Responding to a Performance Based Contract (PBC)

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One area not usually covered in the discussions of developing and operating better practice Performance Based Contracts (PBC) is how to respond to a PBC tender.

In many cases the PBC will be competitive through an open or limited tender.  In this situation, the aim of the seller is how to increase the Probability of Winning, commonly referred to as the Pwin, by balancing:

  • the desire to comply with the buyer’s position of specific PBC requirements (e.g. the performance measures, associated performance levels and commercial consequences; and
  • the commercial risk that this compliance brings (e.g. is the performance level achievable or is there a real risk of a failure to deliver, and what will this mean commercially to the seller?).

Having worked for both buyers and sellers I offer the following 4 points for consideration when responding to a PBC tender:

  1. Understand the Buyer’s Intent. When reading the PBC, and especially the performance measures, think about why the measures are being used.  What outcome(s) is the buyer trying to incentivise; either through positive (incentives) or negative (remedies) consequences? And if they are weighted, which outcome is the most important.  Additionally, but less common, if shared or Enterprise Performance Measures are used, consider the role the buyer’s wants the seller to play in delivering a bigger “enterprise” or collective outcome.  This should give you an insight into the buyer’s intent; what contract success should look like.  This understanding is critical if you want to be the buyer’s commercial partner.
  2. Your Solution Should be Designed to Deliver Green Performance. Once you understand the buyer’s intent your solution should be designed to deliver Green performance (i.e. to deliver the buyer’s Required Level of Performance where 100% payment should be achieved).  This isn’t as simple as it sounds, especially when balancing the desire to minimise cost / price in a competitive situation.  However, it is critical the seller understands both the short and long-term implications if Green performance is not delivered.  Not just in terms of payment, but other non-monetary implications such as reduced contract term, limited or no future work and damage to the company reputation, all of which is critical if the buyer is a repeat customer.
  3. Understand the Probabilistic Nature of Performance. Many PBCs will include a range of monetary and non-monetary consequences tied to seller performance.  However, many sellers will confuse the existence of a consequence in the contract with the likelihood of occurrence.  Given this, many sellers try to remove it through putting in a non-compliance in the tender response.  For example, many PBCs will include the right to terminate for continued poor performance, especially those buyers in the public sector.  Before responding, the seller must understand what is the chance that they will continuously deliver poor performance resulting in termination.  Unfortunately, trying to remove the consequence leads the buyer to believe that the seller doesn’t want to be held accountable for their performance.  While this may not be the case, you can understand from a buyer’s perspective why asking to remove (or minimise) their commercial performance protections may give them concern.
  4. Responding to a PBC is a Team Sport. In helping buyers and sellers I have repeatedly observed that responding to the elements of a PBC can get confusing with no single owner within the bid team.  Unlike the technical requirements or pricing, which have clear leads, given a PBC is multidisciplinary in nature touching commercial, financial, technical and management functions, finding and individual accountable can sometimes be hard.  In my experience, it important to ensure there is a single accountable person within the bid team responsible for aligning all aspects of the PBC response to ensure a coherent and aligned response.  I have seen tenders where the seller’s technical team respond with an alternate performance measure, the finance team put no money at risk (despite the buyer asking), and the commercial / legal team removing termination for poor performance.  Yet the executive summary states how the seller wants to be the buyer’s partner, standing shoulder-to-shoulder, being held accountable for their performance and behaviours.  From a buyer’s perspective this is confusing and may lead to concerns with the true nature of the seller’s intent potentially reducing the Pwin.

In addition to these general points, in some cases as a seller you may be asked to provide your opinion on what performance measures and their associated performance levels should be used, taking into account either existing internal measures or industry standard / better practice.  When considering your response you should be very careful in offering an alternate that is not aligned with the buyer’s intent.  If there is a legitimate reason, such as the cost of collecting the data, this needs to be made clear as otherwise this may be seen as form of negotiation, minimising the commercial risk that the seller is exposed to.  Alternatively, where the proposed alternative performance measures include detailed rationale and statement of benefit to the seller (i.e. the why), it may increase your Pwin.

Before I end this article, I do want to highlight that sellers should not simply comply with everything the buyer wants.  Over the years I have seen completely unrealistic PBCs from buyers which were both unachievable (in terms of performance) and unaffordable (in terms of the buyer’s budget).  In these cases, it is critical that the seller understand their commercial imperative as, at least in my opinion, no contract is too important to win at any cost.  A PBC like this will result in numerous disputes and ultimately not deliver the desired outcome to either party; a loose-loose situation.  One option for the seller is to explain the reasons and offer an alternate Performance Management Framework (PMF) that is both achievable and affordable.  Of course, the seller may conclude that the PMF is too arduous and the cost of tendering too high.  In this case, the seller may simply not bid (tender) for the contract.

So in developing your response to a PBC I hope you consider the points in this article.  Importantly, I hope you consider viewing your response from the perspective of the buyer, and how it delivers their desired outcome(s).  Since, just like in school, the best advice my teachers gave was to simply read and answer the question being asked.

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1 Response to Responding to a Performance Based Contract (PBC)

  1. Jacko – another great post (as can always be expected of you!). It might be useful to sellers to also understand the buyer’s segmentation strategy and in which segment the transaction, relationship, project, and/or commodity/service is positioned – as well as one’s own segmentation strategy. If the two parties’ segmentation analyses align, great! If not, then in the seller’s path forward, they need to consider this misalignment in determining whether, and how, to respond.

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