In an earlier post we described the role and common features of a Payment Curve used in a Performance Based Contract (PBC), including the difference between Achieved Performance and the Adjusted Performance Score. In the first of two posts we will look at the 4 different types of Payment Curves that are commonly used in a PBC. Specifically, there are 4 types of Payment Curves used in PBCs as follows:
- All or None Payment Curves
- Linear Payment Curves
- Non-Linear Payment Curves
- Alternative Payment Curves, including Demerit Point and Visual Payment Curves.
So let us look at each of these Payment Curves.
All or None Payment Curves
Simply put, if the required contracted level of performance is met the contractor gets 100% of their performance payment. However, if the required level of performance is not met the contractor gets 0% of their performance payment. This can be seen in Figure 1 noting the two charts in Figure 1 represent the two cases where (1) any decrease in achieved performance is worse to the seller, and where (2) an increase in achieved performance is worse.
This is typical of any Contract that has a Liquidated Damages (LD) clauses where poor performance, often in terms of a delay of delivery, results in the awarding of a pre-agreed genuine estimate of financial damages to the seller.
Figure 2: All or None Payment Curve
Liquidated Damages (LDs)
There is a common misunderstanding that a PBC approach that ties Contractor payment to performance replaces any need for Liquidated Damages (LDs). Where appropriate, LDs are included against traditional contract milestones, such as establishment of the Contractor support organisation (e.g. Operative Date (OD)).
However, LDs can also be used in combination with a PBC payment curve. LDs may be applied where there is no value to the seller in the level of service provided by the Contractor. As damage has occurred an alternative method for delivery of the services required must be considered.
Linear Payment Curves
Unlike the All or None Payment Curve, the Linear Payment Curve reduces payment based on a straight line between the Achieved Performance and variation from the contracted level. It should be noted that 0% Adjusted Performance does not have to occur at 0% Achieved Performance. Alternatively, this linear form can be represented through a series of equal steps. This can be seen in Figure 2.
Figure 2: Linear Payment Curve
Non-Linear Payment Curves
Similar to the Linear Payment Curve, the Non-Linear Payment Curve reduces payment based on Achieved Performance variation from the contracted level. However, in this case the reduction in payment is represented by a curve, multiple linear sections, or an unequal series of steps. These variations can be seen in Figure 3.
Figure 3: Non-Linear Payment Curve