SecB_IncFee.pdf

?.## DETERMINATION OF INCENTIVE FEE

Incentive Fees

This contract includes multiple incentive fees that emphasize Operational Performance (aircraft launch rates, mission completion, and satisfactory inspection results) and Cost Performance. Because the Government considers Operational Performance to be more important than Cost Performance, the target incentive fee will be divided as follows: 60% Operational Performance/40% Cost Performance. The overall target and maximum incentive fees available will be ____% and ____% of the target cost of the contract respectively. As an incentive for the contractor to exercise exceptional cost control, the additional fee (difference between the target fee and maximum fee) can only be earned in the category of Cost Performance. The minimum fee available in both categories is zero percent. Fees relating to Operational Performance will be awarded quarterly and based upon the calculation of fees described below. Fees relating to Cost Performance will be awarded following the completion of the appropriate period of performance by applying the cost sharing ratio formula that relates total allowable costs incurred to the Target Cost.

Operational Performance Incentive

The target (as well as maximum) fee available in this category is ____% of the Target Cost. The minimum fee available is zero percent. Fee related to Operational Performance is impacted by the following three variables:

1. Launch rate

2. Mission completion

3. Aircraft inspection

The primary calculation is a ratio obtained by multiplying percentage launch rate by percentage mission completion. For example a launch rate of 90 percent and a mission completion rate of 90 percent equals a performance ratio of 81 percent. The contractor would then receive 10 percent times .81 or 81 percent of the available operational performance fee. If either figure is less than 90 percent, there is zero operational performance fee. The aircraft inspection factor is a negative incentive. Each aircraft that fails an inspection would result in the loss of one-third of the operational fee. If three aircraft fail an inspection, 100 percent of the fee earned for Launch Rate and Mission Completion for that quarter is forfeited.

Launch rate. The percentage of operational requests that are responded to with the numbers, types, and properly configured aircraft. This is not an operational readiness rate. Launch rates are not calculated based upon the status of each aircraft in the fleet. It is a measurement of the ability of the contractor to provide an aircraft in response to a specific operational request. On a quarterly basis, the Government will determine the number of requests that were properly responded to as a percentage of aircraft requested. All support sites will be rolled into one percentage. The contractor will not be penalized for this Incentive Fee metric for situations which are beyond the contractor’s control. Examples of such situations include, but not limited to, the following: an aircraft is not available for launch because it is being painted by a third party vendor; an aircraft is not available for launch because is undergoing a Government directed modification; non-availability of Government aircrew to perform required maintenance test flights or ground runs, etc.

Mission Completion. The percentage of missions that were fully completed versus the number flown. To be considered a completed mission, all systems under the control of the contractor must have functioned properly and not contributed to the inability of the crew to complete its assigned mission. If systems malfunction, the contractor will not be held accountable for this Incentive Fee metric if all three of the following are true:

1. The inoperative equipment was not the fault of the contractor. For example, failure to perform a scheduled maintenance, failure to perform a required test, or failure to repair or replace equipment the Government had noted was inoperative or not fully functional.

2. The problem was not foreseeable by the contractor.

3. The problem was beyond the contractor’s control to have avoided.

On a quarterly basis, the Government will determine the number of missions as a percentage of missions flown that were not completed due to contractor performance or failure to perform contractual requirements. All support sites will be rolled into one percentage.

The launch rate and mission completion rate percentages will then be multiplied together to obtain a fee related to operational performance. There will be zero incentive fee if either percentage is below 90 percent as shown in the Operational Performance Incentive Fee Matrix shown in Tab 5 of Attachment 2.

The statistics will be calculated by the contractor and verified by the Government.

Results of Government Aircraft Inspections. During each quarter, the Government will inspect at least 34 aircraft.

These inspections will be conducted by the Government on a “no notice” basis. For each aircraft that fails a Government inspection, the contractor will forfeit one-third of the earned fee earned for that quarter. If three aircraft fail an inspection, 100 percent of the fee earned for Launch Rate and Mission Completion for that quarter is forfeited. See Tab 8 of Attachment 2 (Government Aircraft Inspections) for details.

Delayed Launches. The inability to launch aircraft in a timely manner due to the fault of the Contractor could result in missed missions. Unfortunately, the Government currently has no tool for capturing delayed launch data and the impact it has on meeting mission requirements. Therefore, the Contractor’s performance in this regard cannot be measured objectively. However, specific information relating to missions missed due to delayed launches will be used to reflect unsatisfactory performance in the Contractor Performance Reports.

Cost Incentive Fee

The amount of Cost Incentive Fee earned is based on a formula that relates total allowable costs incurred to the Target Cost. This formula (share ratio) provides, within limits, for increases in fee above the Target Fee when total allowable costs incurred are less than the Target Cost. Likewise, the formula provides for a decrease in fee when total allowable costs incurred exceed the Target Cost. Specifically, the fee payable shall be the Target Fee increased by _______cents for every dollar that the total allowable cost is less than the Target Cost or decreased by _______ cents for every dollar that the total allowable costs exceeds the Target Cost. The target fee available in this category is ____% of the Target Cost. The maximum fee available in this category is ____% of the Target Cost and the minimum is zero percent.

Following is an example of how the Cost Incentive Fee would be structured for a contract with the following: a Target Cost of $70,000,000, a target Fee of 3%, a maximum fee of 5% , and a 75% Government/25% Contractor share ratio:

Minimum Cost: $64,400,000 Target Cost: $70,000,000 Maximum Cost: $73,360,000

Target Maximum

Cost Performance $840,000 $2,240,000

Total Incentive Fee Structure

Following is an example of the Total Incentive Fee structure for this contract with the following: a Target Cost of $70,000,000, a target Fee of 3%, a maximum fee of 5%, and a 75% Government/25% Contractor share ratio:

Target (3%) Maximum (5%)

Operational Performance (60%) $1,260,000 $1,260,000 Cost Performance (40%) $ 840,000 $2,240,000 Total Fees $2,100,000 $3,500,000

Minimum Cost: $64,400,000 Target Cost: $70,000,000 Maximum Cost: $73,360,000

Using this Fee structure, following is an example of how the Operational and Cost Performance Incentive Fees would be calculated based on the stated performance results for a given 12-month period of performance:

Operational Performance:

1st Quarter 2nd Quarter 3rd Quarte 4th Quarter Launch Rate 90% 92% 85% 92% Mission Completion Rate 90% 93% 100% 90% Failed Aircraft Inspections 1 3 0 2

Fee Available: $315,000 $315,000 $315,000 $315,000 Performance Ratio: x .81 x .86 x .85 x .83 Operational Performance Fee Earned: $255,150 $270,900 $ 0 $261,450

Deductions for Failed Aircraft Inspections ($ 85,050) (270,900) ($ N/A) ($174,300) Total Fees Earned: $170,100 $ 0* $ 0** $ 87,150

* - No fee earned because of three failed aircraft inspections.

** - No fee earned because of the Launch Rate being less than 90%.

Cost Performance:

Should the Contractor’s total allowable costs for the period of performance come in below the Target Cost at $67,000,000, the Cost Incentive Fee earned would be calculated as follows:

Target Cost: $70,000,000 Less Total Allowable: $67,000,000 Amount below Target: $ 3,000,000 Multiplied by: $ 0.25 Increased Fee: $ 750,000 Plus Target Fee: $ 840,000 Total Cost Fee Earned: $ 1,590,000

Likewise, should the Contractor’s total allowable costs for the same period of performance come in over the Target Cost at $72,000,000, the Cost Incentive Fee earned would be calculated as follows:

Total Allowable Costs: $72,000,000 Less Target Cost: $70,000,000 Amount above Target : $ 2,000,000 Multiplied by: $ 0.25 Decreased Fee: $ 500,000

Target Fee: $ 840,000 Less Decreased Fee: $ 500,000 Total Cost Fee Earned: $ 340,000

Total Operational and Cost Performance Fee Earned for the 12-month period of performance under the following two scenarios:

Scenario 1 (Total Allowable Costs = $67,000,000) Operational Performance Fee Earned: $ 257,250 Total Cost Performance Fee Earned : $ 1,590,000 Total Operational and Cost Fee Earned: $ 1,847,250

Scenario 2 (Total Allowable Costs = $72,000,000) Operational Performance Fee Earned: $ 257,250 Total Cost Performance Fee Earned : $ 340,000

Total Operational and Cost Fee Earned: $ 597,250