Case Study – Setting Performance Levels

Early in my career at the start of Performance Based Contracting (PBC) as a Reliability Engineer I was asked to check a services contract that was delivering availability for a particular piece of equipment.

The buyer was concerned that the equipment was not meeting the required performance levels, in this case an availability level, specified in the contract and that the seller had agreed to deliver through competition.

On the other hand the seller, who had agreed to deliver to the performance level in the contract, was delivering the best possible performance.  Having completed an independent review, it was clear that the seller was delivering the best performance in the world (compared to other users) and was better than the design specification. However, it was still lower that the contracted performance level. So what do you do?

Discarding the do nothing option, the first option is for the buyer to enforce the contract by forcing the seller to delivery the performance. Unfortunately, in this case it was physically impossible for the seller to do better than they had done (world best practice) and the only outcome here would be contract termination. Interestingly, if the buyer looked for another seller through an open market Request For Tender (RFT) I questioned whether they could get better performance and price than they were getting.

The second option is for the buyer and seller to agree to ‘reset’ the performance levels in the contract through a formal Contract Change Proposal (CCP) to those being delivered. This allows the buyer to set the current performance level making sure of continued  delivery while assuring the seller of continued tenure by removing the threat of termination for the delivery of world-class performance; a win-win for both buyer and seller. Fortunately, the buyer and seller settled on option 2.

The lesson for this example is that in setting performance levels (see Setting the Performance Levels (Part 1, Part 2 and Part 3) for further information on how to sett performance levels in a PBC):

  1. The buyer – must make sure that the required performance level is possible for a seller to deliver to – there is no point contracting for something that can’t be done. This will simply lead to failed outcomes and a broken relationship.
  2. The seller – must make sure that they do not sign up to a required performance level that cannot be delivered. This may need the seller to either not bid for the contract or offer an alternative performance level with a rationale for why. Some readers may think that perhaps the contract was too good to lose. However, in my experience, some contracts are too bad to win and potentially threaten both the financial outcome and reputation of the seller.

Simply put, while I am not blind to either buyer or seller trying to maximise their commercial outcome, there is no point starting a commercial relationship that cannot succeed.

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2 Responses to Case Study – Setting Performance Levels

  1. Jim Dewberry says:

    Some years ago I was re-negotiating the terms of a maintenance contract with the DMO/RAN. Their new demands for the ‘performance’ were an increase of around 25% to that performance they originally ‘purchased’ during the acquisition contract. This original contract ‘performance’, expressed in terms of ‘availability’, was determined by their own skill level and the amount of spares they carried. Furthermore, buying spares is often an afterthought once ‘warranty’ expires! I hear they aren’t much better today!

    • Hi Jim,

      thanks for the comment. While I cannot comment on the specific contract you mentioned (mainly since I have no idea which one you are referring to . . . which is a good thing!), over the years I have seen both buyer and seller set performance levels for a number of different reasons including increasing the performance levels at the end of transitional support period or reducing performance in order to achieve a cost saving. The key to setting good performance levels is to choose levels that deliver a fair outcome for both parties.

      As for buying spares, my experience also shows that they always appear to be the first to be ‘harvested’ for money when the project is short. Unfortunately, many people don’t understand the long-term impact of this short-term action, especially on the performance ‘ilities’ such as availability, reliability and maintainability. But it is a great discussion point.

      Again, thanks for the comment and I hope you like the blog.

      regards
      Jacko

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