Performance Based Contracting
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Performance based contracting (PBC), also known as
performance-based logistics Performance-based logistics (PBL), also known as performance-based life-cycle product support,Ilias Solutions, N.V.Performance Based Logistics accessed 24 December 2022 is a defense acquisition strategy for cost-effective weapon system support whi ...
(PBL) or performance-based acquisition, is a product and services purchasing strategy used to achieve measurable supplier performance. A PBC approach focuses on developing strategic performance metrics and directly relating contracting payment to performance against these metrics. Common metrics include
availability In reliability engineering, the term availability has the following meanings: * The degree to which a system, subsystem or equipment is in a specified operable and committable state at the start of a mission, when the mission is called for at ...
,
reliability Reliability, reliable, or unreliable may refer to: Science, technology, and mathematics Computing * Data reliability (disambiguation), a property of some disk arrays in computer storage * High availability * Reliability (computer networking), a ...
,
maintainability In engineering, maintainability is the ease with which a product can be maintained to: * correct defects or their cause, * Repair or replace faulty or worn-out components without having to replace still working parts, * prevent unexpected working ...
, supportability and
total cost of ownership Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting concept that can be used in full cost accounting or even ecolog ...
. The primary means of accomplishing this are through incentivized, long-term contracts with specific and measurable levels of operational performance defined by the customer and agreed on by contracting parties. The incentivized performance measures aim to motivate the supplier to implement enhanced practices that offer improved performance and cost effective. This stands in contrast to the conventional transaction-based, or
waterfall A waterfall is a point in a river or stream where water flows over a vertical drop or a series of steep drops. Waterfalls also occur where meltwater drops over the edge of a tabular iceberg or ice shelf. Waterfalls can be formed in severa ...
approach, where payment is related to completion of milestones and project deliverables. In PBC, since a part or the whole payment is tied to the performance of the provider and the purchaser does not get involved in the details of the process, it becomes crucial to define a clear set of requirements to the provider. Occasionally governments fail to define the requirements clearly. This leaves room for providers, either intentionally or unintentionally, to misinterpret the requirements, which creates a game like situation. Performance-based approaches are widely used within the
defense industry The arms industry, also known as the arms trade, is a global industry which manufactures and sells weapons and military technology. It consists of a commercial industry involved in the research and development, engineering, production, and s ...
, but can be applied across any spend category.


Overview

PBC is about buying performance, not transactional goods and services, through an integrated acquisition and
logistics Logistics is generally the detailed organization and implementation of a complex operation. In a general business sense, logistics manages the flow of goods between the point of origin and the point of consumption to meet the requirements of ...
process delivering improved capability to a range of products and services. PBC is a support strategy that places primary emphasis on optimising system support to meet the needs of the user. PBCs delineate outcome performance goals, ensure that responsibilities are assigned, provide incentives for attaining these goals, and facilitate the overall life-cycle management of system reliability, supportability, and total ownership costs. A PBC in practice involves a contracting agency (who are contracting the work to an external provider) and a contractor (who are responsible for completing the work set out in the contract). Several other parties are often involved, including subcontractors, a legal team and consultants. These parties work for both contracting agency and contractor completing various elements of work associated with contract development, contracted work completion or performance management / measurement. United States
federal law Federal law is the body of law created by the federal government of a country. A federal government is formed when a group of political units, such as states or provinces join in a federation, delegating their individual sovereignty and many po ...
defines performance-based acquisition and treats it as "the preferred method for acquiring services". The
National Defense Authorization Act The National Defense Authorization Act (NDAA) is the name for each of a series of United States federal laws specifying the annual budget and expenditures of the U.S. Department of Defense. The first NDAA was passed in 1961. The U.S. Congress o ...
for Fiscal Year 2001 established an order of precedence for: #performance-based contracting with firm fixed prices #other forms of performance-based contracting #non-performance based contracting.


Implementation

A typical process for implementing a PBC is as follows: #Business Case – a document which reviews potential risks, benefits and other potential impacts of a PBC, usually presented to senior managers to aid in their decision making #Outcomes – a short statement reflecting the desired result or final deliverable of the contract #Measures – define a set of performance measures that collectively measure the organisations performance against the outcome statement #Levels – set performance levels for the performance measures, i.e. how well the contractor needs to perform #Payment – develop a set of payment curves which set out the pay for performance regime i.e. how much the contractor gets paid for their performance level #Incentives – set out a group of incentives that encourage positive behaviours and discourage negative behaviours #Contract – draft, review, workshop and finalise a contract which covers all aspects of the performance, payment and terms and conditions of the relationship #Review – conduct an analysis of the outcomes of the PBC, taking into account the differing definitions of success from the different groups involved in the contract.


Naming

PBC is the name used in Australia,
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
and
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
to describe the practice of attaching contract payment to a set of performance metrics. It is commonly known as
performance-based logistics Performance-based logistics (PBL), also known as performance-based life-cycle product support,Ilias Solutions, N.V.Performance Based Logistics accessed 24 December 2022 is a defense acquisition strategy for cost-effective weapon system support whi ...
in the US and Contracting for Availability or Contractor Logistics Support in the UK. Although it was developed in the US for defence applications, and is most actively applied there, PBC strategies are growing in popularity around the world and in industry sectors other than defence. In particular, PBC frameworks are becoming popular in shipping, transport, health services and the energy sector. Alternative terms include: *Performance-based life-cycle product support, an alternative name for performance-based logistics *Contracting for Availability (CfA) Chartered Institute of Procurement & Supply
Performance-Based Contracting across Public and Private Organisations: Taking Stock
published 2014, accessed 25 December 2022
*Contractor Logistics Support (CLS) *Contracting for Capability (CfC) *Performance based service acquisition *Procurement of complex performance (PCP) *Power-By-The-Hour *Managed Services (or IT and BPO
Business Process Outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
contracts) *Facilities management contracts *Outcome Based Contracting, *Pay for Performance (P4P)


Applications


Defence

PBC is widely applied in the Australian defence sector, primarily by the major acquisition and support organisation, the former
Defence Materiel Organisation The Capability Acquisition and Sustainment Group (CASG) is an organisation within the Australian Department of Defence, responsible for acquisition and supply chain management of military equipment and materiel including aircraft, ships, vehic ...
(DMO). It is particularly useful in the defence environment because of the inherent complexity and large scale of the projects. Recently, Australian Defence has initiated an escalation of the use of PBCs with the strategic aims of improving capability outcomes and reducing total cost of ownership. In Australia and the US, PBC frameworks are most commonly applied in a defence context. PBC frameworks are currently being used in numerous defence-related projects, including: * BAE Systems Hawk *
Boeing Defense, Space & Security Boeing Defense, Space & Security (BDS) is a division (business unit) of The Boeing Company based in Arlington, Virginia. It is responsible for defense and aerospace products and services. It was formerly known as Boeing Integrated Defense System ...
*
Eurofighter Typhoon The Eurofighter Typhoon is a European multinational twin-engine, canard delta wing, multirole fighter. The Typhoon was designed originally as an air-superiority fighter and is manufactured by a consortium of Airbus, BAE Systems and Leonardo ...
*
Anzac class frigate The ''Anzac'' class (also identified as the ''ANZAC'' class and the MEKO 200 ANZ type) is a ship class of ten frigates; eight operated by the Royal Australian Navy (RAN) and two operated by the Royal New Zealand Navy (RNZN). During the 1980s, t ...
s *
Royal Australian Armoured Corps The Royal Australian Armoured Corps (RAAC) is a corps of the Australian Army which provides the Australian Defence Force's armour capability. Armour combines firepower, mobility, protection and networked situational awareness to generate shock ...
vehicles *
Collins class submarine The ''Collins''-class submarines are Australian-built Diesel-electric transmission, diesel-electric submarines operated by the Royal Australian Navy (RAN). The ''Collins'' class takes its name from Australian Vice Admiral John Augustine Collins; ...
s *
GE Aviation GE Aviation, a subsidiary of General Electric, is headquartered in Evendale, Ohio, outside Cincinnati. GE Aviation is among the top aircraft engine suppliers, and offers engines for the majority of commercial aircraft. GE Aviation is part of t ...
* Lockheed Martin


Industry

Although it is applied primarily in the defence environment, PBC is becoming more popular in a broader range of private and public sector organisations as they seek to reduce costs and create a closer link between expenditure and performance goals. Areas outside defence where PBC is applied include: * Commercial Shipping * Public Transport * Health Services * Energy Generation * Maintenance, Repair and Overhaul * Commercial Airlines * Manufacturing * IT and
Business Process Outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(BPO) * Facilities Management Some examples: * PBC for Australian Road Maintenance. This case study provides insight into road maintenance contracts conducted in
Western Australia Western Australia (commonly abbreviated as WA) is a state of Australia occupying the western percent of the land area of Australia excluding external territories. It is bounded by the Indian Ocean to the north and west, the Southern Ocean to th ...
and
New South Wales ) , nickname = , image_map = New South Wales in Australia.svg , map_caption = Location of New South Wales in AustraliaCoordinates: , subdivision_type = Country , subdivision_name = Australia , established_title = Before federation , es ...
. In both instances, very positive outcomes are recorded. Another case study related to Performance Based Contracting in Road Maintenance claims that in 2005, 35 countries were employing PBC for Road Maintenance, and in 2006 15 others had implemented a PBC or were investigating its use.


PBC and Sourcing Business Models

Procurement/Sourcing Business Models A performance-based model is one of seven Sourcing Business Models. Sourcing Business Models theory is a systems-based approach to structuring supplier relationships. A sourcing business model is a type of
business model A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...
that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based. The seven models are: Basic Provider, Approved Provider, Preferred Provider, Performance-Based/Managed Services Model, Vested Business Model, Shared Services Model, and Equity Partnership Model. Sourcing business models are targeted for procurement professionals seeking a modern approach for achieving the best fit between buyers and suppliers. Sourcing business model theory is based on a collaborative research effort by the
University of Tennessee The University of Tennessee (officially The University of Tennessee, Knoxville; or UT Knoxville; UTK; or UT) is a public land-grant research university in Knoxville, Tennessee. Founded in 1794, two years before Tennessee became the 16th state ...
(UT), the Sourcing Industry Grou

(SIG) the Center for Outsourcing Research and Educatio

(CORE), and
World Commerce & Contracting Commercial management is "the identification and development of business opportunities and the profitable management of projects and contracts, from inception to completion". Commercial management within an organization is applied only at policy ...
(formerly the International Association for Contracts and Commercial Management, IACCM). Their initial research formed the basis for the 2015 book, ''Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models in Modern Procurement.''


Research

Recent studies highlighted that the shift from transaction-based to outcome-based relationship requires a business model innovation. There is discussion about the efficacy of PBC as a product support measure. However, there is significant research to suggest that PBC can reduce costs and result in better supplier outputs/performance against metrics than traditional contracting approaches, such as transaction-based contracts. The U.S. Department of Defense/Air Force/
Defense Acquisition University The Defense Acquisition University (DAU) is a corporate university of the United States Department of Defense offering "acquisition, technology, and logistics" (AT&L) training to military and Federal civilian staff and Federal contractors. DAU is ...
sponsored a research project conducted by the University of Tennessee, looking at the effectiveness of PBC frameworks in defence projects. The study found that projects employing a true PBC framework resulted in substantially lower costs and improved system readiness / capability when compared to non-PBC arrangements. The U.S. Department of Defense has many documented case studies from award-winning PBL contracts.Defense Acquisition University
DoD Performance Based Logistics (PBL) Guidebook
accessed 25 December 2022
In addition, a study by
Booz Allen Hamilton Booz Allen Hamilton Holding Corporation (informally Booz Allen) is the parent of Booz Allen Hamilton Inc., an American management and information technology consulting firm, headquartered in McLean, Virginia, in Greater Washington, D.C., with 8 ...
found that even incorporating a small amount of a PBC framework into weapons system support will create positive results. In a more general sense, implementing a PBC framework has a broad range of benefits for organisations, contractors and contracting agencies, including: * Improved contracting for supplier performance against supplier performance metrics * Possible reduction in
Total Cost of Ownership Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting concept that can be used in full cost accounting or even ecolog ...
(TCO) * Ability to forecast cost within contract bounds * Improved accountability for performance * Development of a clear understanding of performance requirements * Promotion of strategic benefits for Contracting Agency and Contractor * Integration of all contracting aspects in a single set of performance measures * A 'Fair' contract * A greater understanding of life-cycle costs * Investment in workforce and skills An international workshop on PBC held in 2014 found both a wide variety of practical applications had been identified for PBC alongside a level of academic interest, but also observed that PBC is "by no means always appropriate".


References


Further reading

* ''Aerospace Systems Division PBC Handbook'

* ''Australian Department of Defence - ASDEFCON PBC Template'

* ''Defence Materiel Organisation (DMO) - Contracting'

* Adapted from - Performance Based Logistics Partnerships: Assessment of Implementation Methodologies for Selected ACAT 1 & 2 Systems AFLMA (Air Force Logistics Management Agency) Report (LM200400700)CAPT Kirk Pettingill and MAJ Michael A Knipper, October 2004 * J. Boyce and A. Banghart, Performance based logistics and project point proof: A study of PBL effectiveness, Defense AT&L: Product Support Issue March–April 2012 - available online fro

* J. Beggs, B. Ertel & M. Jones, Performance-based logistics perspective, Booz-Allen-Hamilton - available online fro

* BAE Systems Australia 2011 - available online fro

* Defence Industry Daily, December 6, 2011 - available online fro

* Defence Materiel Organisation (DMO), Defence Capability Update, 8 June 2012 - available online fro

* Defence Industry Daily, May 19, 2010 - available online fro

* Society for Cost Analysis and Forecasting, ''Implementing Performance Based Contracting in Through Life Projects'', John Scire and Dale Shermon, Qineti

{dead link, date=March 2018 , bot=InternetArchiveBot , fix-attempted=yes * World Bank, Resource Guide, Performance-based Contracting for the Preservation and Improvement of Road Assets - available online fro

* National Cooperative Highway Research Program, Synthesis 389, ''Performance-Based Contracting for Maintenance'' 2009, available online from

* Defence Materiel Organisation (DMO) ''Discussion Paper Contracting ‘Cost’ Models & Performance Based Contracting Concepts'', 2010, available online from

* T. Jin and P. Wang. Planning performance based contracts considering reliability and uncertain system usage. Journal of the Operational Research Society, vol. 63, 2012, pp. 1467–1478. * J.S. Kang, X.H. Zhang, J.S. Zhao and H.Z. Teng. Managing Performance Based Contract of Repairable System under Three Replacement Policies. 2013 International Conference on Quality, Reliability, Risk, Maintenance, and Safety Engineering . Management by type Contract law