Contracting for Performance: No More “Acquisition Think”

Performance-based contracting offers government the ability to transform dramatically the nature of service delivery

Look around. It will probably come as no surprise that the number of government procurement professionals is dwindling. A recent General Accounting Office (GAO) report on spending and workforce trends estimates 38 percent of the federal acquisition workforce will be eligible for retirement between now and 2008. Other estimates put that number closer to 50 percent.

The shrinking workforce, coupled with evertightening budgets, has forced government to seek alternatives to labor-intensive procurement practices. Performance-based contracting (PBC) has become one increasingly important option.

PBC is hardly new. Lawrence L. (Larry) Martin, for one, wrote his first such contract in 1982, while working for Maricopa County in Phoenix, AZ.

Martin, who now serves as professor of Public Affairs and director of the Center for Community Part-nerships, College of Health and Public Affairs, University of Central Florida (Orlando), has studied the recent trend toward performance-based contracts.

“While I assume that at least some federal departments and agencies have a long history with PBC,” Martin says, “the current interest in the topic comes about as the result of studies, guidance, and encouragement provided by the Office of Federal Procurement Policy (OFPP) and goals and targets established by the Bush administration, the Office of Management and Budget (OMB), and The Procurement Executive Council.”

What is Performance-Based Contracting?
Defining performance-based contracting is no simple task.

“This is the major problem with PBC: there is no uniform definition,” Martin says. “The Office of Federal Procurement Policy guidance on PBC takes one approach, the Department of Defense another approach, the Federal Acquisition Regulation (FAR) yet another approach. And state and local governments subsume a wide variety of approaches under the rubric of PBC.”

Martin has proposed a comprehensive definition that would encompass all approaches, describing a performance-based contract as one that “focuses on outputs, quality, and outcomes of service provision and may tie at least a portion of a contractor’s payment, as well as contract extension or renewal, to their achievement.”

Output, the volume or amount of service, is a measure of efficiency. Quality describes the character of service. Outcome—the results, accomplishments, or impacts of a service provision—is a measure of effectiveness.

“Output, quality, and outcome represent the three musketeers of government performance,” Martin says.

The focus in PBC contracts, then, is on what is to be achieved rather than how it is to be done.

On the federal level, performance-based contracts must:

• Describe desired outcome rather than how service should be performed,
• Set measurable performance standards,
• Describe how contractor’s performance will be evaluated, and
• Establish positive and negative incentives, as appropriate.

State and local governments, on the other hand, have more flexibility in terms of what they consider PBC. They are constrained by fewer policies, procedures, and guidelines.

“In my opinion, state and local governments have been more creative in their use of PBC than [has] the federal government,” Martin says. “PBC is still in the research and development stage as a government procurement tool. It is much too early to be talking about ‘best practices’ or trying to prescribe a ‘onesize-fits-all’ approach to PBC as the federal government has done.”

Reversing the Roles of Responsibility
One advantage performance-based contracting offers is that it alleviates some of the responsibility traditionally placed on government entities.

“[In the past] government was very specific in spelling out how the work was to be accomplished,” says Hamilton Brown, a contracting officer with the Food and Drug Administration (FDA). “What did that result in? It resulted in low quality because contractors could always point to the contract and say, ‘This is what you told me to do.’ The way government corrected that [before] would be to just put more money into the contract because it was cost reimbursement, and the cost risk was always on the government.

“Now, when you go to a perform-ance-based work scope, it’s the offeror, not the government, who determines how the work is to be accomplished,” Brown says. “The risk is on the offeror, not only for performance, but also for accomplishing that performance within a defined cost ceiling which, ironically, most contractors prefer! They want that responsibility of performance to be theirs so that they can decide where they will invest their resources. Quality becomes a critical issue.

“You are looking at quality much more heavily in PBC,” Brown says, “not that you weren’t concerned with quality in the traditional scope of work, but [then] it became an issue for the government to correct. Now it’s an issue for the contractor to correct.”

Solutions for Services
Contracting for services represents the single largest category of federal procurement, accounting for some $88 billion, or about 43 percent of federal contract dollars, Martin says.

A recent GAO finding says agencies reported that 24 percent of eligible service contracts, by dollar value, were considered performance-based in FY 2001. To date, 47 states have adopted some sort of performance measurement/budgeting requirement.

“Output, quality, and outcome represent the three musketeers of government performance. ”
Lawrence Martin, Professor of Public Affairs and Director of the Center for Community Partnerships, College of Health and Public Affairs, University of Central Florida (Orlando)

“Performance-based contracting is a good tool for use in service contracting,” Martin says. “Government procurement policies were designed to acquire supplies and equipment, not services. However, today, much of what governments do is acquire services. PBC is really one of the first attempts (along with best value) to develop procurement tools that are specifically designed for services acquisition.”

Benefits Abound
In addition to helping a dwindling procurement workforce do more with less, performance-based contracting offers the advantage of cost savings. According to a 1998 OFPP report, an evaluation of 26 performance-based contracts in 15 federal agencies with a total value of $585 million found that costs to the government decreased by 15 percent, customer satisfaction increased by 18 percent, and financial audits decreased by 93 percent.

Performance-based contracts also allow for a more expansive offering from contractors.

“From a practical point of view, what we experienced was that the evaluation and negotiations of a PBC requirement are much richer than what we had done under the traditional scope of work, in that we got a wider variety of different approaches on how to tackle a service requirement,” Brown says. “When you go down this path, you shouldn’t be surprised that your proposals could be wide-ranging in their differences.”

“Theoretically, PBC should lead to a lessening of the need for contract monitoring and a reduction in the amount of contract administration required,” Martin says. “Rather than attempting to monitor the process of service delivery (using design specifications), PBC focuses on a few critical performance expectations (using performance specifications). The monitoring and contract administration functions then become primarily concerned with documenting the extent to which the desired performance is achieved.”

“The intent of performance-based contracts is to shift the paradigm from traditional ‘acquisition think’ into one of teamwork, with a focus on program performance…”
Seven Steps to Performance-Based Services Acquisition

Establishing Standards
Purchasers are familiar with using objective standards for the receipt and acceptance of supplies and products. Procuring services, however, can be less straightforward.

“Standards for services are more difficult to develop and apply because [we’re] frequently faced with having to objectively measure the qualitative versus the quantitative outcome of a service,” Brown says. “Quality lies in the eye of the beholder and will always be subjective. There is nothing wrong with the subjective measurement of a service as long as it is done in accordance with a reasonable, fair, and consistently applied standard.”

Still, in general, Martin believes it should be easier to precisely define a small number of performance expectations in a service contract than to attempt to prescribe exactly how the service is to be provided.

Patrick Plunkett, senior analyst with the General Services Administration (GSA) Office of Governmentwide Policy, says,”Effective performance measures are customer driven, give an accurate and comprehensive assessment of acquisitions, programs, and activities; minimize the burden of data collection; and are accepted and used to improve performance.”

Encouraging Contractors
According to the U.S. Department of Health and Human Services Acquisition SuperSite, Knownet, “performance-based contracting is predicated on the notion that the best way to motivate a contractor is to shift the responsibility for achieving acceptable performance from the government to the contractors by allowing them to devote the resources and intelligence necessary to make their own ideas work.”

In his research, Martin has found that contractors embrace the concept.

“Most federal, state, and local government contractors that I have spoken with prefer PBC to the old way of contracting for services,” Martin says. “They have greater freedom to change service delivery processes, while being held accountable for more precise performance expectations.”

Acceptable Quality Levels (AQL), the allowable deviation from a performance measure, help both purchasers and contractors to understand a contract’s minimum requirements. Adding incentives for superior performance and penalties for inferior results helps to encourage contractors to do their best.

Incentives usually take the form of additional compensation but may also extend existing contracts or award new contracts based on excellent past performance. Penalties deny compensation for substandard work and the possibility of future contracts.

“Incentives must be directly related to what the contractor will gain or lose by virtue of the incentive,” says John Cousins, a procurement analyst with the Program Support Center of the U.S. Department of Health and Human Services. “This is very important.”

Thinking Objectively
The federal acquisition workforce has not, to date, fully embraced performance-based acquisition, says an interagency-industry report titled Seven Steps to Performance-Based Services Acquisition. There are many reasons, such as workload demands, but more fundamentally, traditional “acquisition think” is entrenched in a workforce of dwindling numbers, says the report, a joint effort between GSA, U.S. Department of Commerce, U.S. Department of Defense, and other federal agencies.

To keep them mindful of their focus, Martin suggests procurement professionals think in terms of a statement of objectives (SOO) instead of a traditional statement of work (SOW).

“My observation is that when a SOW is used in PBC, government procurement professionals fall back into the old habit of focusing on process,” Martin says. “A SOO forces one to think in terms of performance.”

Gaining Ground on Goals
Shortly after being elected, President Bush established a goal that 20 percent of all service contracts valued $25,000 and over be performance-based by 2002.

The Procurement Executive Council set an even higher goal, aiming to see 50 percent of all service contracts as performance-based by 2005.

The former goal, Martin believes, has probably not been met. The latter could be reached, depending on how PBC is ultimately defined.

“The more expansive the conceptualization and definition, the more likely the goal will be achieved,” Martin says. “It is too early to think that we have found the one best way to do PBC. We should be more concerned with encouraging governments and procurement professionals to experiment with PBC and less concerned with reporting how many contracts are performance-based.”

Perseverance Through Potential Pitfalls
Moving to performance-based contracting may take time. Martin sees three potential obstacles.

“First, too much is being expected of PBC too quickly,” Martin says. “We are talking about a major paradigm shift in government procurement and contracts administration. This is not going to happen overnight and will necessitate a major organizational culture change on the part of government procurement and contracts administration professionals.

“Second, PBC could easily become another management fad like PPBS (Planning, Programming, and Budgeting System process), MBO (Management Buy Outs), zero-based budgeting, and others that could implode in a mass of paperwork and reporting,” Martin says.

“Third, government procurement professionals seem to have a great deal of difficulty making the transition from a focus on process to a focus on performance,” Martin says. “Having been trained in process and having spent their careers thinking about process (e.g., project management), [to not think] about process is difficult.”

Still, procurement professionals who persevere with perform-ance-based contracting stand to gain rewards for their entities and taxpayers.

“One of the challenges facing contracting personnel is that PBC requires more up-front work,” says Michelle Ringo, Esq., a contracting officer with the Sub-stance Abuse and Mental Health Services Administration (SAMHSA), an agency of the U.S. Department of Health and Human Services. “The contract specialist must provide a lot of technical assistance to project officers as they become familiar with the PBC environment. However, the payoff is a better contract with more accountability.”

Lawrence L. (Larry) Martin, professor of Public Affairs and director of the Center for Community Partnerships, College of Health and Public Affairs, University of Central Florida (Orlando), has 25 years of experience in government procurement and contracts administration. He has taught, consulted, trained, and conducted research on service contracting, public-private competition, and performance-based contracting (PBC). Martin is currently working with the National Institute of Governmental Purchasing (NIGP) to revise and update the organization’s training and certification materials on service contracting, which includes the use of performance-based contracting.