Performance Measure Gate

One advanced, yet uncommon, approach to performance management in a Performance Based Contract (PBC) is the concept of a performance measure ‘gate’ which modifies the overall Weighted Performance Score (WPS) based on specific criteria.

A gate can be used where there is a critical requirement (typically safety or statutory/law) that must be met before making the final performance assessment. It may help to think of it as a pre-requisite before calculating the overall WPS.

The intent of using a gate is to make sure the contractor recognises that there are some underlying minimal performance requirements that must be met before considering the delivery of service. This can either be applied to an individual performance measure or the overall WPS. Given this minimal requirement these types of contracts are sometimes called a ‘safety before profit’ contract.

For example, consider a PBC that requires a contractor to deliver meals and their performance is measured (and paid) based on the timeliness of the meals, quality of the meals and the number of meal choices. However, it is also possible to include a ‘gate’ that modifies the overall WPS based on the number of confirmed cases of food poisoning. In this case, the use of a gate highlights to the contractor that if there is a choice between being on time with the meals and under-cooking them leading to food poisoning, the contractor should met the more important safety requirement and not simply be on time not that I am suggesting that this occurs!

So how does this work in practice? In calculating the overall WPS we place a gate as follows:

Final WPS = overall WPS x gate

where:
overall WPS = performance score for the period of observation for the overall WPS; and
gate = 1 or 0 , based on the defined conditions (e.g. confirmed case of food poisoning)

In our example, if the contractor got an overall WPS of 85% for the month, yet there was 1 confirmed case of food poisoning, then the overall WPS would be set to 0% for the month.

The above example highlights the main issue when using a gate and why they are rarely used. For example, given this “all or none” approach, if a gate is triggered on day 1 of the month and there is no possibility of getting any of the performance payment what financial motivation does the contractor have to perform for the rest of the month? Recognising this, options to address this include reducing this impact of the gate (e.g. not 0 or 1, but rather some significant reduction such as 0.5 or 50% which means the contractor cannot earned greater than 50% of the performance fee) or an ability to “earn back” some of this loss through either additional (value add) work or superior performance.

So while they are not common in PBCs it is important as PBC practitioners to consider whether (1) a gate could apply for your contract scope and the performance measures you have chosen and (2) if so, what it the effect when the gate is triggered.

This entry was posted in Basis of Payment, Performance Measure, the How and tagged , , , , , , . Bookmark the permalink.

One Response to Performance Measure Gate

  1. Pingback: Payment Curves (Part 1) | Performance Based Contracting (PBC) Blog

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