PERFORMANCE BASED
CONTRACTING
Supply Chain Management
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PERFORMANCE BASED CONTRACTING
PBC – First, a procurement METHOD… then a resulting TYPE of contract
How is it a procurement METHOD?
• All aspects of the procurement are geared toward the PURPOSE of the
contract, not the HOW the contract will be performed.
– Encourages supplier to bring new approaches at a reasonable price by
giving suppliers latitude in determining HOW to achieve contract purpose
and providing incentives for suppliers to achieve purpose cheaper, faster.
– PBC looks to the supplier to best organize resources to achieve contract
purpose.
– Not described as a procurement method in the VPPA.
– Requires clear, specific, objective contract requirements and measurable
outcomes.
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PBC? What is it? Why?
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DEFINITION: Method of contracting where Customer defines the results it is
seeking, rather than the process by which those results are attained. Also
included are the standards against which contractor performance will be
measured, and positive and/or negative incentives.
BENEFITS:
– ® Better prices and performance;
– ® The customer is released from having to develop detailed specifications and
define the process;
– ® The contractor has more flexibility on how to achieve the desired results;
– ® Less day-to-day surveillance is required; and
– ® Contractors are motivated to be innovative and to save money (we must
evaluate cost vs. benefit!).
What’s So New About This? NOTHING, in the commercial world. They long ago
realized they do not have the expertise to tell their suppliers how to do the
work.).
The burden is on the contractor to accomplish the required results. He measures
his own performance by developing and implementing a Quality Assurance (QA)
plan, plus the customer measures his performance against standards established
in the contract.
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PERFORMANCE BASED CONTRACTING
Key attributes of PBC:
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Outcome oriented
Clearly defined objectives
Clearly defined timeframes
Performance incentives
Performance monitoring
PBC Objectives:
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Maximize performance – supplier delivers based on best practices and customer’s desired
outcome.
Maximize competition and innovation – encourage innovation using performance requirements.
Minimize burdensome reporting and reduce use of contract provisions that tie supplier’s hands.
Shift risk to suppliers so they are responsible for achieving contract objectives through their own
best practices and processes.
Achieve cost savings through performance requirements.
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PERFORMANCE BASED CONTRACTING
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Elements of a PBC
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SOW or other document describing requirements and customer expectations in terms
of measurable outcomes rather than by means of prescriptive methods.
Measurable Performance Standards – written definition of what is considered
acceptable performance to determine whether contract outcomes are met.
Quality Control Plan (QCP) – written document describing how supplier’s
performance will be monitored and measured against contractually established
performance standards.
Incentives –
• Written procedures addressing how met and unmet contractual performance
standards will be resolved, escalated, remediated and/or remunerated.
• Incentives may be linked to price or fee adjustments.
• Incentives can be used, where appropriate, to encourage performance that will
exceed the established performance standards.
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PERFORMANCE BASED CONTRACTING
In a PBC, the contract MUST include:
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Everything buying or covered by the contract;
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Volume assumptions for services (particularly if there are large variable costs involved.)
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Reliability, availability and performance (RAP) requirements, methods of dealing with
operational issues (escalation, help desk, hot line and severity levels) and conditions of
use or change of use conditions/restrictions.
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Dates/deadlines where specific deliverables are due at initial switch on, ramp up, ramp
down or upgrade of service; e.g. year end, implementation dates, legislation changes.
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Method of delivery (paper/fax/hand, means/source or object code.)
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Time after which deliverables must be consumed or tested and still supported
(obsolescence limits).
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Documentation/manual and standards.
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Definition of what is considered a service failure and what is considered an
“enhancement” to the service.
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PERFORMANCE BASED CONTRACTING
Critical Success Factors in designing a PBC:
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Define agency baseline and what level of performance is expected.
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Include provisions for flexibility and incentives
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Craft a performance based contract or SOW that:
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Includes mechanisms for measurement, reporting, monitoring and supplier feedback
Defines a system for revisions and reconciling deviations in expected performance
Considers a transition period – use “hold harmless” clause during period.
Monitors performance with regular reporting requirements
Can be adjusted when needed.
Identify factors that might impact performance
Devise corrective action plan for performance deviations
Benchmark and compare.
Revise performance targets to continue to achieve progress.
Provide comparative performance data for suppliers – create a “race to the top” culture.
Communicate and reward success.
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PERFORMANCE BASED CONTRACTING
Make SMART Performance Measures/Incentives Part of the Contract:
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Specific
Measurable
Accountable
Results oriented
Time-bound
Before Contract: - AQL
Customer must determine acceptable quality level (AQL) so that the supplier can be
measured and evaluated against this pre-established level during the contract.
AQL establishes minimum allowable variation or error rate from the standard.
AQL must be reasonable and determinable.
*During negotiations, customer may allow supplier opportunity to propose different target levels
of standards of service along with the appropriate price adjustment.
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PERFORMANCE BASED CONTRACTING
PBC Performance Measures Should Measure What’s Important:
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TCO – Total Cost of Ownership
Quality of Goods/Services
Proposed technical performance
Financial stability
Cost of Training
Qualifications of Individuals employed/utilized by supplier
Risk Assessment
Availability and cost of technical support
Cost/Price
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Performance Incentives
• Cost-based - Relate profit/fee to results achieved by the
supplier in relation to identified cost-based targets.
• Award fee - Allows suppliers to earn a portion (if not all) of an
award fee pool established at start of an evaluation period.
• Share-in-savings - Supplier pays for developing an end item
and is compensated from the savings it generates. Established
baseline of costs is extremely important.
• Share-in-revenue - Generates additional revenue
enhancements; compensation based on sharing formula.
• Balanced scorecard -Used when performance is less tangible,
i.e., quality of lead personnel or communication and resolution
of issues.
• Non-performance Incentives - Specified procedures for
reductions in payment when services are not performed or do
not meet contract requirements.
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Payment Strategies
A payment strategy is not limited to incentive or award
fees, but may include payments tied to performance
and acceptance. For instance, a payment incentive
schedule may include 100% payment for on-time
deliveries that are validated to exceed or conform to
performance requirements; while delinquent
deliveries or those with diminished performance may
have payment reductions based on calculated
increments or percentages tied to % of service levels
not being met.
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Non-$ Incentives
Non-Monetary
• Revised schedule
• Reduced oversight
• Positive performance evaluation
• Automatic extension of contract term or option exercise
• More frequent payments
• Lengthened contract term (award term contracting) or purchase
of extra items (award purchase)
• Publish article(s) in agency newsletter or speak at agency
seminars
• Letters of appreciation to individual employees may translate to
bonuses
• Use trade space for licensing, access to agency officials, etc.
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PBCs and SLAs
Service level agreements (SLAs) are contracts which specify in
measurable terms the services to be provided, the standards to
be attained in the execution of those services and the
consequences that occur in the event the standards are not met.
SLAs often include:
• Percent of time services should be available
• Number of users to be supported
• Performance benchmarks
• Schedule for advanced notification of system changes, upgrades,
downtime
• Response time
• Usage statistics
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Service Level Agreements
In developing and negotiating a successful SLA, the following should be considered
and included:
• Definition of the agency’s business goals, requirements and scope of services
being procured.
• A detailed service description, duration of services, installation timetable,
payment terms, ts and cs and legal issues (i.e. warranties, indemnities and
limitations of liability.)
• A repeatable process, with solid and accurate metrics’ capture and analysis, to
measure the supplier’s progress and monitor performance.
• A documented reporting process that includes type, amount, format and a
schedule of information to be reported by the service provider and procedures
for how customer will oversee the agreement and ensure performance
measures are met.
• Agreed upon procedures for non-performance in case of unforeseen
circumstances.
• Detailed service expectations, performance levels, positive and negative
incentive structure, escalation procedures and legal ramifications; i.e., breach
and default.
• An executed contract that binds the agency and the service provider; the SLA
will be a part of the contract.
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EXAMPLE – PBC- Software Development
Desired Outcomes
Required Service
Performance Standard
Monitoring Method
Incentives/Disincentives
for meeting/not meeting
Performance Standards
What do we want to
accomplish with this
contract?
What task must
be accomplished
to give desired
result?
What should the
standards for
completeness,
reliability, accuracy,
timelines, quality
and/or cost be?
How will we
determine that
success has been
achieved?
What carrot/stick will
best reward good
performance or punish
poor performance?
Enterprise Architecture
standards will be met,
along with functional
requirements.
All functional
requirements shall be
met; software
delivered shall
comply with
enterprise
architecture
standards including
security
All architectural
requirements shall be met.
Functional requirements
shall be prioritized to allow
for not more than 1%
deviation for each
requirement.
Review test
results/analyses to
ensure required
functionality provided.
Obtain and analyze
user feedback.
Full payment for 100%
compliance. Payment less
than 100% may be made for
less than full compliance if
less than full functionality is
accepted.
User guides and
documentation are
accurate, complete
Documentation shall
meet agency
requirements for
accuracy,
completeness and
ease of use
95% of documentation
provided meets the stated
standards.
Review documentation
with IV&V to ensure
functions and
operations properly
documented.
For each % > 95, supplier shall
receive an extension of the
software support agreement
for an additional 3 month
period.
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Example – cont’d
Desired Outcomes
Required Service
Performance Standard
Monitoring Method
Incentives/Disincentives
for meeting/not meeting
Performance Standards
Interfaces with all system
components and full
functional to user.
Software full
compatible with
existing LAN and
software suite.
100% compliance required
for customer satisfaction,
performance and utility.
Review system admin.
Logs, noting service
interruptions, conduct
IV&V, tests using
commercial
performance tests.
Full payment made for 100%
compliance. Additional fees
may be awarded if supplier
successfully reengineers
interfaces and improves
baseline performance.
Software can perform
requisite functions,
delivered in accordance
with the stated schedule,
including shorter-term
milestones.
Delivery dates in
contract are met or
exceeded.
Stated delivery date shall be
met unless new completion
date agreed to.
100% inspection
For each week ahead of
schedule the documentation is
delivered, contractor shall
receive additional fee of .5%.
No additional fee paid for nonconforming deliverables.
All users shall receive
training appropriate for
their intended use of the
new software.
Data in existing files
shall be transferred
to the new system
with minimal loss of
productivity and data.
95% of data transferred to
new system suffers no
conversion errors and is
usable when new systems
are made available.
Review user
complaints, trouble
tracking, noting errors
due to data
conversion, improper
software function,
programming
problems.
+/- .5% of total monthly price
for each variance of +/- .5%
variance from standard.
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