Performance-based Pointers

Here's the 30-second elevator speech describing performance-based contracting: "Tell the contractor the result you want, not how to do the work, and then be sure you can measure whether that result has been achieved." Performance metrics and incentives or disincentives that focus the contractor's actions on the agency's goals provide the framework for evaluation.

Since the federal mandate to use performance-based contracting is a decade old, many agencies have taken a stab at it, but it's by no means prevalent nor is it uniformly applied. Only a handful of senior agency officials attending a May Brookings Institution workshop on performance metrics knew much about performance-based contracting and even fewer had received any training in doing it. For the approach to work, two factors are critical: agreeing on results and setting up an effective contract administration and monitoring plan.

One of the toughest parts of contracting is getting the right team together early on and having them agree on the outcome they're seeking. It's amazing how frequently people differ on what they expect from a contract. But if the government isn't sure what it wants, it's awfully hard to hold a contractor accountable for achieving that result. The notion of "outcome" itself is difficult. All too often, the goal of a contract is a deliverable, a study perhaps, which will be seen as the outcome of the effort. At other times, the outcome will be "approval to proceed to the next stage of the project." What's missing in both examples is a clear rendering of the impact of the contract on the agency's mission.

One way to express an outcome successfully is to insert the phrase "to enable the agency to" in the middle of the outcome statement. Here's an example: "A business case on the pros and cons of consolidating data centers will be developed to enable the agency to decide whether to proceed with consolidation." This type of outcome deals with an effort early in a project where the focus still is on studies or analyses. Here's another example for later in the project: "Fourteen data centers will be consolidated into three to enable the agency to achieve equivalent performance at a 10-year savings of $50 million."

While the upfront work is demanding, administering the contract is equally critical. If performance metrics haven't been well thought through, or if an effective measurement scheme hasn't been put in place to document results, then accountability is lost. The Veterans Affairs Department has been operating a performance-based contract with QTC Medical Services Inc., a Diamond Bar, Calif., firm, since an initial pilot effort in May 1998. The contract now is in its third year and is operating at 10 Veterans Benefits Administration regional offices.

The new approach for this contract is to have a private sector firm, rather than VA hospitals, provide disability exams for veterans. Performance is the key to the arrangement. Measures include timeliness, quality, cost and customer satisfaction. All other elements of the contract revolve around a requirement to get the job done within 40 days. QTC must contact the veteran, scan and image the veteran's medical records, schedule and perform the exam, get the test results, do a report and get it back to the VA within 40 days or suffer significant penalties. The "how" is left up to the contractor.

As Gary Krump, VA's procurement executive, says, the agency took on the new approach "without a well-developed body of law or a six-foot-long file to tell you how to do it." That meant that all parties had to think things through from the start with the VA's clinical and business sides working in close partnership with each other and the contractor.

Why has it worked? Right from the start a clear contract administration plan identified action items for each party and defined team responsibilities. The contract-monitoring plan doesn't micromanage, but it does provide for oversight visits, monthly audits and continuous feedback on quality and performance.

What does Krump see as the key to success from a contract administration standpoint? "Constant communication between the contracting officer's technical representative, the contracting officer, the vendor and the program official." In fact, the vendor and the VA regional offices communicate daily, so problems can be resolved before they become major issues.

What are the lessons learned here? Define your outcomes well upfront so there's no ambiguity about expectations from any team member, whether government or contractor. For advice on administering the contract, Krump quotes Ronald Reagan: "Trust, but verify."