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This first appeared as an ASPANET On-Line column in March 2004.
Leveraging
Performance
by John M. Kamensky
More than a decade ago, David Osborne popularized the phrase “steer don’t row” as guidance to public managers. By this, he means public managers should, wherever possible, leverage the work of others rather than trying to deliver services directly through government bureaucracies and staff.
This phrase became part of the reinventing government mantra and contributed to changes to federal government procurement rules – called “performance-based contracting” – that are still evolving today.
Performance-based contracting (PBC) can be a key tool for leaders who want their organizations to manage for results. Much like performance budgeting requires links between planners, measurers, and budget staffs; and performance management requires links between planners, measurers, managers, and human capital staffs; performance contracting requires links between program managers and the specialized world of acquisition staffs.
With government’s growing reliance on the private or non-profit sectors to deliver services, ensuring that what they do is performance driven -- and is monitored to ensure they do what they promise -- is key. But the first step is understanding.
What is Performance Based Contracting?
The Federal Acquisition Regulations defines PBC as contracting for “results required rather than the methods of performance of the work.” A July 2003 OMB Task Force on expanding the use of performance-based contracting elaborates: “The principle objective is to express government needs in terms of required performance objectives, rather than the method of performance, to encourage industry-driven, competitive solutions.” The Office of Management and Budget (OMB) says a performance-based contract should have four attributes:
OMB has been a strong advocate of this approach. It has issued guidance, best practices, and conducted studies of performance based contracting for more than a decade. OMB has long been sold on the concept based on studies it sponsored showing that costs decrease about 15 percent and customer satisfaction increases about 18 percent. With about $150 billion in federal services contracts being spent annually, this has the potential for substantial savings as well as better performance. In FY 2002, GSA reports that there were more than 62,000 performance-based contracts valued at nearly $46 billion.
President Bush in early 2001 set a goal of 20 percent of all service contracts should be performance-based. The 2004 goal is 40 percent. Agency procurement executives have set a further goal of 50 percent by 2005.
The Pitfalls of Performance-Based Contracting
However, despite the intellectual appeal of the PBC approach, agency contract officers and program officials are not flocking to its use. Why not? In part, it is because there is a lack of clarity as to what it is, and a perceived risk that government agencies will lose control if they cannot clearly define and monitor the terms of the contract. David Drabkin is an executive at the U.S. General Services Administration (GSA) who is one of the lead advocates for performance-based contracting. He says “it is hard intellectually to change how people think about their programs.”
But it’s not just that. Performance expert Dr. Robert Behn at Harvard notes that there is an inherent tension between paying for an activity and paying for a result. Contracting for an activity is less risky for government contract officers: they define in exacting detail how many people, what kind of skills, what technologies, techniques and materials a vendor must use. This approach is premised on the assumption that a vendor will seek to cheat the government in every way possible.
But moving to a performance-based contract, Behn notes, means a vendor has flexibility in how to best produce results and is paid only when it has been successful. This assumes the vendor can be relied upon to do something that contributes to achieving an agency’s purpose. It also assumes that there is no single best way to achieve an end result. It also encourages the vendor and the agency to work together to achieve the end result – not the traditional hands-off, throw-it-over-the-transom approach agencies often take with vendors.
Progress in Using Performance-Based Contracting
While PBCs may be slow to take off in federal agencies, this approach seems to be more frequently used in state-local government contracts, according to an IBM Center report by Larry Martin. Martin notes that states and localities may be more successful because of state-local accounting rules where: “the Service Effort and Accomplishments (SEA) reporting initiative . . . [provides] greater clarity as to what constitutes performance accountability” and state and local governments have greater freedom to experiment with performance-based contracting. He describes more than a dozen successful case examples of what make this work at the state-local level and concludes that federal efforts need to be more closely tied to the framework of the Government Performance and Results Act.
Federal agencies are moving forward. They met the President’s FY2002 goal of using PBCs for 20 percent of their services contracts and are on target for meeting the new goal of 40 percent. The General Accounting Office is also supportive and its concludes that agencies need to do a better job of providing guidance on how the process works.
Some Examples
There are examples of successful federal performance-based contracting initiatives, both large and small. Some are new and others have been in place for more than five years. For example:
Coast Guard’s Deepwater Initiative. One of the most visible recent performance-based contracts is the US Coast Guard’s $17 billion, ten-year “Deepwater Initiative” to create Integrated Coast Guard Systems. While only a few dozen pages in length, the contract defined 200 capabilities desired by the Coast Guard and was awarded in June 2002 to a team led by Lockheed-Northrup Grumman to deliver up to 91 cutters and 209 aircraft in an integrated delivery system.
Veteran Administration’s Home Loan Servicing. Beginning in 1997, VA contracted with a commercial vendor to provide portfolio services for its home loans under the GI Loan program. This includes ensuring real estate taxes are paid, paying insurance premiums, etc. VA retains custody of the loan instruments and the loan approval process, but the contractor manages the foreclosure process, when necessary.
Department of Energy Labs. The Department of Energy has long used performance-based contracts with its network of laboratories. These contracts have specific metrics and incentives linked to them.
Department of the Army’s On-Line University. The Army contracted with an integrator to develop and operate a portal and program to enable enlisted soldiers to pursue post-secondary degrees and certificates via internet-based “classrooms.” The performance-based Statement of Work for this effort, according to one participant, basically described the envisioned portal and program, and what they would enable soldiers and the Army to do. The Statement did not dictate specific technical architecture, and there was no “requirements definition” phase in the project – the contractor had a lot of latitude in determining how to achieve the Army's what. The contract was award in December 2000 to PricewaterhouseCoopers Consulting (now IBM Business Consulting Services); the portal was launched January 2001 and was fully functional by that June. To date, eArmyU has enrolled more than 42,000 participants who are earning a degree.
What Are Some Next Steps?
The OMB Task Force, GAO, GSA, and recent congressional actions have created a quick list of next steps for helping agencies achieve the aggressive goal of moving half of all service contracting to performance-based contracts. These include:
More education. GAO and OMB have both advocated a more aggressive effort to educate both program officers and contract officers. Individual agencies are beginning to move forward on this and are providing useful resources. For example, agency-specific guides have been developed, for example, by Defense, Transportation, and Health and Human Services.
More guides. GSA and the Chief Acquisition Officers Council are sponsoring useful websites with examples and guides. They led an interagency acquisition group that created a 7-step guide as a step in this direction.
Clearer guidance. GSA and OMB are clarifying the “how to” steps for potential users to clear up ambiguities as well as make the process more accessible. Revisions to the Federal Acquisition Regulation are in progress.
Simpler process. Congressional action to simplify the use of performance-based contracts is a growing incentive for both program officers and contract officers to put this contracting tool at the top of their list. Recent statutory changes have encouraged this approach; in fact a new law allows agencies to use the simplified acquisitions approach for all performance-based contracts under $25 million which, GSA’s Drabkin notes, “will bring in virtually all but the biggest contracts.”