Performance-based contracting ascends

The buzz around performance-based contracting continues to grow, aided most recently by a boost from the Services Acquisition Reform Act.

Under SARA, some performance-based contracts — in which contractors get paid based on how they meet predefined metrics — can be considered "commercial item" acquisitions and in some cases exempt from oversight laws.

But SARA is only one bill that promotes performance-based contracting. Another piece of recent legislation, the Defense Transformation Act, authorizes the secretary of Defense to create a performance-based logistics program to improve the availability of weapons systems.

The model has worked, at least in the early stages, for contracts such as the Transportation Security Administration's billion-dollar Information Technology Managed Services (ITMS) contract. But industry and government alike still need help understanding and using it, experts say.

"At the highest levels, we talk performance-based contracting, but if you get out in the field, people aren't doing it," said Charles Self, deputy commissioner of the General Services Administration's Federal Technology Service and a proponent of performance-based contracts. "I think we're just treading water."

In simple terms, a performance-based contract is one in which the agency defines its objectives and lets the contractor decide how best to meet them. Together the agency and the contractor choose performance measurements to gauge a solution's effectiveness, with rewards for superior performance and penalties for sub-par work.

In a sense, performance-based contracts are harder for both government agencies and the vendors. Agencies have to think clearly about what they are trying to accomplish and how they'll know when they do so. Meanwhile, contractors are no longer told what to do and therefore have to solve the agency's problems.

"Performance-based contracts are typically going to be much less defined and much larger in scope" than more conventional contracts, said Robert Sturm, director of government contractor services at H&K Strategic Business Solutions. "Performance-based contracting over the past couple of years has been rather foreign to the government agencies. They're starting to wake up."

H&K and Acquisition Solutions Inc. recently co-hosted a workshop for contractors to teach them how to use performance-based contracts. Although it has not been a common practice for a long time, the companies that already have experience often have a better chance of winning the government work, he said.

"This is a different way of doing business with the government," said Donald Taylor, Computer Sciences Corp.'s vice president for sourcing solutions in the federal government. "The government has historically gotten involved with the solution. In performance-based contracting, it should be hands-off. You tell me what you want, and we'll tell you how we're going to deliver it. There's a line there, and it's a new way the government is having to get used to."

Acceptance is moving through the government unevenly, Sturm said. "There are a lot of old-school people within agencies who don't get it. They don't know how to write a statement of work, they don't know how to use the metrics, they don't know how to administer performance-based payments," he said. "They're scared by it, so they don't do anything."

That recalcitrance will be overcome, both by mandates and by a growing acceptance as agency officials see how effective the contracts can be, Sturm said.

"At TSA, it's the rule rather than the exception," said Mark Emery, the agency's acting deputy chief information officer. The paradigm has gained rapid acceptance in the new agency, he said.

With the success of ITMS, awarded to Unisys Corp. last fall, TSA has seen the key strength of the performance-based approach: "The government puts its energies into determining the outcomes it desires and then ensuring the quality of the delivery of those outcomes, as opposed to the government spending its energies on the details of how the outcomes are to be achieved," he said.

The trickiest thing is figuring out how to measure performance, something best done through collaboration with the contractors, he said.

"The agency has to be very clear about what its strategic goals are and how those goals are influenced by the service being provided," he said. "I leave how to perform something up to the contractor. Now the government is going to be able to concentrate on what it's good at, and the contractors can concentrate on what they're good at."

But choosing the performance measures is not trivial work, he said. TSA and Unisys established some basic measures for ITMS, but have been working for six months to refine and add to them.

"These are mutually set goals. We want the contractors' experience from industry — what's best practice?" he said. "It's a negotiation process. It almost creates a partnership arrangement between the government and the contractors."

From the contractor's point of view, the key element is to clearly understand the agency's goals, said Tom Conaway, managing partner for homeland security at Unisys.

"It's a very analytical process," he said. "You begin to lay out parameters that are very specific in nature, that can be measured. It takes a lot of hard work between the government and the contractor. First and foremost, everyone has to agree. And it has to be defined and detailed enough that everyone can agree."

Both sides have traps they have to avoid, Conaway said. On one side, the government has to guard against being too involved.

"Under the [conventional] systems integration model, the government is more involved in the day-to-day scope of the contract," he said. "Theoretically, under the performance-based model, the government doesn't have to get that far into the weeds. This is a new type of contracting. If they've never worked in a performance-based environment, the tendency would be to manage more from a systems integration perspective."

On the other side, contractors have to become more involved.

"The natural tendency is still to get the government to sign off on the requirements and design, so if something doesn't work, you can say, 'Well, you agreed to it,' " he said. "I don't think you can do that anymore."

***

Defining the best ways to measure results on a performance-based contract is the trickiest part of the process, said Charles Self, deputy commissioner at the General Services Administration's Federal Technology Service.

Creating a performance-based contract may look easy, because it doesn't have a lengthy set of specifications for contractors to follow prescriptively. But without that burden, the agency gets the new task of determining appropriate benchmarks.

"It takes an added level of expertise to understand that I need a certain level of uptime, and how does that relate to [network] capacity, and how much should I pay for it?" Self said. "You've got to have measurements that determine whether there are going to be savings or cost differences."

"It's very important to really understand the outcomes you're contracting for and that it really lines up with the business objective," said Mark Emery, acting deputy chief information officer at the Transportation Security Administration. "I would never look at network uptime. I would look at what am I trying to provide to my users — what is the user experience?"