A new way to use past performance in contracting

I have, more or less forever (actually, since I published a book on government information technology procurement back in 1990), argued that consideration of vendor past performance in the award of new contracts has the potential, if used well, to dramatically improve the quality of vendor performance. It’s common sense – a key way any market economy works is that if you have a good experience with a product or service, you go back for more. If you don’t, you don’t.

I do believe that introducing consideration of past performance in government procurement in the 1990s improved the process, though I have also extensively written about problems and shortcomings in the system as used in the real world of government contracting.

At any rate, I also believe there are lots of ways to use past performance to improve various intractable, or hard to get a handle on, elements of the procurement process. I wrote recently on that theme in a column on making better use of past performance evaluations in sole-source spare parts pricing. Today I want to suggest another idea – using past performance evaluations to encourage vendors to share cost savings on fixed price contracts.

What’s the issue here? There is an increasing emphasis in the government on using fixed-priced contracts for service contracting, a trend that on balance in my view is a good thing (though I am aware of the criticisms and downsides). One virtue of fixed-price contracting is that it encourages vendors to come up with lower-cost ways to meet contractual requirements, since the contractor’s payment is independent of their costs, and if they can lower their costs, their profits will go up.

At the same time, though, currently there is no way for the government to get any of the benefits of such contractor cost reductions. Since the contractor is entitled to receive the full fixed price agreed to as long as the contract requirements are met, there is no sharing of cost-savings benefits as with an incentive fee or share-in-savings contract.

Here’s my proposal: if a contractor, at the end of the contract where performance has met requirements, returns 3 percent of the fee on a fixed-price contract to the government customer (maybe make it 5 percent for a contract under $500,000), the contractor will automatically be given the highest-possible rating on the cost control element of the past performance evaluation, with an explanation in the evaluation of why the rating was received. With the increased attention these days to cost control, this may be a valuable incentive for contractors to return money (to which, it should be remembered, they are entitled to by the contract) to the government

A few points: First, I suggest a specific percentage return, rather than “at least,” because you want to tell the contractor in advance exactly what will earn them the highest possible rating. (I realize that no contractor is likely ever to return more than the 3 percent or 5 percent, even if they had saved 30 percent.) Second, one thing I like about this approach is that it recognizes the idea of rewarding a contractor who goes “above and beyond” contract requirements, rather than expressing the view one hears sometimes that contractors should do only what the contract specifically says, nothing more.

Note that an agency, or even an individual office working on an individual contract, could implement my proposal with absolutely no statutory or Federal Acquisition Regulation changes – although I think if an agency plans to do this, it should announce the policy in its solicitation. But this will be more powerful if adopted as a policy at an agency or even a government level. Maybe an Office of Federal Procurement Policy letter or something on this? This certainly would tie in with the administration’s emphasis on cost savings from contracting, as well as being a complement to the administration’s effort for more fixed-price contracting.

I raise this proposal partly because I think it’s a good idea, and partly to get others to think about other good ideas for how to improve the way we use the procurement system to deliver value to the government.