Award Fee
A variable fee in a government contract earned based on periodic government evaluation of contractor performance, designed to incentivize exceptional results.
An award fee is a variable payment that a contractor can earn above the base contract fee by demonstrating exceptional performance during defined evaluation periods. It is a performance incentive tool used primarily in cost-reimbursement and some fixed-price contracts for long-duration programs where ongoing quality of performance matters as much as cost control.
How Award Fee Works
The contract specifies a base fee (guaranteed) plus a maximum award fee pool. At the end of each evaluation period, typically every six to twelve months, a government Award Fee Board assesses contractor performance against criteria defined in the Award Fee Plan. The board determines what percentage of the available pool the contractor has earned, from 0% to 100%. The evaluation considers performance in categories such as technical quality, schedule, management, and small business utilization.
Award Fee Plans
The Award Fee Plan is a document developed by the government that describes the evaluation criteria, their relative weights, the rating scale, and the evaluation process. Contractors should request the Award Fee Plan early in contract performance and manage their activities explicitly against its criteria. Understanding exactly how the government will evaluate you is essential for maximizing your earned fee.
Award Fee vs. Incentive Fee
Award fee is determined by subjective government evaluation. Incentive fee (on Cost-Plus-Incentive-Fee contracts) is a mathematical formula that adjusts fee based on cost, schedule, or performance metrics against defined targets. Award fee requires periodic government assessment; incentive fee adjusts automatically based on measurable outcomes.
Strategic Value
For contractors, award fee potential can significantly increase total contract profitability on programs where strong performance is achievable. For the government, award fee aligns contractor financial motivation with mission outcomes. Contractors should treat Award Fee Board briefings as formal presentations requiring careful preparation and clear documentation of accomplishments.
Frequently asked questions
Can a contractor earn zero award fee?
Yes. If performance is rated unsatisfactory or the contractor fails to meet the minimum threshold specified in the Award Fee Plan, the board can determine that zero award fee has been earned for that period. Award fee determinations are generally not protestable because they are within the government's discretion.
What is the base fee in an award fee contract?
The base fee is the guaranteed minimum fee the contractor receives regardless of award fee evaluation results. It is typically set low, between 1% and 3% of costs, to ensure the award fee pool is large enough to be a meaningful incentive. The base fee plus the maximum award fee together represent the total potential profit on the contract.