May 2011 Presented by FCS GROUP th Ave. NE, Suite D-215, Redmond, WA (425) Office of Financial Management Basics of Performance Based Contracts

Introduction Why use performance based contracting? –State spent over $21 billion on contracts services in the last biennium –Increase accountability –Ensure state gets what it pays for How will I know Ive succeeded if I dont know what I was trying to do? Unknown 2

Governors Executive Order Applies to all contract types except: –Non-financial contracts –Contracts where the state is paid to provide services Applies to new contracts and renewals –If not cost effective, then contract can be exempt Must actively manage contracts 3

4 Topics Covered Background on Performance Based Contracting Writing Clear Contracts Setting Deliverables, Performance Measures or Outcomes Linking Payment to Performance Using Incentives or Consequences Managing/Monitoring Contracts

What is Performance Based Contracting (PBC)?

PBC Definition Performance-based contracts identify expected deliverables, performance measures or outcomes; and payment is contingent on their successful delivery. Performance-based contracts also use appropriate techniques, which may include but are not limited to, consequences and/or incentives to ensure that agreed upon value to the state is received. 6

Definition of Terms Deliverables/outputs = measurable or tangible unit of service/product that must be completed or delivered. Performance measure = quantifiable expression of the amount, cost or result of activities that indicate how well and at what level, products and services are provided. Outcomes = desired impact on customers or the public; results or benefits of the outputs. 7

Definition of terms (cont.) Process/activity = work done to transform inputs into outputs. Inputs = resources to carry out an activity (e.g. time and materials). 8

9 Standards Performance-based contracting (PBC) typically: Emphasizes results related to output, quality, and outcomes rather than how the work is performed; Specifies deliverables, performance measures/standards, or an outcome orientation and clearly defined objectives and timeframes; Uses quality assurance plans, measurable performance standards and/or outcomes;

Standards (cont.) Provides performance incentives and/or consequences for non-performance; and Ties payment to deliverables, performance measures, and/or outcomes. 10

Business Process Logic Model 11 Source: 2009 OFM Performance Measure Guide Outcomes Management Process or Activity Suppliers Inputs Customers Output

Contracting Process Logic Model 12 Outcomes Agency Management Process/Activity/ Service Contractors Inputs Agency/Clients/ Customers Output Performance Measures Deliverables Interim Deliverables/ Performance Measures

Corrections Logic Model 13 Activity: We train inmates in work skills # of classes taught Activity: We train inmates in work skills # of classes taught Inmates will have a marketable skill when they leave prison… # of inmates certified in the skill Inmates will have a marketable skill when they leave prison… # of inmates certified in the skill Inmates choose gainful employment over crime… % of inmates finding a job after release Inmates choose gainful employment over crime… % of inmates finding a job after release Recidivism rate declines. % of inmates who commit crimes after release Recidivism rate declines. % of inmates who commit crimes after release …so that… Degree of Influence/Control Output Immediate Outcome Intermediate Outcome Ultimate Outcome …so that… Ultimate Policy Intent Source: 2009 OFM Performance Measure Guide

Group Exercise Identify at least one deliverable, one performance measure, and one outcome for one of the following: –Facilitation services –contractor facilitates a meeting at your agency –Employment evaluation services – contractor evaluates clients to see what services they need –Health care services – Doctors are hired to provide medical services –Snow removal services – contractor plows your parking lot –Pick your own service in your group 14

15 What Are The Benefits of PBC? Encourages and promotes contractors to be innovative and find cost effective ways of delivering services; Expects contractors to control costs; Creates better value and enhanced performance; Ties contractor compensation to achievement; and Identifies priority areas and invests resources to maximize outcomes.

What are the Challenges? Establishing meaningful performance measures –Use logic model to link measurable outputs to outcomes –Research commercial quality standards –Collaborative relationships with contractors to develop appropriate measures Limited understanding of the vendors perspectives and limitations in the marketplace –How will vendors evaluate the risks and benefits of your contract –What is your position in the marketplace? 16

Challenges (cont.) Establishing meaningful outcomes –Takes practice and requires an understanding of customer, partner, and stakeholder needs –Benefit is describing results to be achieved, allowing contractors to be innovative 17

18 Partnership and teamwork Training Planning Internal management systems –Available Data and Reporting –Monitoring and Quality Assurance Process –Payment Processes What are the Critical Success Factors?

19 More about Planning Conducting sufficient planning before implementing is an important element. Planning efforts involve: –establishing who should be involved, –identifying performance measures and desired outcomes in tandem with contractors and vendors, –determining the current performance level, –identifying potential risks, –evaluating what services and programs will benefit the most from performance based contracting, and –developing an implementation plan. A key indicator of agency planning is whether the agency already has a strategic plan and has established performance measures for its various programs. What are the Critical Success Factors?

Approach Overview Source: Seven Steps to Performance-Based Services Acquisition, 20

The Contract Management Process 21

What are the Key Implementation Elements?

23 Writing Clear Statements of Work and Contracts Establishing Meaningful Deliverables, Performance Measures, or Outcomes Linking Payments to Performance Monitoring Plans Key Implementation Elements

24 Case Studies Yellow – School Age Care (DEL) Salmon - Security Alarm Systems (LCB) Purple – Contract Liquor Store (LCB) Green – Job Training (ESD) Grey – IT Project (SPI) Pink – Parent Aide Service

25 Key Elements Clearly written Results focused Clearly defined Complete Measurable Writing Clear Contracts

26 Statement of Work should clearly describe performance expectations, including how they will be monitored; Compensation/Payment should clearly describe how payment is tied to performance; and Terms and Conditions should support performance, include any consequences for non- performance Writing Clear Contracts

27 Definition and Purpose The Federal Acquisition Regulations define the statement of work as follows: Defines requirements in clear, concise language identifying specific work to be accomplished, tailored to consider the period of performance, deliverable items, and desired degree of performance flexibility. Describes the work in terms of what is to be required output rather than how the work is to be completed or the number of hours to be provided, enable assessment of work performance against measurable performance standards, rely on the use of measurable performance and financial incentives in a competitive environment to encourage competitors to develop and institute innovative and cost effective methods of performing the work, and avoid combining requirements into a single acquisition that is too broad for the agency or prospective contractor to manage effectively. (Bold emphasis added) Writing Clear Contracts

28 Key Questions Who will do the work? What services are expected? What are the expected deliverables, performance measures, or outcomes? How will you know the work was done or performed, or whether the outcome was achieved (monitoring and QA plan) Writing Statements of Work

29 Statement of Work Questions Who will do the work? What services are expected? How are services provided? When will the work be performed? What are the expected performance measures and outcomes?

Establishing Deliverables How to identify deliverables: –What is the Contractor producing that is a measurable unit of service/product? Examples: –Training Curriculum –Interim Work Tasks –Draft or Final Report –Counseling Session –Medical Services –Product Installation 30

31 Types of Performance Measures Output - The volume, amount, and quantity of services provided Outcome/Effectiveness- The quantifiable impact on customers or your agency, the extent that goals and objectives are achieved, a measure of the amount and frequency of occurrences, or results that happen because a service is provided Efficiency – The cost or resources per unit of service Establishing Meaningful Performance Measures

32 Performance Measures Examples Output Number of intakes and assessments, Number of clients trained Outcome Referred clients are placed into a competitive employment job for a minimum of 90 calendar days Effectiveness Percentage of referred clients placed into a competitive employment job for a minimum of 90 calendar days

33 Performance Measures Examples Type of Measure Child WelfareEmployment Output# of foster care placements # of job placements Outcome/ Effectiveness % of placements resulting in adoptions 60% of placements lasting 90 days with a wage of $12 or more per hour

34 Attributes of a Good Performance Measures Relevant –Based on program goals and objectives related to program mission statement –Significant decision making or accountability implications Understandable –Reasonable and concise, but comprehensive –Limited to a number and degree of complexity that provides a meaningful performance assessment Comparable –Provides data over time –Is a norm or standard for the industry Establishing Meaningful Performance Measures

35 Attributes of a Good Performance Measures (continued) Timely –Provides ability to make decisions and assessments within a reasonable amount of time Consistent –Reported from period to period over time –Consistent throughout a strategic plan, budget, accounting and reporting systems, and over time Reliable –Verifiable –Free from bias –Represents what it is designed to report Establishing Meaningful Performance Measures

Establishing Outcomes How to identify outcomes: –What is the desired impact on customer or public? What results or benefits does the state expect from these services? Examples –% of people who quit smoking after taking a class to help them quit –% of families with no new CPS referrals within 6 months of completing parenting classes 36

37 Performance Measures Issues Are the performance measures specific to the tasks and services? Are they achievable? Are they consistent with industry standards? Are they consistent with or contribute to the agencys performance measures? Are there interim or in-process measures that can be used as a basis for payment?

Linking Performance to Payment Incentives –Financial –Non-financial (Contract renewal) Consequences –Already in contract (termination, no payment if unsatisfactory performance) –What to add (liquidated damages, penalties, warranties) Talk to your contracts staff for help 38

Linking Performance to Payment Are the deliverables/performance measures/outcomes specific to the tasks and services? Are there interim or in-process measures that can be used as a basis for payment? How will your monitoring plan identify when performance requirements are not met? 39

Linking Performance to Payment How can the state be sure that when it pays, the expected services were received? Are payment incentives or penalties appropriate? Is the payment related to a contractors cost to perform the service? Is payment tied to monitoring and reporting provisions? 40

Linking Performance to Payment Types of Payment Methods Amount per unit of output (e.g. $200 per client referred) Percentage of a task (e.g. set amount for an assessment, but a fixed percentage for different stages of the assessment process) Variable percentage of a fixed fee depending on performance Incentives if performance exceeds a standard Phase in of performance payments 41

42 Linking Payment Questions Is payment related to a performance or interim measure? What is the relationship between a performance measure and a payment method? Are there payment incentives or penalties based on performance? Is the payment related to a contractors cost to perform the service? Is payment tied to monitoring and reporting provisions?

Managing/Monitoring Contracts Monitoring is a key element of PBC –Must ensure contractor performed according to the contract before payment is made –Address issues with contractor How to Monitor –Documentation is important –How will you know the contractor performed? 43

44 Does the contractor or agency have the capacity to provide data related to the performance measures? Does the plan and data relate to the performance measures or outcomes? Should there be performance milestones? How frequent is the monitoring and is it tied to the payment cycle? What performance and financial statistics and data are needed and when? Should you verify data? Are there provisions for corrective action if progress is not satisfactory? Managing/Monitoring Contracts

45 Monitoring Questions Does the contractor have the capacity to provide data related to the performance measures? Does the plan and data relate to the performance measures? Should there be performance milestones? How frequent is the monitoring and is it tied to the payment cycle? What performance and financial statistics and data are needed and when? Should you verify data? Are there provisions for corrective action if progress is not satisfactory?

Conclusion Performance based contracting is a thoughtful process which takes time. Starting with deliverables in contracts is fine, think about progressing to performance measures and/or outcomes. 46

Resources Available OFM guidance, policy and GMAP reporting information – ased/default.asp – ormancemeasureguide.pdf GA Guidance – ontracts.pdf Federal Guidance – 47

Wrap Up Questions?? Evaluation 48