5 keys to performance-based contracting

Performance-based acquisitions have been around in some form for many years, and they have been a mandate in government since the early 1990s. But agencies have only recently started to embrace the concept, longtime practitioners in the field say.

That's encouraging, said Chip Mather, co-founder and partner of Acquisition Solutions and a 20-year government contracting veteran.

Although the words "performance based" have been a part of contract language for a while, Mather said, it's been a form of pressure rather than a form of acquisition.

"That is still mostly the case today, though it's starting to change," he said. "And industry is also starting to react. They are trying to work out how to respond to performance-based contracts."

Mather and others offered some tips for companies to adjust to performance-based contracting.

Get started

Getting started is hard for agencies and contractors, Mather said, because performance-based acquisitions seem intimidating compared with more traditional procurement forms. Failures and bumps in the road will occur at least in the beginning, he said.

"Get together with people who have already done it," Mather said. "Talk to those who have already gone down the path and see what lessons they've learned."

Examples of successful performance-based acquisitions that people can learn from abound, Mather said, adding that tools exist for helping with the first step.

The Office of Federal Procurement Policy, for example, publishes a seven-step beginners' guide to performance-based acquisitions, complete with case studies.

"It's the 90/10 rule," said Andrea White, vice president of contracts and support services at Robbins-Gioia, a consulting firm. "You get 90 percent of the work done in 10 percent of the time, and it's that final 10 percent that takes most of the effort. But if you wait until you are 100 percent sure, it will never get done."

Performance-based acquisition is not a blackboard subject, Mather said. "You can learn the principles in the classroom," but the rest is based on experience, he said. "Performance-based acquisition is a hands-on thing."

Tie payment closely to performance

Agencies and contractors struggle to correlate payment and performance because it means moving away from paying for labor and time expended, which is the more familiar and comfortable payment method.

"It's fairly tricky because sometimes the results of a contract won't be known for a considerable time, but agencies can't expect the contractor to shoulder all of the costs until results are achieved," Mather said.

Neither time-and-materials nor fixed-price payments work now, he said. Agencies and industry need to meet somewhere in the middle.

Building such contracts is possible, said Don Scott, a senior vice president at EDS' U.S. Government Solutions division and former associate administrator at the General Services Administration. The contract could stipulate a maximum total payment, for example, and the contractor would get components of that based on meeting certain metrics.

Performance-based metrics change over the length of the contracts, and agencies must continually reassess them.

"It requires more of a partnership between the vendor and the agency contract people than they've probably been used to," Scott said. "It's a difficult thing to get right."

If agencies set goals for an acquisition such as savings in operations, some of the contractor's payment could be a percentage of the savings achieved by the project, White said.

Timelines and quality improvements could be other options for performance-based payments.

All those options require good service-level agreements, White said, adding that this is not how it's done most of the time.

"The first breaking point [in this approach] is not adequately defining the buyer's goals for the acquisition," White said. "Contractors still need guidance from the buyer about what's important."

Manage contracts — even after they are awarded

Managing performance-based contracts requires a significant cultural change for agency procurement officials.

They must move from closely directing solutions and expecting compliance to allowing the contractor to perform, Mather said.

That's the essence of performance-based management as opposed to contract management, he said. "Once agency people start to direct something, they've taken responsibility away from the contractor and onto themselves," he said.

It's also a matter of procurement officials in agencies understanding that, unlike in traditionally structured contracts, most of the risk in performance-based acquisition comes after the contract is awarded, said Carl DeMaio, president of the Performance Institute.

That drives the need for better project management upfront and the development of tools such as customer relationship management plans. Most procurement officials are probably unfamiliar with those needs.

Flexibility is crucial, White said, and it's important to realize that change will occur.

"When they don't get what they expected, government does tend to ratchet back and go with more specific requirements," she said. "You need to plan for those early failures."

Focus on transformation, not just the transaction

Mather said one reason many companies set up federal divisions is because their commercial groups didn't want to take on the complicated business of selling to the government. That's produced organizations that are focused on meeting the government's demands, he said. But in a performance-based world, that can be a drawback.

"They are set up to not reward their people if they are out of line with the government's contract specifications," he said. "Ironically, companies now need to retool their federal divisions to be more like the commercial side."

Those federal divisions are used to selling parts and products to the government, and they are comfortable with that, DeMaio said. In a way, their culture is as strong as the government's culture of requirements-based contracting.

"We have to show that there's far more opportunity for the vendor as a solutions provider, and for that they have to start thinking about transformation rather than the transaction," DeMaio said.

The change has to be more than the adoption of commercial approaches by federal groups, said Bob Guerra, a partner at the government technology consulting firm Guerra, Kiviat, Flyzik and Associates. "Vendors have to intimately understand what the drivers are in government and what agency enterprise architectures are all about," he said.

Focus on meaningful measurements

Both sides have to realize that once they start using performance-based acquisition, there's still a long way to go, Mather said. Agencies and industry must decide meaningful compliance measures upfront that can account for inevitable changes.

Agencies need to realize that performance-based acquisitions cannot be done by only the procurement side of the house, Scott said. The approach requires long-term teaming by procurement and program managers.

"There's a tendency for people to write a statement of work and throw it over the transom and think that's where it ends," he said. "But everyone needs to have a better sense of belonging to both the contract and to its performance."

Agencies need to know what it is they are acquiring to better define their requirements, DeMaio said.

"If they don't know what it is they have to measure, that's a good early warning sign that the contract they are about to engage in is likely to fail," he said.