When to use a Performance Based Contract?

While advice has been written (see the United States Department of Defence Product Support Business Case Analysis (BCA) Guidebook) on when to use a Performance Based Contract (PBC) (or Performance Based Logistics (PBL) contract) my colleagues and I have recently discussed a method for simplifying this process. The process we are leaning towards utilises 3 sequential questions as follows:

Step 1 – Should We? (Assess Net Benefits of Approach)

Step 1 simply poses the threshold question of whether a PBC approach will deliver net benefits to the buyer; that is, the benefits will outweigh the costs.

Areas that should be considered in this step are:

  • Extent of seller’s freedom to deliver the contract outcome including the application of novel or innovative solutions
  • Known accountability of the buyer, seller and any third parties in delivery of the overall outcome
  • Impact of performance on seller’s overall outcome
  • Cost of collecting, cleaning (including adjudication based on specific business rules), calculating, analysing, reporting and storing performance data
  • Access to accurate and meaningful data to measure performance
  • Future variation in performance through maturity of the item being supported

Step 2 – Could We? (Assess Key Enablers)

If step 1 identifies the net benefits that could be realised, we then need to decide whether we have, or could put it place, all the enablers to support the successful application of a PBC including cultural aspects.

Areas that should be considered in this step are:

  • Stakeholder support of a PBC approach including executive, users, contract managers, procurement and contracting, legal, etc
  • A governance structure that supports the regular reporting and discussion of performance management
  • A contracting architecture that has PBC built-in, or has the ability to be readily tailored
  • Potential suppliers are accepting of a PBC approach as a part of the Approach To Market

Step 3 – How (Select Approach)

If Step 2 confirms the enablers are in place, or strategies are agreed to develop/source them, we then need to decide which PBC approach to use.

For example in the past 18 months my colleagues and I have focused on refining ‘lite’ variations of our standard approach to a PBC. These ‘lite’ variations keep the intent and features of a PBC while reducing the management overhead for smaller support contracts. But more on this in a future post.

In summary, I believe that by having the discipline to ask 3 simple questions (Should I? Could I? and How?) as part of the development process for a PBC will result in a more highly successful PBCs. Something that I believe all of us want.

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