Pay for Success Contracts under FAR? (Different from what we call "Performance Based")

[Vern Edwards]

@Tzarina of ComplianceI don't know whether PFS is a good idea. I've done some reading, and there are advocates and skeptics. I like to think that I have been an innovator, but I tend to be skeptical (not cynical) about anything that comes out of ivory towers like the Harvard Government Performance Lab, as would be anyone who knows the history of ideas like performance contracting in education, whence came todays Performance-Based Acquisition (formerly, Performance-Based Contracting). As far as I'm concerned, PFS is just education performance contracting with a financing twist.

I've been around a long time, Tzarina.

If you want an opinion about whether PFS contracting, as usually described, can be done under the FAR, my opinion is that it depends on how you want to do it. My general view is that it probably cannot be done under the FAR without approval of some, perhaps many, FAR deviations and perhaps some legislation. An informed opinion would require you to answer more questions than I want to ask.

As for whether "Government pays nothing," well, that's a bold statement in a world with lawyers.

I hope that if you undertake a PFS contracting arrangement you tell us about it and let us know how it goes.

Best.

[Tzarina of Compliance]

8 minutes ago, joel hoffman said:

Correct, under the scenario that I described.

Its a variation of both a fixed price incentive with fixed target (FPIF), where the target equals the maximum price and what industry refers to as a Guaranteed Maximum Price (GMP).

No payment unless and until the object/requirement is successful.

(Edit: Profit or fee also payable but only upon success).

Have to look into those, thanks.  Do you have any good examples of what it looks like in a GMP contract?

[Vern Edwards]

Joel, for pete's sake. GMP?

[joel hoffman]

Please note that both the Navy and GSA are using forms of FPIF and FPIS for design-build construction to get as close to the industry model of GMP as possible. But, of course- progress type payments are included in their methodology.

That and zero contractor share of cost underruns would be the major difference here.

 

[joel hoffman]

17 minutes ago, Tzarina of Compliance said:

Have to look into those, thanks.  Do you have any good examples of what it looks like in a GMP contract?

You could ask NAVFAC or the GSA folks for their policy guidance and descriptions of their methods. I saw them a few years ago but no longer have that info.

The Design-Build Institute of America(DBIA) hired me to develop a GMP model for Federal Contracting that would be compliant with the FAR. I provided it to them and they own the rights to it. It was very similar to what the GSA has developed.

It is basically a much simplified FPI type contract. However, it would only be used for very complex design-build projects that aren’t suitable for FFP. 

 

[joel hoffman]

34 minutes ago, Tzarina of Compliance said:

Have to look into those, thanks.  Do you have any good examples of what it looks like in a GMP contract?

Please remember that I said what you are proposing goes beyond what the industry calls GMP and what the couple of government agencies using a similar form of GMP are doing.

In both cases, the owner or government make regular interim payments during performance and they incentivize cost savings by sharing cost savings within a defined band. 

[Vern Edwards]

Here is how the Design-Build Institute of America describes a Guaranteed Maximum Price contract:

Quote

Industry frequently makes use of a type of design-build contract called a Guaranteed Maximum Price (“GMP”) contract. An industry cost-plus/GMP contract is essentially a hybrid contract combining the cost reimbursement features of a cost-plus contract with the cost certainty of a lump sum (firm fixed-price) contract. The owner benefits by paying only the actual reimbursable costs and knowing that the project won’t exceed an ultimate price ceiling. The contract includes a fixed fee. The contract also includes an incentive provision for sharing some or all cost savings to control costs within the price ceiling. Contractors that perform the contract for less than the estimated cost will share the cost savings with the buyer, meaning that contractors receive a higher fee, while, at the same time, reducing overall costs.

For example, assume that a contractor and buyer agreed that the appropriate estimated cost of a project was $8.00, with a $2.00 additional fee, making a total price ceiling of $10.00. The parties have also agreed on a 50/50 share ratio for any cost savings under the estimated cost. Should contractor’s actual cost total $7.00, contractor and buyer would split the $1.00 delta between the estimate and the cost. The contractor would realize a $2.50 profit instead of a $2.00 profit and the buyer would pay only $9.50 total instead of $10. Thus, a GMP contract incentivizes the contractor to keep costs low.

See: https://dbia.org/wp-content/uploads/2018/05/DeeperDive-Federal.pdf

Keep in mind that GMP are used in construction, where "success" is based mainly on objectively measurable physical and functional characteristics.

See the following for pros and cons:

https://www.designingbuildings.co.uk/wiki/Guaranteed_maximum_price_for_construction_contracts

[Tzarina of Compliance]

25 minutes ago, Vern Edwards said:

Here is how the Design-Build Institute of America describes a Guaranteed Maximum Price contract"

See: https://dbia.org/wp-content/uploads/2018/05/DeeperDive-Federal.pdf

Keep in mind that GMP are used in construction, where "success" is based mainly on objectively measurable physical and functional characteristics.

See the following for pros and cons:

https://www.designingbuildings.co.uk/wiki/Guaranteed_maximum_price_for_construction_contracts

Thank you.  Learning is my favorite.