Performance Procurement

The concept of paying services contractors for performance has won wide support in principle, but putting it into practice is a bigger challenge.

For several years now, the Bush administration has touted performance-based acquisition as its preferred method of procuring services from the private sector. According to the Office of Federal Procurement Policy at the Office of Management and Budget, agencies are on board with the initiative, using the technique for approximately 45 percent of their services contracts, compared with 26 percent in 2001. Acquisition experts, however, say the picture is not quite as rosy as it appears.

Performance-based acquisition was designed to help agencies reap the benefits of private sector innovation. Proponents of the initiative say that for years, the government has micromanaged its contracts by spelling out every detail of how it wanted goals to be achieved. In the performance-based approach, an agency says what problem needs to be solved and allows contractors to make bids detailing their proposed solutions. The agency is charged with developing clear ways to measure the result as well as the contractors' performance over the course of the contract.

"The real philosophy behind this is the government was driving up the price of work by mandating that people do it in a certain way, when, in fact, [contractors] may have known a better way to get it done," says Jon Desenberg of the Washington-based Performance Institute, a think tank dedicated to improving government performance. The idea "is to let the contracted group come up with the best possible solution and only pay them based on solving the problem . . . not on the individual steps and minutia that we have for so many years required."

While few people disagree with the performance-based approach on principle, many experts are concerned with how it is being implemented. One of the fundamental challenges is determining what types of contracts lend themselves to use of the technique. OFPP Administrator Paul A. Denett says a wide range of the approximately $140 billion a year in services contract agencies issue are well-suited to the approach. Some federal organizations, such as the Treasury Department, have required all eligible services contracts to be based on performance unless explicitly exempted. Patricia Hoover, chief of the quality assurance branch of the Internal Revenue Service's procurement office, says that in some cases the requirement forces contracting and program personnel to establish explicit measures for cost reimbursement and time-and-materials-type contracts that are poorly suited for performance-based payouts. "Then you have critics of performance-based saying [the contract] is not really performance-based because you're still paying the contractor hourly or by what costs are incurred," she says. "You'll have people debating that forever."

Desenberg cites the Army's effort to clear military bases of environmental hazards before turning them over to private organizations as an ideal opportunity for performance-based contracting. "The proof in that case is right in front of you," he says. "You just test if the ground water is clean, the soil is clean, and you know right then if the contractor did a good job." The Performance Institute believes that only 25 percent to 30 percent of services contracts are of the process-driven sort unbefitting performance-based acquisition.

Mutual Foot-Dragging

OFPP and the General Services Administration have offered agencies resources on implementing the initiative, including a seven-step guide. They characterize performance-based acquisition as a lengthy expedition, not a matter of meeting simple quotas. While encouraging agencies to "have a good journey," the guide cites the acquisition community culture as a primary impediment to competency in performance-based acquisition. "Traditional 'acquisition think' is entrenched in a workforce of dwindling numbers. The situation is complicated by a lack of push from the program officers who have the mission needs and who fund the acquisitions," the guide states.

Agencies aren't the only ones dragging their feet. Contractors aren't as eager as one might expect to steer the course of their own work. Some are concerned that as they move forward along a path established by an agency, the requirements or scope of contracts can shift. "A problem well defined is half solved, but you're going to run into problems if you're trying to nail Jell-O to a tree," says John Slye, manager of federal industry analysis for market research firm INPUT in Reston, Va. The organization released a report in October 2007 warning that performance-based acquisition could be too risky and expensive for many potential vendors.

The bid and proposal process under the performance-based approach requires a substantial amount of resources. That means, the report argues, that "only sophisticated, well-established companies can make a reasonable profit margin . . . while smaller companies will be challenged to absorb the risk."

Stan Soloway, president of the Professional Services Council, an association in Arlington, Va., that represents services contractors, says the initiative can benefit both government and industry as long as agencies write solid statements of work and provide potential vendors with all the necessary information. "I think small and midtier businesses would see it as a great opportunity to be innovative, to propose and generate innovation rather than be contained in a predesigned box," he says. "It gives them an opportunity to demonstrate agility." Soloway says such companies should carefully assess risks before entering into performance-based contracts.

Denett acknowledges that performance-based acquisition "can be risky for contractors when agencies provide vague contract requirements and performance measures. This lack of clarity is usually the principal reason for failed [acquisitions]." OFPP developed an acquisition certification program in 2007 that requires program managers to take training courses on the development of performance-based contract requirements and evaluation measures.

Desenberg says contracts that are contingent on demonstrated performance at the end of the process heavily favor larger companies, which are better able to absorb the early costs and wait for a payout at the finish line. Agencies, he argues, should focus on intermediate performance measures and incentive pay milestones to attract smaller companies. And the performance-based approach doesn't need to be restricted to expensive, long-term acquisitions. Smaller service contracts lasting a few months also can be performance-based, allowing small businesses a chance to participate and possibly gain an edge over big business by providing original solutions.

After Awards

If requirements are well-defined, the success of a performance-based acquisition rests heavily on post-award monitoring and management. Experts believe that failure at this stage is often the result of communication breakdowns between those in the technical, financial and procurement arenas. Desenberg says additional training of contracting officers' technical representatives, who monitor performance and provide practical guidance to contracting officers over the course of a contract, could help bridge these communication gaps. "The COTR has to take the bull by the horns and say, 'We need to operate as a team here,' " he says. To take on such a role, technical representatives must be familiar not only with the procurement process but with the ins and outs of specific programs. That would require changes in the way agencies recruit and train such officials.

Hoover seconds the importance of the technical representatives. "The COTRs are the ones that are managing those contracts on a day-to-day basis," she says. "We've had this focus on contracting personnel for so long. The focus needs to be on program personnel, because they're the ones that write the requirements, they're the ones that monitor the contracts. They're critical." She praised OFPP for recognizing this and developing federal acquisition certification courses for program and project managers.

Successful performance-based acquisition also depends on forging effective relationships between federal officials and their partners in the private sector. Establishing and maintaining lines of communication ensures that contractors become familiar with the business problems the agency is trying to solve before developing potential solutions. In turn, agencies become familiar with the contractors' capability to address their needs and can adjust expectations accordingly. "The traditional problem continues to be whether the contractors and the agency are talking far enough upstream of the business problem solution . . . that the contractor can provide some degree of consultation on how they might best formulate the requirements they're trying to achieve," Slye says.

No matter how well both sides communicate to develop requirements and performance measures, observers say the majority of projects still will experience some degree of scope change. If government chooses to emphasize achieving a specific goal, they say, agencies must be willing to bear their share of the cost of managing contracts to meet their requirements. "They need to look at the proposals coming in, understanding that you're asking a higher standard," Slye says. "You're going to be happier with what you get if you're willing to take a best-value approach."

Partnership-Driven Government

Increasingly, federal officials and private sector experts see performance-based acquisition as a necessity, not a choice. Agencies' heavy reliance on contractors to perform key government functions, especially in big-budget areas such as defense and intelligence, isn't likely to change any time soon. Advocates of the performance-based approach say accountability and transparency will suffer if agencies focus on micromanaging instead of results. "The government of the future is partnership-driven," Desenberg says. "We don't have all the answers and . . . the government can't operate in a vacuum anymore. The problems we're facing require much more interconnection, which means you have to be outcome- and performance-driven."

The growth in performance-based acquisitions indicates that agencies are getting behind the initiative. But the culture change that a widespread shift to the new approach requires will be gradual. Time, training and continued guidance will help agencies reach the goal laid out by OFPP and GSA in their seven-step guide: to "shift the paradigm from traditional 'acquisition think' into one of collaborative, performance-oriented teamwork with a focus on program performance, improvement and innovation, not simply contracting compliance."

The Bush administration has emphasized performance as a key focus of its management agenda. But performance-based acquisition is likely to last beyond the administration. OFPP has projected that agencies will exceed the goal of using it on 45 percent of service contracts in 2007. While the growth is impressive, the Services Acquisition Reform Act Advisory Committee, established in 2004 to look at government buying practices, reported in 2006 that the statistics are misleading because many contracts classified as performance-based had serious flaws or were completely without performance-based characteristics. Desenberg estimates that about half the contracts classified by OFPP as performance-based have good performance measures and are managed properly.

The advisory panel recommended that specific quotas on percentages of performance-based acquisitions for agencies be dropped. "For the next president, we hope there is a continued focus on these issues, but less of a focus on checking boxes and hitting certain numbers as far as these quotas, because that has somewhat driven people in the wrong direction," Desenberg says.