Performance-based Contracting is a Team Effort

More than ten years after the federal government officially pledged performance-based contracting as an efficient means of procurement, agencies and the private sector alike still wrestle with the concept. For performance-based contracting to actually succeed, both sides need to improve communication and let go of the old way of doing things, said a panel of government officials this morning at a breakfast discussion sponsored by the Bethesda Chapter of the Armed Forces Communications and Electronics Association (AFCEA).

According to the Office of Federal Procurement Policy (OFPP), performance-based contracting "emphasizes that all aspects of an acquisition be structured around the purpose of the work to be performed." The point is to provide contractors with some leeway to determine how to best meet stated performance objectives, and to enable agencies to only pay for services that meet expected levels of quality. The Office of Management and Budget's stated target is to have agencies use performance-based contracting for 40 percent of contracts awarded for services worth more than $25,000.

"People look at [performance-based contracting] as a procurement issue, but it's really a business process issue," said David Grant, director of the Office of Procurement at the Internal Revenue Service (IRS). "We just don't have the resources to manage programs the way we used to; we need to find more flexible processes and we need to try something new."

But performance-based contracting is on the rise. Beyond the Department of Defense that spearheaded the process, the IRS increased its percentage of service contracts that are performance-based from 9 percent in 2003 to 26 percent in 2004, and the Department of Housing and Urban Development (HUD) uses performance-based contracts to forward many of the department's e-government initiatives, technical support, and applications development and systems maintenance.

Even agencies with the best of intentions find it difficult to stay true to the goals of performance-based contracting, often reverting back to measurements of progress based on incremental stages in the IT project rather than the stated objective.

"We're still not at the point where we plan to be," Grant said. "We're a wolf in sheep's clothing; in a lot of cases, we're offering the same contracts in terms of behavior patterns."

That said, private sector partners are sometimes just as guilty as agencies of not properly following through on performance-based contracts. Too often, contractors respond to challenges by throwing product at customers--a strategy that is arguably typical of requirements-based contracts. Many performance-based contracts are fixed price, however, making that option of piling on added costs unacceptable.

"What drives me crazy is when I go to my contractor and say 'here's my problem,' and that contractor comes back with a $500 million solution," said Lisa Schlosser, chief information officer at HUD. "On the other hand, another [contractor] will say 'here's how much you pay now; here are three alternatives that allow you to shift the money around and solve the problem for the same price.'"

Generally speaking, the secret to success in performance-based contracting is communication and a shared, defined goal. If agencies' objectives are vague, contractors have to sit down at the table and demand that they be told clearly what's expected. And vice versa, agencies need to take the time to ensure that contractors grasp the overall mission.

"I need contractors to understand our business," Schlosser said. "I need them to understand that [at HUD] we want to increase home ownership and that we need to increase loans to do it; that we rely on certain processes and technology, and that the technology is 30 years old. I need them to understand all of those things--and not just that we are [upgrading] our architecture or that we use Lotus Notes."