HClause(EarnedandIncentiveProfit).doc

H-XX2

INCENTIVE PROFIT AND QUALITY PERFORMANCE INDICATOR

JUL 2006

(AETC CONS/LGCK)

(a) This is primarily a Fixed Price Incentive (Firm Target) contract. This clause applies only to the target cost contract line items. The government shall calculate the adjusted target profit in accordance with this supplemental clause.

(b) For this contract the minimum proposed profit rate is 3% , the maximum profit rates must be equal to or lower than the ceiling percentage and the maximum ceiling percentage is 6%. The contract has a target cost and target profit, which the contractor offers in its proposal and are set at contract award. FAR clause 52.216-16 shows how the government will adjust the target profit if total allowable cost is different from target cost. Furthermore, any profit earned under this clause is subject to the quality performance indicator (QPI) described in paragraph (d) of this clause except the profit proposed for the Transition Period.

(c) Please note profit has been divided into earned profit and incentive profit. In general, the contractor will earn earned profit by performing at acceptable performance levels as defined within the Service Summary. The Service Summary also defines contractor performance levels required to earn incentive profit. The earned and incentive profit formulas are contained throughout this clause. Three examples of how the government will adjust the target profit if total allowable cost is different from target cost are below.

Assume the following:

Target cost (TC):

$50,000,000 Target Profit (TP); 4% in this example

$ 2,000,000

Earned Profit Ratio (EPR) = 1/3; ETP = $ 666,667

Incentive Profit Ratio IPR) = 2/3; ITP = $1,333,333

Ceiling Price (CP); assume 106% of TC

$53,000,000

Underrun share ratio (U): 50% Overrun share ratio (O): 50% Example 1 (Underrun) Total allowable cost (TAC):

$48,000,000

Total Underrun = TC-TAC = $50,000,000-$48,000,000 $ 2,000,000 Formulas for amount of profit AVAILABLE for contractor to earn when TAC < TC:

Earned:

Adjusted Target Earned Profit (ATEP) = (EPR)[(TC-TAC)(U)+TP]

ATEP = (1/3)[(50,000,000 - 48,000,000)(.5)+2,000,000] = $1,000,000

Incentive:

Adjusted Target Incentive Profit (ATIP) = (IPR)[(TC-TAC)(U)+TP]

ATIP = (2/3)[(50,000,000-48,000,000)(.5)+2,000,000] = $2,000,000

Both adjusted target profits are subject to the QPI adjustment described in paragraph (d-k) of this clause.

Example 2 (Overrun), at or below CP, but greater than or equal to the target cost

$52,000,000

Total Overrun = TC - TAC = $50,000,000 - $52,000,000 ($ 2,000,000)

Formulas for amount of profit AVAILABLE for contractor to earn when TC < TAC < CP:

Earned:

Adjusted Target Earned Profit (ATEP) = (EPR)[(TC-TAC)(O)+TP]

ATEP = (1/3)[(50,000,000-52,000,000)(.5)+2,000,000] = $ 333,333

Adjusted Target Incentive Profit (ATIP) = (IPR)[(TC-TAC)(O)+TP]

ATIP = (2/3)[(50,000,000-52,000,000)(.5)+2,000,000] = $ 666,667

Both adjusted target profits are subject to the QPI adjustment described in paragraph (d-k) of this clause.

Example 3 (Overrun), above CP

$55,000,000

Total Overrun = TC - TAC = $50,000,000 - $55,000,000 ($ 5,000,000)

Formulas for amount of profit AVAILABLE for contractor to earn when TAC > CP:

Earned:

Adjusted Target Earned Profit (ATEP) = (EPR)[((TC-CP)(O))+(CP-TAC))+(TP)] ATEP = (1/3)[(($50,000,000 - $53,000,000)(.5)) + ($53,000,000-$55,000,000)) + ($2,000,000)]

= ($ 500,000)

Adjusted Target Incentive Profit (ATIP) = (IPR)[((TC-CP)(O))+(CP-TAC) +TP]

ATIP = (2/3)[(($50,000,000 - $53,000,000)(.5)) + ($53,000,000-$55,000,000)) + ($2,000,000 )]

= ($1,000,000)

Both adjusted target profits are subject to the QPI adjustment described in paragraphs (d-k) of this clause.

(d) Quality Performance Indicators (QPI). Notwithstanding any other contract clause or any other language in or attached to this contract, the profit earned under this clause is subject to QPI adjustment. The QPI adjustment shall be the final determination of the amount of profit the government pays the contractor. The QPI is designed to ensure that performance expectations are not sacrificed to achieve cost objectives. The QPI reflects the contractor’s success in achieving acceptable levels of customer satisfaction and maintaining acceptable measures in metrics and other contract requirements.

The adjusted target profit calculation will be done for each of the annual periods of performance as required by the contract clause. Once the adjusted target profits are determined in accordance with this clause, the earned and incentive profit QPIs must be calculated as well. The QPIs consist of 1200 earned and 1200 incentive profit points available to be earned per year. Earned and incentive profit QPI points are then converted to percentages that are applied to the earned and incentive adjusted target profits, respectively. For example, if the contractor earned 948 earned profit QPI points during the period of performance, the contractor would be entitled to receive 79% of the adjusted target earned profit as adjusted by the formulas contained within this clause. Continuing the example, if the contractor earned 900 incentive profit QPI points during the period of performance, the contractor would be entitled to receive 75% of the adjusted target incentive profit as adjusted by the formulas contained within this clause. A complete example of the earned and incentive profit calculation is provided in paragraphs (c-k) of this clause. Earned and incentive profit QPI points will be calculated monthly and totaled to calculate a percentage to be applied to their respective adjusted target profit. The earned profit QPI points available monthly are allocated as follows: Customer Satisfaction, 40 points; Incentivized Performance Metrics, 40 points; and Small Business Goals, 20 points. The incentive profit QPI points available monthly are allocated as follows: Customer Satisfaction, 40 points; Incentivized Performance Metrics, 40 points; and Small Business Goals, 20 points. After approval by the Performance Management Council (PMC), the Administrative Contracting Officer (ACO) may unilaterally change the QPIs available to be earned by providing written notice to the contractor. Changes to the QPIs shall be effective as of the first full day of the first full month following ninety days after the date of the ACO’s written notification to the contractor. Changes to the QPIs shall be limited to not more than 45 points during any consecutive three-month period.

The Quality Performance Indicators measure the following three categories: Customer Satisfaction, Incentivized Performance Metrics, and Small Business Goals. This measurement is described for each of the components below:

(e) Customer Satisfaction (CS). The contractor will provide a customer satisfaction measurement system that meets the criteria of this plan. There is a maximum of 40 earned profit QPI points and 40 incentive profit QPI points available monthly to be earned by the contractor for the category of Customer Satisfaction and 480 earned and 480 incentive points per year. There are two separate methods of measuring customer satisfaction, i.e., Point of Service (POS) and General Population (GP). The POS will be collected by the contractor to calculate and report the results to the Performance Management Flight (PMF) and Performance Management Council (PMC) monthly. The GP will be conducted two times each year (to be conducted in the 6th and 12th month of each contract period). During the contract period of performance, the Air Force may unilaterally modify or change the customer satisfaction measurement system as the mission and priorities of Maxwell-Gunter Air Force Base evolve as determined by the ACO. Such changes will be limited to not more than 5% changes in service area group weighting, a 0.05 change in each POS and/or GP threshold score to be achieved to earn profit, and a 4 point change between POS and GP QPI points over any 6 month period and will be approved by the Performance Management Council. Data for computing POS and GP customer satisfaction will not include BOS contractor or subcontractor personnel feedback.

Service Area Groups. The PMC needs visibility into each of the five service area groups with the POS measurement. To provide this visibility, the POS and GP data are reported to the ACO broken down into Airfield Support (AS), Base-Wide Support (BWS), Civil Engineering (CE), Information Technology (IT), and Logistics Support (LS). To reduce the possibility that any one Service Area Group (SAG) would dominate the score calculation, the maximum allowable earned and incentive profit POS QPI points available that can be earned for each SAG per month is as follows:

SAG

Earned Profit POS QPIs

Incentive Profit POS QPIs

AS

BWS

4.5

CE

IT

LG

POS Methodology. Data for computing the POS SAG rating will be collected from POS feedback forms. Each SAG must receive a minimum of one completed feedback form for that SAG to be eligible for that months’ incentive profit. Each POS form will be scored by totaling each questions’ numeric rating and calculating an overall average for the form. Questions without a numeric rating will not be used in the computation. Each POS form will be assigned to only one SAG. The scores for all POS forms within a SAG will be totaled to calculate an overall average score which will be used as the POS SAG score. The POS SAG scores will be compared to the POS QPI point scoring model below to determine the number of POS customer satisfaction QPIs that are earned for each SAG. No QPIs shall be earned for an average score less than 3.00. No extrapolations are permitted.

· SAG POS score > 4. 5 on a 5 point scale will earn 100% of SAG Customer satisfaction incentive profit QPI points available. A SAG POS score less than 4.5 earns zero incentive profit POS QPI points.

· SAG POS score > 3.0 on a 5 point scale will earn 100% of SAG Customer satisfaction earned profit QPI points available. A SAG POS score less than 3.0 earns zero earned profit POS QPI points.

GP Methodology. The GP customer satisfaction measurement will be used to determine the monthly incentive profit for the 6 months following the completion of the GP survey. The GP measurement results will also be broken down into the same five SAGs and earned and incentive profit QPI points are available to be earned, as follows:

SAG

Earned Profit GP QPIs

Incentive Profit GP QPIs

1.5

All the GP customer satisfaction ratings will be totaled for each SAG and averaged by SAG to establish the five SAG GP scores. Questions without a numeric rating will not be used in the computation. The GP SAG scores will be compared to the GP QPI point scoring model below to determine the number of GP customer satisfaction QPIs that are earned for each SAG. No QPIs shall be earned for an average score less than 3.00. No extrapolations are permitted.

· SAG GP score > 4.2 on a 5 point scale will earn 100% of SAG Customer satisfaction incentive profit QPI points available. A SAG GP score less than 4.2 earns zero incentive profit GP QPI points.

· SAG GP score > 3.0 on a 5 point scale will earn 100% of SAG Customer satisfaction earned profit QPI points available. A SAG GP score less than 3.0 earns zero earned profit GP QPI points.

Total CS Earned Profit and Incentive Profit QPI Points. All CS Earned Profit QPI Points will be totaled by adding the earned profit QPI points for each SAG for both the POS and GP surveys. Similarly, all CS Incentive Profit QPI Points will be totaled by adding the incentive profit QPI points for each SAG for both the POS and GP surveys. After the earned and incentive profit QPI points for the SAGs are totaled, then the QPI points for the POS and GP surveys are added together for earned profit and for incentive profit separately to determine the total QPI points earned for customer satisfaction in earned profit and in incentive profit for the month (see example).

(f) Customer Satisfaction QPI points Calculation Example:

POS Calculation: 60 Monthly QPI Points Possible (30 Earned and 30 Incentive)

SAG POS Scores

CS Earned Profit POS QPIs Earned CS Incentive Profit POS QPIs Earned

4.8

4.4

4.9

Earned Profit POS QPI Points = 30 (out of 30 possible)

Incentive Profit POS QPI Points = 21 (out of 30 possible)

GP Calculation: 20 Monthly QPI Points Possible (10 Earned and 10 Incentive)

SAG GP Scores

CS Earned Profit GP QPIs Earned CS Incentive Profit GP QPIs Earned

4.1

4.4

4.9

Earned Profit GP QPI Points = 10 (out of 10 possible)

Incentive Profit GP QPI Points = 9 (out of 10 possible)

Calculate the total CS earned and incentive profit QPI points earned as follows:

CS Earned Profit QPI Points (CSEPQPIP) = Earned Profit POS QPI Points + Earned Profit GP QPI Points

CSEPQPIP = 30 + 10 = 40

CS Incentive Profit QPI Points = Incentive Profit POS QPI Points + Incentive Profit GP QPI Points

CS Incentive Profit QPI Points (CSIPQPIP) = 21 + 9 = 30

First 6 months. Since there is no GP survey available for the first 6 months of the contract, the QPI points available for POS will be increased as shown below and the GP points will be reduced to zero, as follows:

SAG

Earned Profit POS QPIs

Incentive Profit POS QPIs

SAG

Earned Profit GP QPIs

Incentive Profit GP QPIs

(g) Incentivized Performance Metrics. The PMC will approve a set of incentivized performance metrics from the metrics listed in the Performance Plan. Each of the selected metrics will be reviewed each month to determine how much of the earned profit and incentive profit available for each incentivized performance metric has been earned. The contractor’s performance each month will be measured for each incentivized metric to determine if the contractor’s performance meets or exceeds the SDS established standards to earn the earned profit and incentive profit for that particular metric. The number of incentivized performance metrics meeting or exceeding the SDS earned profit standard will be totaled and used to calculate the percentage of incentivized metrics meeting earned profit performance standards. Similarly, the number of incentivized performance metrics meeting or exceeding the SDS incentive profit standard will be totaled and used to calculate the percentage of incentivized metrics meeting incentive profit performance standards. For example, if the contractor met the earned profit standard rating on 36 of 40 designated metrics, the percentage for earned profit metric effectiveness would be 90%. Additionally, if the contractor met the incentive profit standard rating on 20 of 40 designated metrics, the percentage for incentive profit metric effectiveness would be 50%. These percentages would then be applied to the total number of QPI earned profit and incentive profit QPI points available, respectively, to determine how many earned and incentive profit QPI points are earned for the month. For example, since there are 40 QPI points available for earned profit incentivized performance metrics and 40 QPI points available for incentive profit incentivized performance metrics, the contractor would earn 36 Metric Earned Profit QPI Points (MEPQPIP) and 20 Metric Incentive Profit QPI Points (MIPQPIP) in the example above. The PMC may, at their discretion, elect to discard no more than ten percent of the designated incentivized performance metrics from the monthly calculation should the PMC determine that unanticipated factors outside of the contractor’s control influenced the contractor’s performance for the metric. This decision must be documented in the minutes of the PMC meeting. During the contract period of performance, the Air Force may unilaterally modify, change, or replace the incentivized performance metrics as the mission and priorities of Maxwell-Gunter Air Force Base evolve as determined by the ACO. Such changes will be limited to no more than 10% of the total number of incentivized metrics over any 6 month period and will be approved by the PMC.

(h) Small Business (SB) Goals. The contractor’s contract specifies a goal to subcontract a percentage of the actual total contract dollars to qualified small businesses, small disadvantaged businesses, woman-owned businesses, HUBZone businesses, and severely disabled veteran owned small businesses. Achievement of this goal will be cumulative and calculated on an annual basis. The goals are described in H-xx1, SUBCONTRACTING WITH SMALL, SMALL DISADVANTAGED, HUBZONE, WOMEN-OWNED, AND SEVERELY DISABLED VETERAN-OWNED SMALL BUSINESSES (JUL 2006). For the purposes of calculating the earned profit and incentive profit QPI points earned, each of the five specified percentages will be compared to the goals for each category described below. Dollars may be counted in the percentages for more than one category, as appropriate. The dollar value of qualifying small business contracts by category will be divided by the actual total contract dollars to produce a percentage for each category. For example, if $4M dollars were awarded to qualified small businesses and the total actual contract dollars spent was $40M, the percentage would calculate at 10%. This percentage will then be used in the appropriate formula below to determine the number of QPIs earned for that particular category of small business goals. For example, since 13 QPIs were allocated to the small business goal, and 10% small business effort were achieved, the total number of QPIs earned would be 7.22 for that category. No QPIs may be earned in excess of 100% of the allocated points per category. To earn the 20 small business incentive profit points, all of the earned profit percentage goals must be achieved and a percentage of at least 40 percent for small business overall must be achieved. The ACO may not change the number of QPIs allocated to the small business goals during the execution of an annual period of performance. However, the QPI allocation to small business may be unilaterally changed by the ACO, as approved by the PMC, but it may only be changed prior to the execution of the next annual period of performance, and such change, when conveyed in writing to the contractor, would only apply to next annual period of performance.

Small Business Goals to be achieved by Contractor:

Earned Incentive Small Business (SB) 18% 18+x%

Small Disadvantaged Business (SDB) 5% 5+x%

Woman Owned (WO) 5% 5+x%

HUBZone 1% 1+x%

Severely disabled Vet Owned (SDVOSB) 1% 1+x%

Total:

30% > 40%

Small Business QPI Points Available (20 earned profit & 20 incentive profit):

Small Business Earned Profit QPI Points (SBEPQPIP) Distribution Formulas:

SB QPI pts = (SB percentage achieved /18% ) X 13 pts available (NTE 13 points)

SDB QPI pts = (SDB percentage achieved /5% ) X 2 pts available (NTE 2 points)

WO QPI pts = (WO percentage achieved /5% ) X 1 pts available (NTE 1 points)

HUBZone QPI pts = (Hubzone percentage achieved /1% ) X 3 pts available (NTE 3 points)

SDVOSB QPI pts = (SDVOSB percentage achieved /1% ) X 1 pts available (NTE 1 points)

Total NTE 20 points

Small Business Incentive Profit QPI Points (SBIPQPIP):

Meet ALL small business earned profit category goals AND have at least 40% small business overall earns 20 points

(i) Small Business QPI points Calculation Example:

Example Small Business percentages achieved by Contractor:

Small Business (SB) 25%

Small Disadvantaged Business (SDB) 7%

Woman Owned (WO) 8%

HUBZone 1%

Severely disabled Vet Owned (SDVOSB) 1%

Total:

42%

Example Small Business Earned Profit QPI Points (SBEPQPIP) Earned:

SB QPI pts = 25% /18% X 13 pts available = 18.05, but NTE 13 so = 13 points

SDB QPI pts = 7% /5% X 2 pts available = 2.8, but NTE 2 so = 2 points

WO QPI pts = 8% /5% X 1 pts available = 1.6, but NTE 1 so = 1 point

HUBZone QPI pts = 1% /1% X 3 pts available = 3 points

SDVOSB QPI pts = 1% /1% X 1 pts available = 1 point

SBEPQPIP = 20 points

Example Small Business Incentive Profit QPI Points (SBIPQPIP) Earned:

Met all small business earned profit category goals and achieved 42% small business overall earns 20 points

SBIPQPIP = 20 points

(j) Total Earned Profit and Incentive Profit QPI Calculation:

Total Earned Profit QPI Points (TEPQPIP) = CS Earned Profit QPI Points + Metric Earned Profit QPI Points + Small Business Earned Profit QPI Points

TEPQPIP = CSEPQPIP + MEPQPIP + SBEPQPIP = 40 + 36 + 20 = 96

Total Incentive Profit QPI Points (TIPQPIP) = CS Incentive Profit QPI Points + Metric Incentive Profit QPI Points + Small Business Incentive Profit QPI Points

TIPQPIP = CSIPQPIP + MIPQPIP + SBIPQPIP = 30 + 20 + 20 = 70

(k) Formulas For Determining Final Total Contractor Profit (FTCP). Going back to the examples in paragraph (c) of this clause:

Example 1 (Underrun, when TAC < TC) In this scenario, the contractor has an Adjusted Target Earned Profit (ATEP) of $1,000,000 and an Adjusted Target Incentive Profit (ATIP) of $2,000,000, available before QPI adjustment. The formulas to calculate the Final Earned Profit (FEP) and Final Incentive Profit (FIP), respectively are:

Final Earned Profit (FEP) = [(ATEP)(TEPQPIP/100)] = [($1,000000)(96/100)] = $ 960,000

Final Incentive Profit (FIP) = [(ATIP)(TIPQPIP/100)] = [($2,000,000)(70/100)] = $1,400,000

FTCP = FEP + FIP = $960,000 + $1,400,000 = $2,360,000

Example 2 (Overrun, when TC < TAC < CP) In this scenario, the contractor has an Adjusted Target Earned Profit (ATEP) of $333,333 and an Adjusted Target Incentive Profit (ATIP) of $666,667 available before QPI adjustment. The formulas to calculate the Final Earned Profit (FEP) and Final Incentive Profit (FIP), respectively are:

Final Earned Profit (FEP) = [(ATEP)(TEPQPIP/100)] = [($333,333)(96/100)] = $ 320,000

Final Incentive Profit (FIP) = [(ATIP)(TIPQPIP/100)] = [($666,667)(70/100)] = $ 466,667

FTCP = FEP + FIP = $320,000 + $466,667 = $786,667

Example 3 (Overrun, when TAC > CP) In this scenario, the contractor has an Adjusted Target Earned Profit (ATEP) of ($500,000) and an Adjusted Target Incentive Profit (ATIP) of ($1,000,000) available before QPI adjustment. The formulas to calculate the Final Earned Profit (FEP) and Final Incentive Profit (FIP), respectively are:

FEP = [(ATEP - ((EPR)(CP - TAC)))][(TEPQPIP/100)] + [(EPR)(CP - TAC)]

FEP = [(-$500,000 - ((1/3)($53,000,000 - $55,000,000)))][(96/100)] + [(1/3)($53,000,000 - $55,000,000)]

= ($506,667)

FIP = [(ATIP - ((IPR)(CP - TAC)))][(TIPQPIP/100)] + [(IPR)(CP - TAC)]

FIP = [(-$1,000,000 - ((2/3)($53,000,000 - $55,000,000)))][(70/100)] + [(2/3)($53,000,000 - $55,000,000)]

= ($1,100,000)

FTCP = FEP + FIP = ($506,667) + ($1,100,000) = ($1,606,667)

IMPORTANT PLEASE NOTE: The FTCP go negative if insufficient QPI points are earned. This creates a situation where the contractor assumes all remaining costs of the overrun and receives no profit.