Performance Based

Contracting

Slide 1
 Adopting A
Performance
Mindset

The Basic Principle:

Managing Results Through
Measurement

Slide 2
Basic Requirements
Procurement Level

Requires: Competitive Solicitation

and a Written Contract
Options: ITB, ITN, Other Entity Contract

$75,000 Purchase (Category 2)

Discretionary Procurement Method

Slide 3
Procurement Methods

Procurement Most Evaluation

Method Appropriate Factor
for
Invitation to Bid Specific Low Cost
(ITB) Commodities (Not Flexible)
Invitation to Performance Most Flexible
Negotiate (ITN) Based (Best Value
Contracts Approach)

Slide 4
Other Procurement
Methods
• State Contract
– Originated by the Department of
Management Services
• University Term Contract
– Procurement Specialist Initiated
• Exceptions
– Sole Source, Emergency, etc.

Slide 5
Making a Contract Performance Based
Key Attributes
• Outcome orientation
– Bids solicited based on expected results
NOT
Activities to be conducted
• Clearly defined objectives
• Clearly defined timeframes
• Performance incentives
• Performance monitoring
Slide 6
Making a Contract Performance Based
Deliverables/Milestones

Must Be:

• Clear • Specific
• Detailed • Measurable
• Concise • Quantifiable

Slide 7
 Making a Contract Performance Based
Measuring What’s Relevant: Selection Factors
• Total cost of • Qualifications of the
ownership individuals within the
company
• Quality of • Risk Assessment of
goods/services the proposed
• Proposed Technical solutions
Performance • Availability and cost
of technical support
• Financial Stability • Past Performance
• Cost of training • Cost/Price

Slide 8
Making a Contract Performance Based

Step 4 Step 1 Planning

Monitoring
Understanding
Achievement
Goals

Step 2 Acquisition
Step 3 Contract Strategy
Management
Making Performance
Incentives Based Partnerships

Slide 9
 Step I: Planning
Understanding Achievement Goals
Primary Goals
“The primary goal of Performance Based Contracting is
the achievement of the BEST VALUE for the Taxpayer”

This Includes:

• Financial Savings • More Innovation

• Better Quality • More Flexibility
• Better Service • More Availability
Slide 10
 Step I: Planning
Understanding Achievement Goals

“Best Value” Definition

The outcome of any acquisition that ensures

customer needs are met in the most
effective, timely, and economical manner.

Slide 11
 Step I: Planning
Understanding Achievement Goals
1) Ask These Key Questions:
– What are your departments Performance
Goals?
– How will the contract/vendor support those
goals?
2) Derive Partnership Goals
3) Prioritize Partnership Goals
4) Assure/Assess the Compatibility of
these Goals
Slide 12
 Step I: Planning
Understanding Achievement Goals
Relationship with Vendors
“A good vendor relationship will add greatly to the
chances of success and satisfaction of a contract”
• Visit the with the vendor/provider
• Document all communications
• Keep your attitude friendly
• Be assertive…but not antagonistic
• Be honest when you don’t know the
answer and obtain an answer as soon as
possible
Slide 13
 Step I: Planning
Understanding Achievement Goals
Criteria Assessment
• Dollar Value of the Contract
• Nature of the Services
• Number of Clients Served
• Prior Provider Performance and
Corrective Actions
• New Provider or Change in Key
Executives
• State or Non-State Contract
Slide 14
 Step I: Planning
Understanding Achievement Goals
Potential Pitfalls
1) Inhibiting Experimentation
2) Cutting Cost But Not Service
3) Stifling Overachievement
4) No Start-up Funds
5) Inhibiting Symbiotic Relationships
6) Risk Identification
-Contract Risk and Contract Management Risk
Slide 15
 Step I: Planning
Risk Management

What is Risk Management?

The culture, processes, and structures that are
directed toward the effective management
of potential opportunities and adverse
effects.

Why does it Matter?

Slide 16
 Step I: Planning
Stages in Managing Risk

The main steps in a risk management process:

1. Establish the context
2. Identify the Risks
3. Analyze and Quantify the Risks
4. Evaluate and Prioritize the Risks
5. Treat the Risks
6. Monitor and Review

Slide 17
 Step I: Planning
Understanding Achievement Goals
Avoiding Pitfalls
• Start Simple & Build
• Monitor Performance Indicators Frequently
• Take an Adaptive Approach
• Encourage Collaboration with Contractors
• Reward Contractors who Demonstrate
Well Defined Progress Consistently
Robert D. Behn & Peter A. Kant, “Strategies for Avoiding the Pitfalls of Performance Contracting,” Public Productivity and
Management Review, 22 (4), 1999, 470-89.

Slide 18
 Step I: Planning
Establishing a Contract Manager

The Contract Manager is the person

charged with the daily administrative
management of the contract. Primary
duties are to plan activities, manage risk,
monitor contractor performance and
exercise delegated authority.

Slide 19
 Step II: Acquisition Strategy
Making Performance Based Partnerships
Establishing a Baseline
• Establishing a Performance Baseline is
Vital to Setting Performance Expectations
• Begin By Measuring Pre-Contract
Performance
• Assure Goals are Measurable in a
Contracting Context

Slide 20
 Step II: Acquisition Strategy
Making Performance Based Partnerships
Developing Performance Goals
“When developing Performance Goals, consider the future
possibilities…don’t use past performance as a limiting factor”

Considerations:

• Borrowing • Mutuality
• Benchmarking • Best Practices

Slide 21
 Step II: Acquisition Strategy
Making Performance Based Partnerships
Detailed Scope of Work
“The Detailed Scope of Work describes what the contractor is to
accomplish. It should address what, who, when, where & how. It
is the foundation for the entire procurement”
• What is to be done and what are the deliverables
• Who is going to do it
• When it is going to be done
• Where will it be done
• How it will be done and how can you tell when
it’s done

Slide 22
 Step II: Acquisition Strategy
Making Performance Based Partnerships
Contract Negotiation
There are 2 elements in Negotiating Contracts:
1) Skill of Negotiator
– Know what to ask for
2) Leverage of the Buyer
– Know your leverage

Slide 23
 Step II: Acquisition Strategy
Making Performance Based Partnerships
Developing Performance Goals
Solicit Service Providers for:

1) Development of Performance Measures

2) Creation of Incentives
3) Referrals

Slide 24
 Step III: Contract Management
Contract Manager Role/Responsibilities

Contract Manager interacts directly or indirectly

with:
• Personnel in the Department
• Procurement Services
• General Counsel’s Office
• Comptroller’s Office
• Budget Office

Slide 25
 Step III: Contract Management
Contract Manager Role/Responsibilities
• Defining precisely what is required to meet a
need
• Carrying out the preparations for soliciting,
analyzing, and awarding contracts
• Negotiating the contract and amendment(s)
• Overseeing and enforcing the providers
performance of contract terms and conditions

Slide 26
Step III: Contract Management
Creating Incentives

• Payment Structures Should be Tied to

Performance Elements
• Levels of Performance Should be
Differentiated for Incentives
• Incentive Successes Should be Tracked

Slide 27
 Step III: Contract Management
Skillset Requirements

Knowledge Skills Abilities

Contract Law Accounting Compliance Measurement
Current Leverage
Negotiating Change Adaptation
Arbitration Mental Flexibility
Communication

Slide 28
 Step IV: Monitoring
Monitoring Principles
• A Metric of At Least 3 Measures Should be Used to
Understand the Object

• Statistics Should Be
used to Understand
the Behavior of
Occurrences of an Attribute

Slide 29
 Step IV: Monitoring
Monitoring Principles
1) Create a Monitoring Plan prior to issuing an
Bid/ITN or Completing a Contract
2) Incorporate Measurement Principles in the
Monitoring Plan
3) Monitoring Plans should be tailored to the
intricacies of each contract
4) Riskier contracts are more complex and
should have more detailed Monitoring Plans

Slide 30
QUESTIONS?

Slide 31