Performance Based Contracting
Performance-based contracting (PBC), sometimes referred to as performance based service contracting (PBSC) or performance-based service acquisition (PBSA), means different things to different organizations, depending on the stage of contracting in which it is being deployed. The general definition of performance-based contracting is: The collection and use of service delivery performance data in the bidding, monitoring, and evaluation of contracts.
The primary essential elements for using PBC are:
- Describing the requirements in terms of results rather than methods of performance
- Using measurable performance standards (e.g., terms of quality, timeliness, etc.) and quality assurance surveillance plans
- Including performance incentives where appropriate (positive and negative)
There are two most frequently used PBCs, which is fixed-price incentive contracts and cost plus incentive-fee contracts. The two constants are: that a portion of supplier payment is based on performance and that the supplier shares some degree of risk on the contract.
Unlike traditional contracts, PBCs are ideal for situations where the parties wish to encourage one another to do more than just meet the baseline deliverable. PBCs include clear goals and expectations to help reduce costs and maximize profits. They incorporate incentives at inception, and these incentives are addressed by implementing specific terms and deliverables that are linked to performance. This ensures that all parties work to minimize costs and maximize productivity.
PBCs is a potentially powerful tool to improve the delivery of services, however, without serious planning and dedication it may in fact do more harm than good. When taking on PBC, significant time and effort needs to be spent training everyone involved on the process and an ongoing monitoring system of those involved needs to be established. Likewise, a balanced series of metrics need to be used. PBC should incentivize both efficiency and quality and focus on the real-world outcomes of a program rather than the day-to-day activities of program administrators.