Benefits of a Performance Based Contract

A common Performance Based Contract (PBC) question is what benefits do they offer over more conventional / traditional contracts?

While there is a lot of discussion on this topic, most is based on anecdotal evidence.  The lack of evidence is due to PBC success usually linked to both contractor performance and payment, two commercially sensitive topics, thereby making case studies that include evidence difficult to find.  However, there are a couple.

One such body of evidence is the United States Department of Defence (US DoD) Proof Point Project.  This project was established to analyse and provide evidence of the effectiveness and affordability of US DoD PBL strategies noting the similarity between US Performance Based Logistics (PBL) arrangements and PBCs.  This project found:

  1. properly structured and executed PBLs reduce Services’ cost per unit-of-performance while simultaneously driving up absolute levels of system, sub-system and component readiness (think availability); and
  2. average annual savings for programs with generally sound adherence to PBL tenets is 5-20% over the life of the PBL arrangement compared to transactional support.

However, the report also found that to deliver these benefits the PBLs must be skillfully constructed, managed, and renegotiated/ re-competed.

More recently, the International Association for Contract & Commercial Management (IACCM) conducted a study into performance or outcome based contracts .  Their report highlighted that while their use remains relatively immature across industry as a whole, their use in many cases was favourable.  Of note, the report highlighted that PBCs resulted in:

  1. better relationship between the buyer and seller, including being able to have the difficult conversations; and
  2. better performance through alignment of clear goals / expectations.

Details of the benefits realised when using a PBC is shown below in one of the slides presented by Tim Cummins (CEO of IACCM) at the recent DMO PBC Conference in Canberra, Australia.

Benefits of a PBC

Benefits of a PBC

The IACCM report also highlighted a number of challenges.  Similar to the US Proof Point Project the IACCM report found a high level of complexity in establishing (e.g. including defining roles, responsibilities and desired performance outcomes) and negotiating PBCs.  Additionally, it found that PBCs also required a high level of coordination and information exchange.  Details of the challenges related to using a PBC is provided below is another slide presented by Tim Cummins at the recent DMO PBC Conference.

Challenges of a PBC

Challenges of a PBC

So the lesson learned from these and other reports is that while PBCs do deliver benefits (i.e. better performance through alignment of clear goals / expectations, reduction in cost and better relationship between the buyer and seller), to realise these benefits the PBCs must be skillfully constructed, managed, and renegotiated/ re-competed.   Something to discuss in a future post.

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