The highly secretive National Security Agency may have relied too heavily on the contractor incentives provided in cost-plus award fee contracts, according to a new inspector general report calling into question some $630 million in awards.

A review of 54 contracts awarded using that method in fiscal years 2016 and 2017 showed that more than half “did not have a valid Determination and Finding justifying use of this contract method,” the NSA inspector general said in an April 3 report. Fifty-one of the 54 “lacked the required cost-benefit analysis of the expected benefits versus the additional administrative costs of monitoring and evaluating the contractor’s performance.”

The review was launched “because of the magnitude of the agency award fee contract pools and the significant potential financial risk to the agency and administrative burden associated with effectively managing award fee contracts,” the IG said.

So-called award fee contracts have long been permitted under the Federal Acquisition Regulation for work of a nature that makes it neither feasible nor effective to devise predetermined objective targets applicable to cost, schedule and technical performance, the report noted. Such awards are also appropriate if the likelihood of a company meeting the agency’s acquisition objectives will be enhanced by using a contract that “effectively motivates the contractor toward exceptional performance and provides the government with the flexibility to evaluate both actual performance and the condition under which it was achieved.”

That assumes that any additional administrative costs and risks for monitoring that performance are justified in a documented cost-benefit analysis.

The award fee arrangement does not include predetermined targets or automatic fee adjustment formulas; instead, the award fee becomes a subjective decision made unilaterally by the government.

NSA, a component of the Defense Department, in recent years has been increasing its obligations for award fee contracts, which rose by 139 percent from fiscal 2010 to fiscal 2017, the report noted. This is all at a time when the Defense Department is moving away from award fee contracts toward “objective incentive arrangements,” with the Pentagon’s reliance on award fee arrangements falling from $34 billion to $10 billion from fiscal 2010 to fiscal 2015.

The IG faulted NSA for failing to “evaluate the effectiveness of award fees. The agency does not comprehensively collect and analyze relevant data pertaining to award and incentive fees paid. Therefore, it cannot determine” whether they have led to improved contractor performance or achieved desired program outcomes.

Because the auditors found “insufficient evidence to support the determination” that the use of award fee contracts was appropriate, the auditors said, “we question $636 million in award fees earned over multiple years associated with 54 contracts.”

One possible reason NSA’s handling of the contracts may not have served the government’s interest, the report suggested, is a “supposition expressed to the OIG by some participants in the contracting process that award fee administrative procedures discourage individuals from rating contractor performance as less than optimal. For example, one individual stated that they were not permitted to assign a 70 percent award fee earned because the contractor had not been given formal notice.”

The IG made three recommendations to assist NSA and its Central Security Service in “addressing the record-keeping deficiencies and data analysis requirements identified in this audit.”

Following publication of the IG report, an NSA spokesman told Government Executive, "When preparing the 54 contracts reviewed by the OIG, NSA contracting officers used sound business decisions and their professional judgment to determine the appropriate contract type in accordance with federal regulations. In response to the OIG's findings, NSA agreed to the recommendations and is making changes to improve the documentation associated with providing the rationale for the use of award fee contracts and percentages. The award fees earned were properly calculated in accordance with the award fee plans under each individual contract."