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Performance-Based Contracting: Can you do this without "incentives"?


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Sure.  It’s done in many instances where you don’t see significant advantages paying for performance exceeding standards.

One example that comes to mind is internal agency mail delivery to individual offices.  You want mail delivered on time but don’t see advantages delivering early

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Say the mail delivery contractor fails to deliver the mail on time.  What is the consequence?  Terminate the contract?  I'm not seeing how this performance-based, as opposed to the same way any other contract is treated.  If a party fails to perform, that is a breach of contract.  So I guess my question really is, what is the difference between a regular contract and performance-based contracting?

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7 minutes ago, govt2310 said:

Say the mail delivery contractor fails to deliver the mail on time.  What is the consequence?  Terminate the contract?

See FAR 52.246-4, Inspection of Services—Fixed Price (Aug 1996), paragraph (e):



 (e) If any of the services do not conform with contract requirements, the Government may require the Contractor to perform the services again in conformity with contract requirements, at no increase in contract amount. When the defects in services cannot be corrected by reperformance, the Government may-

           (1) Require the Contractor to take necessary action to ensure that future performance conforms to contract requirements; and

           (2) Reduce the contract price to reflect the reduced value of the services performed.



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@govt2310 carrying the mail delivery example further, the outcome might be mail gets delivery timely, accurately, and safely to all offices.  Mail gets delivery via trucks from USPS, FedEx, UPS, etc.  You don’t tell the contractor how to do the jobs of dealing with the bags of bulk mail, screening, sorting, prioritizing designated addressees, bundling, and distributing.  All that’s up to the contractor. 

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The advice I give folks in setting up a performance based service contract includes the need to create a summary in the Performance Based Work Statement of the contract's most important performance objectives. We call this a Service Summary. Our performance objectives are snippets of the PWS pulled from the most important shall statements in the PWS. 

In my world we try not to complicate things and typically try to limit the Service Summary to twelve performance objectives...usually much less.  This Service Summary and it is set up as a matrix or table within the PWS and is also duplicated in the Government's Quality Assurance Surveillance Plan, where it does get one additional column not placed in the PWS service summary: a listing of the methods of surveillance applicable to each service summary items.  The QASP is kept out of the contract so that the Government may change the method and intensity of surveillance in light of the contractors performance; when shared with the contractor this information in the QASP itself can be an incentive to contractor performance. 

In the Service Summary, for each performance objective, we establish a minimum acceptable threshold value for performance which we call the Performance Threshold.  The Performance Threshold is based upon some sort of metric, occurrence or event. 

Our best practice is to specify at least one service service summary item falling in each applicable rating area (Quality, Schedule, etc) of the Contractor Performance Assessment Reporting System (CPARS) and  carefully specify a range of several  rating criteria for each service summary item. In our monthly/quarterly surveillances we like to use as many as practicable of the five rating criteria used in the CPARS Annual Evaluation (Exceptional, Very Good, Satisfactory, Marginal, and Unsatisfactory).

Some service summary items might be compliance or safety items which only lend themselves to Satisfactory/Unsatisfactory rating criteria, but we typically have a number of service summary items for which we can use all five of the rating criteria. 

The Satisfactory rating criteria itself is anchored to the Performance Threshold described above and the other rating criteria are set according to measured performance levels above and below the Satisfactory levels. Sometimes we can't set ratings for all five, so we may choose just three or four rating criteria for a particular service summary items.

The idea is to give the contractor a non-monetary incentive toward greater contract performance than just recognizing a Satisfactory levels of performance.

Without implementing this practice Government folks are usually left with a choice of giving Satisfactory/Unsatisfactory Ratings each surveillance period (typically monthly or quarterly), which after a year of performance can leave little basis from which to give anything other than a Satisfactory or Unsatisfactory CPAR rating for contractor performance 

We do surveil performance outside of that specified in the service summary and when doing Annual CPARS Evaluations we do use and  don't ignore the CPAR rating descriptions and notes in the tables at FAR 42.1503 in connection with ratings given. 

These procedures we apply to services and not Systems contracts, Construction or Research and Development...do help folks get organized and thinking about facets of contractor performance that the Government values and for which the contractor can get recognized without necessarily creating monetary incentives. 

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4 hours ago, FAR-flung 1102 said:

The advice I give folks in setting up a performance based service contract includes the need to create a summary in the Performance Based Work Statement of the contract's most important performance objectives. We call this a Service Summary. Our performance objectives are snippets of the PWS pulled from the most important shall statements in the PWS. 

What today we call "performance-based acquisition," see FAR 2.101, and which we formerly called "performance-based contracting" (see FAR Subpart 37.6 (1998)) started out in the early 1970s as "performance contracting," an experiment conducted by the Office of Economic Opportunity (OEO) under Donald Rumsfeld in an attempt to improve public education by contracting out. OEO described it asl follows in its FY1971 annual report:


Performance contracting in education attempts to introduce accountability by paying the suppliers of education--private firms or teachers' groups--only to the extent that they are successful in improving the reading and math skills of their students. More than 30,000 children in 20 school districts (with urban and rural, and black, Indian, Mexican-American, Puerto Rican, Eskimo, and white students) participated in OEO's performance contracting experiment in the 1970-71 school year.

The concept sounded good𑁋pay only for results. But it didn't work, because it was impracticable. Rand Corporation did a study of the experiment and concluded that while the idea sounded good, it was hard to do. See The Performance Contracting Concept in Education, R-699/1-HEW, May 1971:


In order to contract for results, the product or service the contractor is to furnish must lend itself to clear definition. Performance contracting has an even more rigorous requirement: the contractor's achievement must be objectively measurable. 

Meeting those requirements for support services is very difficult, especially for professionally-uneducated and poorly-trained personnel, people who don't know how to develop requirements. In fact, for many if not most services it is effectively impossible.

Nevertheless, the Air Force seized upon the concept in an attempt to improve contracting for base-level services, which, in the new world of the all-volunteer military, had taken off like a wildfire. (Requiring enlisted personnel to perform KP didn't make the military very attractive as a profession. Contract out!) Their approach was to apply the concepts of manufacturing quality assurance𑁋such as random sample inspection and acceptance by lot and acceptable quality level (AQL)𑁋to services.

The Air Force produced Air Force Regulation (AFR) 400-28, Logistics Base Level Service Contracting (1979), which introduced the concept of the performance work statement (without calling it that) and the quality assurance surveillance plan (QASP). It was the kind of thing that FAR-flung 1102 described, above. I was chief of a contracting office in the late 1970s that was directed to try it on contracts for base supply services and base security services. We failed. It was too hard.

Nevertheless, OFPP adopted AFR 400-28 almost word-for-word as OFPP Pamphlet No. 4 (1980), a supplement to OMB Circular A-76. And in 1991 it issued a policy letter calling for contracting for results.

The Air Force cancelled AFR 400-28 in the late 1980s. They couldn't make it work.

Performance-based contracting is a classic example of an idea that makes sense in theory and sounds good but does not work out in practice.

The concept languished until the early 1990s. On April 15, 1991, the OFPP issued its Policy Letter 91-2, Service Contracting:


"Performance-based contracting means structuring all aspects of an acquisition around the purpose of the work to be performed as opposed to either the manner by which the work is to be performed or broad and imprecise statements of work."

"It is the policy of the Federal Government that (1) agencies use performance-based contracting methods to the maximum extent practicable when acquiring services..."

- Defining statements of work to describe “what” work should be performed rather than “how” it should be performed. This approach encourages bidders/offerors to develop innovative, efficient and cost effective means for performing the required level of service. It concentrates on achieving results rather than on documenting a contractor's activities. “How to” statements of work can result in contractors complying with contractual requirements, but failing to accomplish the desired end results in an efficient, economical manner.
- Developing formal measurement criteria to assess actual performance against predetermined performance standards and assigning contractors full responsibility for quality performance. This approach facilitates the use of fixed price contracts, with the concomitant benefit of reducing the Government's risk and contract administration burden. Nonexistent or inadequate quality assurance plans make it impossible for the Government to accurately assess contractor performance and provide effective incentives.

Then the Clinton Administration decided to "reinvent" procurement and ballyhooed the idea. They made all kinds of phony claims for the concept's success and its use by "industry," aided and abetted by foolish contracting office chiefs and GS-1102s who wrote "success stories" about their implementation of performance-based contracting, all in an attempt to win fame and maybe a Silver Hammer award from Vice President Gore. https://govinfo.library.unt.edu/npr/library/awards/hammer/index.htm

Almost everyone (all but the truly deeply clueless) could see that government personnel simply could not pull it off and that the idea had no legs. But the senior people had told so many lies about the concept's successes that the gullible in Congress enacted the thing into law. See 10 USC 4502(c)(5) and 41 USC 1702(b)(3)(C). That's why it's still in the FAR and why people label SOWs as PWSs.

You can still find clueless 1102s who talk about performance-based acquisition as if it were a viable acquisition method, having made no effort to research the policy and without any evidence of its effectiveness. Being locked-in to a failed idea makes it hard for them to think of better ones.

Those who cannot remember the past are condemned to repeat it.

Insanity Stupidity is doing the same thing over and over again and expecting different results.

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The theory is bad, but with a good enough government-contractor relationship, the practice as FAR-Flung describes it can work for some time.  It works until the relationship doesn’t, and then it gets to be too hard or litigious to administer.  At that point, you have two options, dependent on your experience level as a CO: 1) If highly experienced and educated, use Relational Contracting practices to salvage the performance-based acquisition, or 2) Abandon the unfounded practice of performance-based acquisition altogether, and rely strictly on the inspection clause from then on.

When you abandon your service summary, reverting to the simpler reliance on the FAR 52.246-4 inspection clause better be a solid plan B, or else your contract will fail.  So craft your scope of work accordingly.

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1 hour ago, Voyager said:

reverting to the simpler reliance on the FAR 52.246-4 inspection clause better be a solid plan B, or else your contract will fail.

Even 52.246-4 relies on inspection of whether or not services "conform with contract requirements" so the contract still needs to contain some enforceable contract requirements to measure conformance against, which loops right back to the original issue that it is difficult or impossible in many cases, particularly long-term professional support services, to create measurable service output requirements that will remain useful for the life of the contract.
But since we still have to write contracts, I might add a third possibility, which is to use input-based level of effort requirements (e.g. FTEs) to establish a contractually enforceable baseline, and then apply relational contracting practices regarding the output (service quality, timeliness, responsiveness, creativity, etc. whatever the undefinable, subjectively measurable actual things we want to achieve are) with encouragement via CPARS.  Not saying it is a perfect solution, but I think it is an improvement over the typical pretend performance-based contracts with a "PWS" but no defined or definable measurable outputs or inputs at all.

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23 minutes ago, Witty_Username said:

and then apply relational contracting practices

I want to say you meant performance-based acquisition principles here.  Is that an acceptable substitution to your post?

Of course you can be cordial and understanding of the psychology of contracting while you do so…

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39 minutes ago, Voyager said:

I want to say you meant performance-based contracting principles here.  Is that an acceptable substitution to your post?

Hmmm, I think what makes performance-based contracting performance-based contracting is including the required results in clear, specific and objective terms with measurable outcomes in the contract at the time of award (solicitation really); and I don't think you can generally do this for service quality, timeliness, responsiveness, creativity, and the other outcomes you actually want from a professional support service contractor in most cases. 

So I actually was thinking trying to apply relational contracting principles including output or outcome-based models (although not necessarily defined in advance and objectively measurable as required by PBSA); a more collaborative relationship; and an emphasis on relationship management rather than just contract performance surveillance. For example I think meeting regularly to discuss the intangible aspects of performance and providing draft CPARS assessments with constructive feedback on how to get from the satisfactory to very good or exceptional CPARS rather than simply surprising the contractor with a final rating at the end of each year is a more collaborative approach than we often take.

I guess on reflection it is really cherry picking some aspects of performance-based contracting and some aspects of relational contracting and adding them to an otherwise LOE contract; I'm just generally more suspicious of calling anything "performance-based" because the vast majority of so-called performance-based contracts are absolutely not performance-based and we probably haven't hit the point where we're overusing relational and calling everything a relational contract (yet!).

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Okay thanks.  It is cherry-picking I think, yes, but hey - that’s what practice over theory does to a concept.  We do what works, without being puritanical to theory.  I was just checking to make sure we weren’t conflating anything here, in a theory discussion, because oftentimes the uneducated of our industry do that.  They use terms they don’t understand and that’s when we get for example PBSA contracts with no service summary and an unmeasurable PWS.  I am going to be vigilant against that happening to relational contracting, because if it does practitioners will just regress to the mean without ever putting the time in to get educated on a matter.  

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About the only instances of PBA I can say worked all involved use of Statement of Objectives (SOO).  The agencies stated a need or problem in terms of sought outcomes.  Then they allowed offerors to propose a variety of solutions much like in R&D and selected the most promising for award.  I believe opening up the range of ideas as opposed to the traditional way of the government deciding the required approach upfront in a SOW allowed for the successes, albeit in limited numbers.   Those occurred probably more due to the SOO concept rather than application of PBA techniques for contract management and administration.



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Relational Contracting?  Pardon me with admission that I am old school! 

Computers, IA, text messaging, video conferences, emails - I remember the days when I would "lase up my boots" and visit contractors at the construction site, the services site, the supply site, you name it.   Maybe everyone can live in the new world and make it work but a personal handshake; a sit down on the job to visit; in person partnering versus Zoom; your get the idea seems to have been relational contracting to me.   Today it is just another term that I fear is equal to performance based.  The conclusion  I guess is - if it works it works  - really does apply.   Yet the days of funded mandates to make contracting officers really what they are intended to be are gone.  Now the acquisition workforce  managed by dollars and cents rather than what it really takes to have effective contracting.   

Maybe it is a past that should be repeated!

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None of us should talk in terms of an overarching policy about methods of services acquisition. There are several methods, and the key is to use best one for the task at hand.

I believe in a relational approach for the acquisition of long-term, multi-function and multi-task services that are performed in an environment and under circumstances that the contracting parties cannot control. See "A Proposal for a New Approach to Performance-Based Services Acquisition," Defense Acquisition Review Journal, September 2007, https://www.dau.edu/library/arj/ARJ/arj45/ARJ45_Edwards.pdf

A results-based approach might be appropriate for short-term single-task services of particular kinds, such as grounds maintenance.

The path to better policy begins with understanding the nature of services. A good start would be to read On Goods and Services by T. P. Hill.


Until you have read and digested that, and read some other things, as well, and can explain what you mean by the word "services," and say some intelligent things about the nature and variety of services, why not keep your pen sheathed and your opinion to yourself?


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  • 3 months later...

Vern Edwards, I see you quoted the OFPP Policy Letter 91-2.  I can't find this letter online.  Obviously, you have this letter, as you were able to quote from it.  Can you please post the link to OFPP Policy Letter 91-2?

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“OFPP Policy Letter 91-2, Service Contracting

    OFPP Policy Letter 91-2 established policy for acquiring services 
by contract. It encouraged the use of ``performance-based 
contracting,'' which uses standards to measure quality and timeliness 
of contractor performance and surveillance plans to assure that the 
standards are met. Policy Letter 91-2 is implemented in FAR Subpart 
37.6. For more information on this subject, see OFPP's ``A Guide to 
Best Practices for Performance-Based Service Contracting'' (October 
1998) at the ARNet world wide website, http://www.arnet.gov/BestP/
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