B.1 A0004 07-01-08.pdf

B.1 DETERMINATION OF INCENTIVE FEE

Incentive Fees

Operational Performance Incentive not

This contract includes multiple incentive fees that emphasize Operational Performance (aircraft launch rates, mission completion and organizational maintenance) and Depot Management. The Government considers Operational Performance and Depot Management to be more important than Cost Performance. The total target incentive fee for Operational Performance and Depot Management will be divided as follows: 60% Operational Performance/40% Depot Management. The overall Target and Maximum incentive fees available will be (PROVIDED IN OFFEROR’s PROPOSAL). Target Fee ____% and Maximum Fee ____% of target costs. The minimum fee in both Operational Performance and Depot Management is zero percent if the contractor fails to meet the minimum requirements as stated in this clause. Fees relating to Operational Performance and Depot Management will be awarded quarterly and based upon the calculation of fees described herein. Cost Performance will have a cost sharing incentive that will be awarded following the completion of the yearly period of performance. This will be calculated by applying the cost sharing ratio formula (see below) that relates total allowable costs incurred to the Target Cost.

The Target Fee available in this category is ____% and the Maximum Fee 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 two variables:

1. Launch Rate

2. Mission Completion

The primary Operational Performance calculation is a ratio obtained by multiplying percentage launch rate by percentage mission completion (see chart attached). 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 81 percent of the available operational performance fee. either the launch rate or mission complete rate is less than 90 percent, there will be no operational performance fee for the quarter in which it occurred. If the contractor achieves a combined Operational Performance ratio between the launch rate and mission completion rate equal to or greater than 90.25%, the Fee rate will increase to the Maximum Fee rate as proposed. For example, if launch rate for a given quarter is 100% and a mission completion rate of 95% the resulting performance ratio is 95%. In this case the contractor will have earned the maximum available fee for the quarter.

Launch Rate. Launch Rate is the ratio percentage of operational requests responded to as compared to the numbers, types, and properly configured aircraft requested. This is 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 aircraft in response to a specif operational request. On a quarterly basis, the Government will determine the number of requests that were properly responded to as a percentage of the 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’ control. Examples of such situations include, but may not limited to the following:

An aircraft is not available for launch because it is in Depot Level Maintenance;

An aircraft is not available for launch because it is in Scheduled Organizational/Intermediate Level Maintenance;

Non-availability of Government aircrew to perform required maintenance test flights or ground runs, etc.

Mission Completion. Mission Completion is the ratio percentage of missions that were fully completed compared to the number missions flown (launched). A mission is considered successfully completed when all systems under the control of the contractor must have functioned properly and not contributed to the inability of the crew to complete the assigned mission. The contractor will not be held accountable for a system malfunction if all three of the following are true:

1. The equipment became inoperative through no fault of the contractor.

Example: Engine Failure due to a Bird Strike

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

Example: All required maintenance performed in accordance with directives, policy, and maintenance instruction manuals, scheduled periodic inspections, (daily, 28 day etc.), i.e. a hydraulic pump failure.

3. The problem was not foreseeable by the contractor.

Example: A non-contractor operated vehicle collides with an aircraft on the flight line.

On a quarterly basis, the Contractor will provide, for Government verification, the Mission Completion rate as a ratio percentage of missions not completed due to contractor failure to perform contractual requirements against missions scheduled. All support sites will be rolled into one percentage.

Example: 12 Missions scheduled – 10 successfully completed, (2 missions not successfully completed due to contractor performance – 1 pre-launch abort, 1 in-flight abort.) 10 ÷ 12 = .83 Mission Completion Rate

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 the QASP.

The contractor will submit an invoice that reflects the work performed and shall be calculated by the contractor and verified by the Government.

The Depot Management incentive fee starts at the maximum proposed by the contractor. This category will utilize a maximum incentive fee proposed by the contractor of _____% but will be reduced by the following criteria for any given quarter:

1. The number of aircraft that fail to meet scheduled delivery dates within a 30-day window

2. Failure to identify all major over-and-above repairs within 90 days of induction on the 90 Day Damage Report

3. Failure to identify long-lead-time material requirements that could lead to a stop work order

4. Failure place on order within 5 workings days of government authorization for long-lead-time material requirements that could lead to a stop work order. Material is considered to be on order when a purchase order is verifiable by the government and a delivery date is provided.

If any of the above factors occur during any quarter, a fee reduction by 25% for each incident will be incurred. If there are 4 or more failures than the contractor will receive no fee in depot management for that particular quarter.

Following is an example of the Total Incentive Fee structure for this contract with the following:

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 $2,100,000 Depot Management (40%) $ 840,000 $1,400,000 Total Fees $2,100,000 $3,500,000

Depot Management Incentive

Total Incentive Fee Structure

Using this Fee structure, the following is an example of how the Operational Performance, Depot Management, 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 Quarter 4th Quarter

Launch Rate 90% 100% 85% 92% Mission Completion Rate 90% 95% 100% 90%

Fee Available: $315,000 $525,000 $315,000 $315,000 Performance Ratio: x .81 x .95 x .85 x .83 Operational Performance

$255,150 $498,750** $ 0* $261,450

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

** - In the second quarter the Contractor went above 95% so you would use the dollar of the higher fee rate multiplied by .25 for that quarter.

Depot Management

Below is an example of the calculations for Depot Management:

Depot Management 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Maximum Possible Fee $ 262,500 $ 262,500 $ 262,500 $ 262,500 Number of Depot Failures 2 4 * 1 - Depot Fee $131250.00 $ - $196,875.00 $262,500.00

* Zero Fee for 4 failures

Cost Performance:

Example 1.

Should the Contractor’s total allowable costs for the period of performance come in below the Target Cost at $67,000,000, the Cost sharing 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

Example 2.

Likewise, should the Contractor’s total allowable cost or 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

Fee Earned:

Total Cost Fee Earned: $ 750,000

Multiplied by: $ 0.25 Overall Fee reduction: $ 500,000

Example 3.

Another example would be if the Contractor was able to come in below the Target Cost at $64,000,000, but was not able to meet one or both of the operational performance requirements of 90%. Let’s say you got a 89% for launch rate.

Target Cost: $70,000,000 Less Total Allowable: $64,000,000 Amount below Target: $ 6,000,000 Multiplied by: $ 0.25 Increased Fee: $ 0

If you are not able to meet the required 90% you will not receive the 25% cost savings share or the target Fee.

Example 4.

Another example is if the Contractor is able to meet the 90% requirement for both launch rate and mission completion, but has a significant over run in cost.

Total Allowable Costs: $85,000,000 Less Target Cost: $70,000,000 Amount above Target : $15,000,000 Multiplied by: $ 0.25 Decreased Fee: $ -3,750,000

In this case the Contractor went way over the target cost, which resulted in no cost savings sharing and it cancelled out what the Contractor would have received in target fee. This -$3,750,000 will be applied against the fee that the Contractor received for meeting the operational performance requirement.

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

Example 1. (Total Allowable Costs = $67,000,000) Operational Performance Fee Earned: $ 697,410 Depot Management Fee Earned: $ 525,000 Total Cost Performance Fee Earned: $ 750,000

Example 2. (Total Allowable Costs = $72,000,000) Operational Performance Fee Earned: $ 697,410 Depot Management Fee Earned: $ 525,000 Total Cost Performance Fee Earned: $ -500,000

$ 722,410

Example 3. (Total Allowable Costs = $65,000,000 but got an 89% on launch rate during one quarter.)

Operational Performance Fee Earned: $ 1,335,000 Depot Management Fee Earned: $ 525,000 Total Cost Performance Fee Earned: $ 0

Total Cost Fee reduction: $ -500,000

Total Cost Fee Earned: $ 0

Total Cost Fee Earned: $ -3,750,000

Total Fee Earned: $ 1,972,410

Total Fee Earned:

Total Fee Earned: $ 1,860,000

Because the Contractor failed the launch rate they receive no Cost Performance sharing for the year.

Total Fee Earned: $ -1,965,000

Because the difference between operational performance fee and cost performance fee resulted in $ -1,965,000 the contractor will receive no fee.

Example 4. (Total Allowable Costs = $80,000,000 and you meet the operational performance requirements) Operational Performance Fee Earned: $ 1,260,000 Depot Management Fee Earned: $ 525,000 Total Cost Performance Fee Earned: $ -3,750,000

Incentive Fee Matrix for Operational Performance

1.00 0.99 0.98 0.97 0.96 0.95 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.85

1.00 1.00 0.99 0.98 0.97 0.96 0.95 0.94 0.93 0.92 0.91 0.90

0.99 0.99 0.98 0.97 0.96 0.95 0.94 0.93 0.92 0.91 0.90 0.89

0.98 0.98 0.97 0.96 0.95 0.94 0.93 0.92 0.91 0.90 0.89 0.88

0.97 0.97 0.96 0.95 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87

0.96 0.96 0.95 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86

0.95 0.95 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.86

0.94 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.86 0.85

0.93 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.86 0.85 0.84

0.92 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.86 0.85 0.84 0.83

0.91 0.91 0.90 0.89 0.88 0.87 0.86 0.86 0.85 0.84 0.83 0.82

0.90 0.90 0.89 0.88 0.87 0.86 0.86 0.85 0.84 0.83 0.82 0.81 0.89 0.88

0.87 AREA OF ZERO INCENTIVE FEE

0.86 0.85

Launch Rate Percentage

M is si o n C o m p le ti o n R at e

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