary resourcesand infrastructure exist within thecontractor’s and government’s organizationsto prepare, evaluate, and administer thepricing arrangement or cost reductionincentive prior to its implementation.

It is also important to establish, validate, andcontrol cost baselines to ensure awarenessand monitoring of cost performance ingeneral. Baseline management is required totrack performance against planning, toupdate planning, and validate performance. Another method is to use baselines for the identification of critical path work foracceleration if funds become availablethrough cost reductions in other areas. Program and project managers monitor andevaluate cost, schedule and technical reportsof the contractor’s execution of contractfunds. They identify areas where efficiencyor cost effectiveness can be improved.

H. What is the Business ManagementOversight Process?

The passage of the GovernmentPerformance and Results Act, the NationalPerformance Review, and the Department'sinitiative in contract reform led to thecreation of a performance based oversightprocess for business management activitiesof the Department and its contractors. TheBusiness Management Oversight Process isa process for using performance-based management as a key component ofoversight among Headquarters, Fieldorganizations and contractor in all businessactivities.

The Business Management OversightProcess was institutionalized at DOE inDecember 1997 with DOE O 224.1, andincluded the following objectives:

• To improve contractor performance inbusiness management functions througha performance-based process;

• To institutionalize a businessmanagement system that encouragesand rewards excellence, continuousimprovement, and timelycommunication;

• To effect a level of communication,partnership, and trust that minimizes theDepartment's need for conductingon-site reviews of contractor businessmanagement functions; and

• To establish performance objectives,measures, and expectations that:

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Drive cost-effective performanceimprovement, focus on performanceresults, and maintain appropriateinternal controls and compliance;

When possible, are objectivelymeasurable, thereby allowingmeaningful trend and rate of changeanalysis; and

Encourage bench-markinginitiatives as a means ofincorporating industry businessstandards that are meaningful,appropriate, and consistent withDOE requirements.

The process requires Field Elements toestablish pre-agreed performance objectives,measures and expectations in business areas. Operational awareness is conducted duringthe period and the contractor submits awritten self assessment at year end. Anannual review may be conducted. Successin meeting/exceeding performanceexpectations in the business areas will berewarded with less frequent reviews. ForCause reviews may result from poorperformance or trends indicating thepotential for improvement requiring DOEfollow-up to protect the Government’sinterest.

An objective of AL 98-10 is to promulgatethe Balanced Scorecard process which isused to satisfy the assessment requirementsof the Business Management OversightProgram for Federal and contractorprocurement. This acquisition letter alsoprovides a guide which explains the businesssystems assessment program applicable toprocurement/purchasing offices. The guide

was developed to assist all Department andcontractor personnel involved with assessingperformance of the Department'sprocurement and contractor purchasingsystems. It describes the implementationprocedures, evaluation standards, reportingprocess, and other administrative issues.

Where may I find additional informationon the Business Management OversightProcess?

Additional information on BMOP may beobtained at the following web site which isalso listed in Appendix B:

http://www.cfo.doe.gov/progliaison/bmop/index.htm

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On the following pages are the major roles and responsibilities of members of the contractadministration team. Key sections of documents have been summarized for ease of reference. Please bear in mind that the referenced documents themselves are controlling and should beconsulted for a complete discussion of the various roles, responsibilities and requirements. Additionally, other documents, not listed here, may contain other roles and responsibilities.

Note: Various responsibilities on the following pages are marked with an asterisk (*). Thissignifies that the responsibility is not specifically assigned to this individual by a clause,regulation, or procedure. It is suggested because:

(1) The responsibility is necessary to perform Government contract administrationresponsibilities; and is either commonly performed by this individual or reflects "goodbusiness practice."(2) The responsibility is stated in the reference as a DOE/Government responsibility; and iseither commonly performed by this individual or reflects "good business practice."

Local guidance may determine who specifically is obligated to perform the responsibility.

HEAD OF THE AGENCY

Authorize COs to enter into/renew management and operating contracts. [FAR 17.602; Acquisition Letter 96-09]

PROGRAM OFFICE

Lead in planning and selecting performance objectives, measures and incentives with FeeDetermining Official and CO. [Acquisition Letter 98-08]

Provide input to the evaluation of contractor past performance;Assign a cognizant technical official responsible for the technical and past performancerequirements related to the source selection process. [DOE Acquisition Guide, Chapter 42]

WHAT ARE MY MAJOR ROLES AND RESPONSIBILITIES IN THEAREA OF PERFORMANCE MEASUREMENT AND ASSESSMENT?

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Cognizant Assistant Secretary(s) and Procurement Executive (PE) approve CO’s decision toexercise contract options. [DEAR 970.1702-1]

Regarding safety management:* Provide input to and implement the provisions of the Strategic Plan including the Department’smission statement.* Prepare Secretarial Office strategic plans and mission statements. * Provide mission assignments and program guidance to field managers.[DOE M 411.1-1A, sections 9.1.1, 9.1.2 and 9.1.3]

PROCUREMENT EXECUTIVE

Determine applicability of fee policy to contracts other than management and operatingcontracts; Approve fee exceeding Schedules/Guidelines amounts; Use cost-plus-fixed-fee or base fee with reduced Classification Factors for other than Labs; Approve fixed fee or total available fee exceeding 75% of fee calculated, or establish fee for lifeof contract for Labs. [DEAR 970.15404-4, DEAR 970.15404-4-1, DEAR 970.15404-4-8, DEAR 970.15404-4-9]

Coordinate maximum available fee with HCA. [DEAR 970.15404-4-1]

May waive review/approval requirements by Office of Management Systems (MA-52) whenHead of Contracting Activity (HCA) demonstrates internal processes adequate to ensureperformance measures/fee structures are properly developed/administered. [Acquisition Letter 97-06]

Approve the CO’s decision to exercise contract options with the cognizant Assistant Secretary.[DEAR 970.1702-1]

Provide consultation, training, or facilitator services, including facilitation of bench-marking andprocess improvement based on balanced scorecard results, when requested by the HCA. [Acquisition Letter 98-10]

1The term Field Element Manager (FEM) is used in DOE M 411.1.1-1A. It refers to thehead of a field element. The FEM can be the head of a field or operations office, the head of anarea office, etc. In most cases, the FEM would be the Operations/Field Office Manager.

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OPERATIONS/FIELD OFFICE MANAGER

Ensure all important contract performance areas are specified in the contract or PerformanceEvaluation and Measurement Plan, even if not assigned specific weights or percentages ofavailable fee.[DEAR 970.15404-4-8]

Review contractor’s self-assessment, if submitted;Determine total available fee earned. [DEAR 970.5204-54]

* Operations and Field Offices ensure necessary resources and infrastructure exist within boththe contractor and government organization to prepare, evaluate and administer Cost ReductionIncentives prior to implementation. [DEAR 970.15404-4-3, Acquisition Letter 97-09]

May reduce in whole or in part earned fee, fixed fee, profit, or shared net savings for theevaluation period if the contractor fails to achieve stipulated performance levels. (See alsoChapter 2, “Environment, Safety and Health,” for further information.)Consider whether willful misconduct/negligence contributed to the catastrophic event. * DOE approve Safety Management System. [DEAR 970.5204-86]

* Contracting activities collect, review, and utilize information on contractor performance. [DOE DOE Acquisition Guide, Chapter 42]

FIELD ELEMENT MANAGER1

Review and provide input, regarding safety management, to program guidance developed by theProgram Secretarial Office and implement that guidance.[DOE M 411.1-1A, section 9.1.3]

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HEAD OF THE CONTRACTING ACTIVITY

Maintain a database of CORs identifying their authority and limitations. [DOE O 541.1]

Coordinate the maximum available fee with the PE prior to issuance of a competitive solicitationor initiation of negotiations for an extension of a contract. [DEAR 970.15404-4]

Establish an internal process for development and administration of performance objectives,award fees, and incentives to ensure they are well defined, rational, integrated, and mechanisms exist for validation of contractor performance against objectives. [Acquisition Letter 97-06, Acquisition Letter 97-08]

Ensure appropriate, timely integrated participation by key personnel including high levelmanagement in the identification of goals that should drive contract performance requirements. [Acquisition Letter 97-08, Acquisition Letter 98-08] * Submit a recommendation with supporting documentation to extend a management andoperating contract to the Head of the Agency through the cognizant Assistant Secretary and thePE no later than 18 months prior to the expiration of the contract term. [DEAR 970.1702-1]

Ensure that the Balanced Scorecard assessment program is implemented in their Federal andDEAR 970.7103 management contractor purchasing systems as part of DEAR 970.0901 DOEreview of contractor management control systems. [Acquisition Letter 98-10]

* Cognizant DOE Office concurs with and validates assessment processes, Review problem analyses and improvement action planning. [Acquisition Letter 98-10]

Ensure that the contractor maintains a written description of business system; Approve, conditionally approve, or disapprove business system if cognizant DOE Office; and Provide a copy to DOE HQ. [Acquisition Letter 98-10]

Designate Organizational Contract Management Officer for primary interface with DOE HQ andoversight of contractor business systems, surveillance, and follow-up assessments. [Acquisition Letter 98-10]

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Document contractor agreed performance-based business management objectives, measures, andexpectations; Have an operational awareness process that continuously monitors contractor success in meetingthem; and Conduct reviews based on validation of the contractor’s self assessment of results. [DOE O 224.1]

CONTRACTING OFFICER

* Select performance objectives, measures, incentives as a team member with the FeeDetermination Official and subject matter experts. [Acquisition Letter 98-08 Chapters 5 and 6]

Select the Facility/Task Category for computing total available fee. Tailor the documentation of the negotiated fee.Set forth in the contract or Performance Evaluation and Measurement Plan a site specific methodof rating the contractor’s performance of the contract requirements and a method of feedetermination tied to the method of rating. [DEAR 970.15404-4-8, DEAR 970.15404-4-10]

Establish a Performance Evaluation Measurement Plan and notify the contractor of plan changesfor cost-plus-award-fee contracts. [DEAR 970.5204-54]

* Designate CORs (listing their duties and limitations) and provide the contractor a copy of thedesignation letter.

Assess whether competing the contract will produce a more advantageous offer than exercisingthe option and decide with approval of PE and cognizant Assistant Secretary. [DEAR 970.1702-1]

Review each M&O contract at least once every five years to determine whether meaningfulimprovement in performance or cost might reasonably be achieved by extension or renewal. [FAR 17.605, DEAR 970.1702-1]

Accept, reject, or defer Cost Reduction Proposals; and Validate actual shared net savings prior to approving a contractor’s share of net shared savings.[DEAR 970.5204-87]

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Consider whether any fee is appropriate for the management and operation of a laboratory.[DEAR 970.15404-4-2(a)]

Accept the contractor business system and changes in writing; Evaluate and validates contractor’s assessment; and Advise HCA/PE of performance issues. [Acquisition Letter 98-10]

Determine the evaluation of the Contractor’s achievement of the level of performance within thestipulated cost performance levels. [DEAR 970.5204-86]

CONTRACTOR

Involved in developing site specific requirements, level of performance and measurementbenchmarks. [Acquisition Letter 98-08]

* Negotiate the requirements, evaluation areas and requirements subject to incentives, the totalavailable fee, and the allocation of fee.

Submit a self-assessment addressing strengths and weaknesses of performance during theevaluation period, when required by Operations/Field Office Manager. [DEAR 970.5204-54]

Submit comments, rebutting statements, or additional information regarding past performance tothe CO for the ultimate conclusion when applicable. [DOE Acquisition Guide, Chapter 42]

Identify areas where cost reductions may be effected and develop and submit cost reductionproposals to the CO.[DEAR 970.5204-87]

Establish/maintain management systems to monitor and achieve performance expectations,including defining roles and responsibilities and self assessments. [DOE O 224.1]

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Maintain effective systems of management controls for administrative and programmaticfunctions, documented, and satisfactory to DOE. Periodically review them. [DEAR 970.5204-20]

Establish and maintain business systems which meet Department requirements. Conduct documented assessments to include problem analyses. [Acquisition Letter 98-10]

Develop, obtain DOE approval of, and implement a Safety Management System; Meet minimum requirements for ES&H Program, catastrophic event, specified level ofperformance and cost to receive all otherwise earned fee, fixed fee, profit, or share of costsavings under the contract in an evaluation period. [DEAR 970.5204-86]

CONTRACTING OFFICER’S REPRESENTATIVE * Ensure products/services are delivered by the contractor in accordance with cost, scope,schedule, and contract terms and conditions. Perform inspections/acceptance of work. Conduct periodic contractor reviews, assessments, and surveillance to ensure compliance withcontract terms and provides deficiency observations to the CO for formal contractor notification. Provide review/concurrence of fiscal year work plans/scope documents and contractorperformance evaluations.Provide written technical direction. Shall not make written/verbal changes to cost, scope, schedule or terms of the contract; authorizeexpenditure of funds to the contractor; supervise the contractor’s employees. Assist CO in developing contract administration plan. [Acquisition Letter 98-08 Chapter 6]

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WHERE CAN I GO FOR MORE DETAILED INFORMATION ONPERFORMANCE MEASUREMENT AND ASSESSMENT?

On Meeting Performance Expectations

1. DEAR 970.15404-4, “Fees for Management and Operating Contracts”2. DEAR 970.5204-54, “Total Available Fee: Base Fee Amount and Performance Fee

Amount” 3. DEAR 970.5204-86, “Conditional Payment of Fee, Profit, or Incentives”4. Acquisition Letter 97-06, “Review and Approval of Contract Performance Objectives and

Fee Structures”5. Acquisition Letter 97-08, “Structuring Performance-Based Incentive Arrangements”6. Acquisition Letter 98-08, “Performance-Based Contracting Guide”7. DOE G 120.1-5, “Guidelines for Performance Measurement”8. DOE O 130.1, “Budget Formulation” 9. DOE O 135.1, “Budget Execution - Funds Distribution and Control”10. DOE M 411.1-1A, “Safety Management Functions, Responsibilities and Authorities

Manual”11. DOE Acquisition Guide, Chapter 42 “Contract Administration,” “Contractor Past

Performance Information” Section

On Contracting Officer Representatives

12. DOE O 541.1, “Appointment of Contracting Officers and Contracting OfficerRepresentatives”

On Future Award Decisions Including Options and Extend/Compete Decisions

13. DEAR 917.602, “Policy”14. DEAR 970.1702-1, “Term of Contract and Option to Extend”

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15. DEAR 970.5204-88, “Limitation on Fee” 16. FAR 17.602, “Policy”17. FAR 17.605, “Award, Renewal and Extension”18. Acquisition Letter 96-09, “Procedures to Extend Management and Operating Contracts”

On Cost Reduction

19. DEAR 970.5204-87, “Cost Reduction” 20. Acquisition Letter 97-09, “Cost Reduction Incentives”

On Business Systems Performance and Oversight

21. DEAR 970.5204-20, “Management Controls”22. Acquisition Letter 98-10, “Balanced Scorecard Performance Measurement and Performance

Management Program for Federal Procurement and Contractor Purchasing Systems”23. DOE O 224.1, “Contractor Performance-Based Business Management Process”

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