While there are a range of definitions I have always used a very simple definition of a Performance Based Contract (PBC); a form of contracting that directly relates the delivery of the products or services to payment. To do this, a PBC explicitly includes the following 3 characteristics within the contract:
- clear definition of a series of objectives and performance measures to measure contractor performance;
- methodology for the collection of data on the performance measures to assess the extent to which the contractors are successfully implementing the defined services; and
- application of consequences for the contractor, such as provision of rewards or imposition of sanctions (remedies), dependent on contractor performance.
Rewards for superior performance can include additional contract term (sometimes referred to as Award Term), the provision of incentives, or public recognition such as annual supplier awards. Remedies for poor-performance can include a range of financial consequences ranging from a reduction in payment due to non-performance, application of Liquidated Damages, through to Stop Payment and contract termination.
PBC is a deceptively simple concept which can be extremely difficult to deliver given the complexities and uncertainties which surround the practical application.