Shared Savings: Aligning Incentives to Drive Efficiency

Summary

Under a shared savings model, vendors are paid a percentage of the savings they generate, earning nothing if outcomes and savings are not achieved. This approach, which requires no upfront costs for the customer, fundamentally inverts legacy Department of War (DoW) contracting by aligning vendor incentives with government outcomes and has already delivered billions across federal agencies. Expanding its use within DoW procurement will reduce costs and enable funds to be redirected toward our Nation’s warfighters and other mission priorities.  

Why it Matters for the DoW  

The DoW has traditionally favored cost-plus or firm-fixed-price (FFP) contracts, which account for nearly three-fourths of all contract vehicles. With cost-plus contracts, the government bears the financial risk for cost overruns, and FFP contracts carry other risks, such as inflated prices or schedule delays. Shared savings contracts flip the legacy approach and the risk.  

Under shared savings, the DoW pays the vendor only a percentage of the savings it generates, rather than a fixed fee. The vendor bears all upfront costs associated with deploying a solution and earns a portion of the verified cost reductions. In this approach, vendors profit only when they achieve savings for the customer. More specifically, payment is tied to measurable outcomes delivered, rather than effort or activity. If no savings are realized, the vendor earns nothing.   

The concept of shared savings is not new. For decades, it’s been successfully implemented across federal agencies like Medicare and the U.S. Department of Energy, generating tens of billions of dollars in cost savings. The DoW has also used a similar contracting model known as performance-based logistics (PBLs) for weapon system product support, which has successfully incentivized contractors to achieve certain performance outcomes and cost savings. 

In the age of AI, shared savings offers a superior alternative to cost-plus, FFP, and PBL contracting, tying a vendor’s financial outlay directly to speed, cost reduction, efficiency, and measurable performance enabled by agentic workflows. Below are a few use cases where this model could be applied within the DoW. 

Where it Works 

1) Protest-Driven Procurement Delays 

Bid protests frequently delay awards, triggering costly bridge contracts. Many protests result from preventable issues like unclear requirements. AI tools can help reduce this risk by flagging ambiguities in draft performance work statements and generating debriefings that reduce bidder uncertainty.  

Outcome: The vendor earns a percentage of the verified savings associated with mitigating award delays, while the DoW retains the majority of the funds. For example, a $9 million reduction in bridge contract costs with 20% earmarked for the vendor nets the vendor $1.8 million. The DoW recovers $7.2 million and up to 12 months of mission time. At scale, this approach addresses a $9.5 to $35 billion annual problem. (GAP Bid Protest Annual Report FY 2024; Red Cell Partners cost analysis, May 2026). 

2) Lengthy ATO Timelines 

A DoW ATO package approval can require 6 to 12 months of manual documentation. With AI-enabled automation, a vendor can automate this process, compressing the average timeline from several months to just 6 weeks while lowering costs by 70% per package.  

Outcome: DoW recovers hundreds of millions in labor spend and fields authorized systems months faster. Time previously devoted to documentation is returned to service members and program offices to support the mission. (HigherGov contract data; NIWC Atlantic contract inventory). 

3) Audit Factory Expenditure 

Deloitte and KPMG hold multiple concurrent Financial Improvement and Audit Readiness (FIAR) contracts across Air Force components. These contracts—valued at $62 million—can be consolidated by a vendor into a single AI-augmented delivery model overseen by a small team of humans. 

Outcome: This approach delivers an equivalent scope at nearly 40% of the current cost ($24.8 million versus $62 million). If the vendor earns 30 percent of the verified reduction, it receives ~$11 million over the contract term. The government saves $26 million annually, reduces reliance on incumbents, and establishes a competitive, secure, auditable, and traceable AI-native audit support capability. (HigherGov contract data; GSA USASpending.gov; IDA D-3733). 

The Clear Path Forward 

Shared savings is well-suited for the DoW. By launching a small set of pilot programs using existing contracting vehicles, including Other Transaction Authority or Commercial Solutions Opening, the Department can test and refine this approach with clear metrics, independent verification, and timely, transparent reporting. 

With proven precedent and available technology, the path forward is well-supported. This approach offers an opportunity to further align incentives around measurable outcomes and shared success, helping ensure that both government and vendors are working together to deliver meaningful, demonstrable savings that can be reinvested in high-impact mission priorities.