Performance-Based Contracting

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Federal, state and local governments have engaged in performance-based contracting for a long time. We've witnessed a dramatic upswing, however, in the last few of years, especially at the federal level.

Last year, the Office of Management and Budget (OMB) directed agencies to use, in 2002, performance-based contracting for at least 20 percent of service contracts greater than $25,000. The Pentagon has set a goal of 50 percent by 2005.

Even if they're not met, these ambitious goals demonstrate that the emphasis on performance-based contracting is here to stay.

In performance-based contracting, the government states its requirements in terms of desired results rather than detailed, procedural specifications. The contractor decides how to perform and achieve the results. Here's a definition provided by the Navy:

"Under PBSC, the government pays for results, not effort or process, and contractors are free to determine the best and most cost-effective ways to fulfill the government's needs."

A more detailed description is set forth at FAR 37.601:

"Performance-based contracting methods are intended to ensure that contractors achieve required performance quality levels and that total payment is related to the degree that services performed meet contract standards. Performance-based contracts--

    1. Describe the requirements in terms of results required rather than the methods of performance of the work;
    2. Use measurable performance standards (i.e., terms of quality, timeliness, quantity, etc.) and quality assurance surveillance plans (see 46.103(a) and 46.401(a));
    3. Specify procedures for reductions of fee or for reductions to the price of a fixed-price contract when services are not performed or do not meet contract requirements (see 46.407); and
    4. Include performance incentives where appropriate."

Work Statements

While the concept is simple (pay based on performance), implementation isn't. That's because performance-based work statements, which set the terms of payment and work to be performed, are difficult to draft.

Think of the complexity of writing one for a contractor to operate a federal nuclear research facility. You would need a formidable team of MBAs, industrial engineers, and efficiency experts to get the job done. In this situation, how would you quantify performance quality?

As you might expect, the government is having trouble writing practical performance-based work statements because they're often complex to write and because, on the whole, the acquisition work force is not yet adequately trained.

Market Research

A leading government guidebook on the subject ("Guidebook for Performance-based Services Acquisition in the Department of Defense," http://www.acq.osd.mil/) emphasizes the importance of conducting market research. Government acquisition personnel are to become "informed consumers" if they are to have any success in developing work statements.

One leading expert stresses that acquisition teams need to "canvass" contractors, asking such questions as:

  • What measures would they propose?
  • What incentives would they want? How?
  • How would they want to report performance data?

This is yet another example the importance of selling early and personally to government buyers and end-users. You want to be in a position to assist in the market research effort. You want to be "canvassed" (strange as that may sound). You want to provide information on your company's services, help the acquisition team do its job and, hopefully, leave your imprint (however slight) on the resulting work statement.

Another more subtle reason: crafting and responding to work statements requires that both sides--procurement people and contractors--have a clear understanding of an agency's program goals. If you're not in the game early, you're not in the position to devise innovative solutions to meet those goals.

Risk-Taking

Old-style cost-reimbursement contracting is safer for the government contractor. Assuming you have a capable and caring staff, they basically have to go to work, do their jobs and you will get paid and make a profit. Management need only have a good contract manager, leaving them the time to focus attention on winning new contracts.

Cost-reimbursement contracts required procurement personnel to carefully detail what contractors were to do and how they were to do it. To make up for the fact that laying out every detail is impossible, the resulting contracts often allowed reimbursement for extra costs. Post-award cost adjustments were the norm. In the old days, agencies assumed much of the costs of amended requirements, and even the costs of poor performance.

Performance-based contracting, on the other hand, puts a premium on contract management, cost control, and your knowledge of precisely what the costs will be.

Contractors don't have that "wiggle room" with performance-based contracts. So the bottom line is this: you'd better know exactly what you're getting into and you'd better be innovative. If you know your costs and agency program goals, and if you're creative in coming up with solutions, there is money to be made.

Repeat Contracts

What hasn't changed is that service contracts tend to "repeat" themselves. Once you've landed a service contract, you can maintain current annual revenue levels by performing well.

One caveat, however: there is an inherent appearance of impropriety if the government goes back to the same contractor over and over, even though that may be the best deal for the taxpayer. Sometimes internal government politics cause re-competes to go to the wrong contractor.

In spite of this, it is reasonably safe to assume that if you perform you will win next time around and maybe even a few more after that before the government gets nervous about the appearance of a level playing field.

As the incumbent you're the only one who really understands the contract requirements in the real world, and thus you're in the best position to bid a realistic price. The danger of competition deliberately underbidding you, and making up the difference later with contract modifications, is reduced in performance-based contracting. Why? Again, because it's harder to negotiate contract modifications.

Sales Tips

  • Get an even better understanding of the customer's requirements and perceived solutions than you might for a cost reimbursement opportunity.
  • Sell your ability and desire to meet performance-based goals.
  • Instill confidence in the customer that you will be able to perform under a performance-based contract.
  • Stress your experience in performing government performance-based contacts, if you can. If not, substitute commercial experience. Commercial experience carries more weight these days.

Resources:

Note: although helpful for understanding the process, the following are written from the buyer's perspective:



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