Changes to Contractor payments based on Contractor performance is one of the fundamental tenets of the Performance Based Contracting (PBC) approach. While changing payment uses a variety of methods, all typically use a Payment Curve to describe how to change the payments. But, before we look at the different types of Payment Curves let’s look at the common features.
Figure 1 illustrates a generic Payment Curve based on the Support variant of the Australian Standard for Defence Contracting (ASDEFCON) series of contract templates used by the Australian Department of Defence.
Figure 1: Australian Standard for Defence Contracting (ASDEFCON) Payment Curve
Before we look at the key features, it is important to note that each Key Performance Indicator (KPI), or payment performance measure, will have their own Payment Curve. For example, if your PBC had 3 KPIs you are likely to have 3 different Payment Curves.
Noting this, let’s examine some of the key features of a Payment Curve.
The most important feature is that there are 2 dimensions to the Payment Curve. Firstly, the horizontal axis or line, called Achieved Performance, and secondly the vertical axis or line, called the Adjusted Performance Score or APS. The overall intent of the Payment Curve is to change Contractor performance into Contractor payment.
The Achieved Performance represents the actual score that the Contractor reached for the particular Review Period. This could be for an individual event such as deeper maintenance; or over a period of time such as a month or a quarter. Importantly, the unit of measurement for the Achieved Performance reached reflects the unit of the relevant KPI and can represent time (e.g. hours, days, etc.), or other values (e.g. number of items, percentages, etc.)
In contrast, the APS is the percentage of Contractor payment linked to the KPI based on their corresponding Achieved Performance. The unit of APS is always a percentage. Accordingly, many practitioners consider the Payment Curve as a method of translating Achieved Performance to APS.
At the end of the Review Period (e.g. month, quarter, etc.), when determining the overall Weighted Performance Score (see Performance Measure Weighting) the Contractor’s Achieved Score for each KPI is calculated using the specific formula and business rules. The Review Period Achieved Score (in the units of the KPI, such as days) is then compared to the specific Payment Curve to calculate the APS as a percentage. Of course, your calculation may also include a Performance Measure Gate which was discussed in a earlier post.
Now we understand the role of a Payment Curve and the common features, in the next post, we will look at the 4 different types of Payment Curves that are commonly used in a PBC.