Agencies still going slowly on performance contracting

Performance-based contracting may be an efficient and economical approach to procurement, but it is different enough from more conventional methods that many agencies are still hesitant to try it.

Last week, experts in contracting spent a day talking to agency representatives, urging them to learn and use the approach.

In a performance-based contract, agency officials tell the prime contractor what problem it needs to solve and lets the contractor devise the solution. Agencies and contractors together develop a list of measures to use in determining whether the project is on track. Typically, the agencies reward contractors for meeting or exceeding expectations and withhold payment when they fall behind or go over budget.

The method, borrowed from the commercial world, puts agencies in the unusual situation of having less control over the technological approach while demanding more involvement in defining the important elements to measure progress against.

"This is big stuff," said Chip Mather, a former Air Force procurement official and now senior vice president of Acquisition Solutions Inc. "This is capital-C cultural change."

Agencies have to stop dipping their toes into the water, he added. "I don't think we can get there incrementally," he said at a performance-based contracting conference in McLean, Va., sponsored by FCW Media Group. "You've got to just cut those strings and move."

Progress has been halting. Mike Sade, director of the Commerce Department's Office of Acquisition Management, said the government's tentative moves can be discouraging.

"There are days when I sit in my office and say, 'It ain't gonna happen,'" he said. "There are days when I really believe it ain't gonna happen."

However, the culture-change issues are on both sides of the equation, said John Gilligan, Air Force chief information officer. "I've seen cultural issues in industry as well."

Specifically, he said, contractors sometimes argue for low performance measures to be sure they can meet them, setting up an underachieving climate that serves neither side.

The experts identified specific roadblocks that agencies have to work to remove. First, they have to accept that vendors are in it for the money.

"If you're taking a high level of risk, you're entitled to high profits," said Phil Kiviat, of the consulting firm Guerra, Kiviat, Flyzik and Associates Inc.

"I think it's the most important part of every project we put together," Sade agreed. "We ought to reward people if they are on budget and on time."

That is a major part of the culture change, said Steve Kelman, a professor of public management at Harvard's Kennedy School and administrator of the Office of Federal Procurement Policy during the Clinton administration.

"In the olden days, there really were people who in their heart of hearts would rather see the contract fail than see the contractor make a lot of money," he said.

Mather noted that when government is not laying out specific technology requirements, it has to expect that contractors might submit a variety of approaches to solving a problem. Rather than approaching that diversity skeptically, agencies should take it as an opportunity to consider the ideas.

"It's a good thing that we're going to have apples-and-oranges comparisons," he said. "We're harnessing the power of competition."

Contractors can bring ideas to government that never would have occurred to agency leaders otherwise, he said. That can lead to smarter acquisitions, better value for taxpayers and better results for the government.

"How you buy changes what you buy," he said.

Mather also encouraged the use of share-in-savings contracts, in which contractors are paid based on how much money their solution saves the customer.

Agencies should say: "If you can figure out a better way to skin this cat, I'll split it with you," Mather said.

Finally, although experts advocate performance-based contracting, it's not suitable for every project, Sade said. It's harder for research and development work, for example, because the performance measurements are often less tangible and a failed experiment doesn't necessarily mean the contractor didn't measure up.

Kelman said that, from his perch in academia, government is making progress. Industry and government understand each other better than they did, and that breaks down a lot of barriers, he said.

He also encouraged his colleagues not to worry about recalcitrant agencies.

"My philosophy of change is, let's work with the folks who want to change," he said. "We'll be busy enough. Let the stragglers straggle awhile."