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 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.
- 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.