Due diligence at cutting edge of contracting

You're convinced that performance-based contracting will save money for your mission and result in better vendor performance. And you're thinking big. You have a major systems development project that is going to modernize the way your organization does business. Or you're recompeting a contract to run one of your operations, and you want to introduce performance standards into it. What do you do next?

The first thing you do is sit down with your contracting folks and form a team to develop draft performance standards. The old method of developing a work statement and throwing it over the fence to contracting was never a productive way to do business. When you're moving into a performance-based situation, the contracting people can act as facilitators for the group process of developing performance standards. A good first question to the group is: "How would I know whether this contract succeeded?" The answer to that question will start suggesting performance parameters, which in turn is the first step to developing performance metrics. When the government's requirement has a commercial counterpart, market research on commercial standards is also a good idea. Joint, just-in-time training of the team in techniques of writing performance-based contracts is also helpful, and lots of training vendors now provide such training.

Once you've developed draft performance standards and positive/negative vendor incentives, you'll want to try your ideas out on industry, using full-and-open communication techniques. Industry might tell you that if you lowered a certain performance standard by 10 percent, it could shave 25 percent off the government's costs.

Industry also might be able to call the government's attention to important performance dimensions that may be missing from your draft.

Now you face the challenge of getting vendors to be willing to sign on the dotted line to meet the government's performance standards, particularly if they're going to do so for a fixed price.

(And if you think about it, it is unclear what it could mean to "sign on the dotted line" for performance requirements in a cost-reimbursement environment without it potentially bankrupting the government, unless there are significant incentives built into the contract.)

That can be risky under any circumstances. Vendors don't know enough about the "as-is" state of the business processes being re-engineered, or even being operated without re-engineering, in order to understand what it might cost them to meet the standards the government has in mind.

It is not surprising, therefore, that one of the most successful examples of converting a big information technology contract to a performance-based arrangement— involving Computer Sciences Corp. and Allied-Signal at NASA's Goddard Space Flight Center— occurred in the middle of the contract with vendors who were already on-site and knew the existing operation well.

How It Works

Enter the concept of "due diligence," a cutting-edge contracting technique that is more common in the commercial world. The idea behind due diligence is to allow a number of vendors to kick the tires at the operation about which they're bidding— to spend as much as several weeks being able to observe, ask questions and generally poke around. The idea is to reduce the risk to vendors to the point where they are willing to sign up to requirements they otherwise might have been unwilling to bid on.

We've started to see some examples of due diligence in the government. Kelly Air Force Base, Texas, used it in connection with aircraft and engine maintenance competitions that were run over the past two years. The General Services Administration's Federal Acquisition Center— ever sensitive to the latest and greatest in contracting techniques— has expressed a willingness to use this approach for government customers.

Just to show how cutting-edge contracting techniques are connected, the "due diligence" approach ties in with one of the significant innovations in the Federal Acquisition Regulation Part 15 rewrite, which allows an early advisory down-select of noncompetitive vendors. Because an agency would hardly want 10 vendors around kicking the tires, it makes sense to do an advisory down-

select, allow those remaining to perform due diligence and work with those vendors to develop the final request for proposals for them to bid on.

Due diligence also makes it easier for a top-flight nonincumbent to break into a closed system. I have no problem with a well-performing incumbent having an advantage; that's part of what past performance is about. All too often in our system, however, incumbents have an advantage, whether they have performed well or not, simply because they know the agency's operation better than competitors.

Due diligence levels the playing field. That's a good reason to use this idea even in situations that don't involve performance-based contracting.

-- Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.