Performance-Based Contracting Stephen B. (Steve) Gordon, PhD, FNIGP, CPPO September 8, 2016 © 2016 by Stephen B. Gordon, PhD, FNIGP, CPPO

Discussion Points Will include: What is performance-based contracting (PBC)? What forms can PBC take? When should PBC be used? What are some keys to success for PBC?

Our Approach Use slides as a framework Engage in dialogue Examine a few actual cases of the use of PBC Explore opportunities to use PBC successfully

What is performance- based contracting? Contracting for measurable, verifiable objectives A powerful strategic procurement tool when used: In the right circumstances By qualified procurement officers who: “Get” how objectives relate to goals Know what to do in the particular circumstances and at each phase in the procurement cycle Do what must be done well and timely Payment of contractor is contingent on the contractor achieving the goals agreed in the contract. What competencies, values, and traits must procurement officials possess to use PBC effectively?

How Do Objectives Relate to Goals? Both are outcomes, but goals are “higher level”. Your entity’s strategic goals are in its strategic plan Objectives measure the achievement of goals. The procurement unit/program should have its own goals and objectives. Client/customer business units should have their own goals and objectives. What are your entity’s (overall) strategic goals? What are your principal clients’/customers’ strategic goals? What are your procurement agency’s strategic goals?

Where does Performance-Based Contracting Fit into this Picture? Enterprise Strategic Goals Procurement Unit Goals Client Business Unit Goals Set of Objectives for Each Procurement Goal Set of Objectives for Each Client/Customer Goal Tactics for Each Shared Objective

There are several possible ways to support strategic goals through procurement PBC is only one option. Other options include: Open-market procurement (several methods) Cooperative procurement (various forms) Ideally, how one decides which is “best” in the situation Policies and procedures Decision-criteria Application of the decision criteria in the situation

Three Stages of Outcomes Immediate Intermediate Ultimate Let’s Work Some Examples and Ask Some Questions.

Categories of Performance-Based Outcomes Include: Economic outcomes, such as: More services provided for available dollars The entity can address additional priorities Quality of life outcomes, such as: A safe and healthy community High employment locally in desirable jobs What other categories? Price Savings Obtained Costs Avoided Efficiencies Derived Problems Solved Deadlines and Commitments Met Product/Service Improvement and Innovation Allowed, Encouraged and Enabled Opportunities Seized

When Should Performance-Based Contracting Be Used? The necessary pre-conditions include: The entity has staff that is qualified to decide whether to use PBC, and to execute this approach The entity has the capacity (qualified staff hours) available) to decide whether to use and execute PBC The entity has enough cycle time available to engage in a performance-based procurement. The agency has sufficient market “clout”, either alone or in cooperation with others. The risk associated with the particular procurement justifies the level of effort that would be required. Examples of reasons for engaging in performance-based contracting are shown in the rounded-edge rectangles on the previous slide.

Keys to Success These include: Verify that the necessary pre-conditions exist Do what is required at every step in the procurement cycle, and do it well. Procurement Planning Source Selection and Contract Formation Contract Administration What must be taken at each step in the process to assure success?

A Scope of Work – Statement of Objectives Type Key elements include: Background [including strategic goal(s) supported] Listing of outcomes to be achieved Contractor’s responsibilities Entity’s responsibilities Constraints on the contractor Required content of proposal responses Evaluation criteria and method What else? In what circumstances/where in the contracting process might the use of incentives be useful?

Historical Examples of When PBC Has Been Used Increasing the depth of the river channel Powered flight Replacement of the San Francisco interstate roadway and bridges after the earthquake Revenue-generation contracts Reduction of inflow and infiltration into sewer lines Refuse collection

Examples of Where Your Entity Has Used PBC for Particular Procurements Name at least one such procurement. Describe the process through which your entity decided to use PBC, including how “formal” it was. Discuss the process through which your entity (or a lead entity in a cooperative action) developed the performance objectives and the solicitation. Share your assessment of the procurement (i.e., whether and to what extent it was successful). Discuss what you would/will do differently the next time around in each phase of the procurement cycle. Share anything else related to the procurement experience that might be helpful to others. Where can things go “wrong” in a performance-based contracting action?

Examples of Where It Might Make Sense for Your Entity to Engage in PBC Name at least one example. Describe how you would confirm and secure “buy-in” that using PBC would be in your entity’s best interests? Discuss the process through which you would develop performance objectives and the solicitation. Discuss how you would assure quality responses that would lead to a contract that adds strategic value Discuss how you would evaluate those responses. If applicable, explain why and where in the process you might include incentives. Discuss how you would administer the contract. From whom would you need to secure “buy-in”? Why?

Question, Comments, and Additional Feedback Stephen B. Gordon, PhD, FNIGP, CPPO Email: StephenBGordon@comcast.net Mobile Phone: (615) 268-9468