Contracting for Services Makes Cents

Contracting for Services Makes Cents

Performance contracts that purchase specific levels of service total delivered costs

Historically, contracting for the public has involved extensive details on how to perform service or provide a product. the job function of the official to provide proper specifications various suppliers to find the best price and best overall value.

While specifications work wonders for products such as rifles and tanks, they sometimes are hard to quantify when used for services. For example, you can specify a particular air conditioner or heating unit, but in reality it may or may not do what you really want to do—provide a comfortable, year-round interior temperature. Or how do decide on the best roofing system when there are of options?

In the early 1990s, the federal government initiated a new trend in procurement for services—performance-based contracting. The idea was and still is to procure the result or "out-come," not the means. But despite the government's various instructional manuals and memos, many procurement officers still hold fast to using the traditional method of specifications. While change always is difficult to implement, the truth is performance-based contracting makes sense for a number of reasons; most importantly, significant cost savings and increased service with better solutions.

With performance-based contracting, you purchase the result, not the "how." You write a contract for what you expect the level of service to be. For example, when selecting an HVAC system, the building must maintain an interior temperature of 70 degrees year round. Or for roofing, a leak-free building is spec-ified instead of a particular roof system. So how do you plan, procure, and monitor this performance?

In theory and most often in practical experience, performance-based contracting reduces total delivered costs. It takes advantage of the expertise of the supplier and industry standards. While there are many individuals within the public sector who are knowledgeable in a variety of activities from HVAC to roofing to paved roads, most are generalists because of the many demands and priorities in running a city, state, or federal facility. Why not take advantage of the expertise of the mechanical contractor who manages buildings throughout the country or the landscape contractor who knows not only how to cut the lawn but also when to fertilize it for your particular climate? Performance-based contracting lets the experts be experts and the public facility or entity manage its core functions.

According to the Office of Federal Procurement Policy's pilot program on performance-based contracting, the results show an average of 15 percent price reduction and an increase in agency satisfaction. Cost savings take place because you eliminate the learning curve associated with generating a specific contract that explains the how. You also eliminate unanticipated service costs associated with the service and products because the contractor assumes responsibility for performance.

Building on our HVAC example, you write a contract and pay for a year-round climate control of 70 degrees, but the temperature is not maintained within the set parameters and service needs to be performed on a unit. Under the performance contract the service contractor assumes the cost of this unanticipated service call. On the other hand, if you had purchased just the installation of an HVAC unit, the cost of additional service would fall to the public entity. Because the service provider has accepted a contract with performance requirements, the contractor is encouraged to reduce downtime to the equipment because it becomes an additional cost against its profit on the contract. Performance-based contracting introduces responsibility into the transaction and service by shifting a greater degree of the risk of performance to the contractor.

With many notable successes throughout the last 10 years of public procurement, performance-based contracting is starting to gain a foothold, but not without skepticism. The concerns raised regarding performance-based contracting often are used as excuses. Of course, there is validity in asking these questions and finding the answers to them to ensure top performance. How do you ensure quality? How can you ensure improvement of the life cycle or an acceptable level given the age of the existing equipment? What is an appropriate/acceptable error rate? How can you determine existing conditions or required maintenance of existing conditions?

Finding answers to these questions is the first step in writing a performance contract. Here are some guidelines for writing performance-based contracts that ensure you receive the highest level of service:

General Company Information
Look for companies with a track record of providing the type of service you are seeking. Ask for general company information such as history of service, longevity, and profitability.

Past Performance
Ask for references of past performance. References from other public entities that have used the service can offer a wealth of information about the provider's performance. Contact these references and ask if they received the level of performance they had expected.

Management Ability
Ask for details regarding the management ability of the contract. Look for the number of locations that the provider has. Of course, this may be necessary only for some services, but if an HVAC service provider has one location in Duluth and your facility is in Cleveland, its ability to service your contract may be hindered. Also look for the ratio of the service you are requesting to all the company's existing service contracts. For example, if you sign with a roofing company to manage your 120 buildings but to date the company has managed only 60 buildings, the ability of the firm to provide you with proper service may be unreasonable. It is a different story if managing your building adds only one percent to the company's existing capacity. Also, depending upon your future needs, inquire about the company's ability to expand capacity as necessary to meet your changing requirements.

Performance Plan
Ask for an explanation of the service provider's performance plan. For example, if you are contracting for roofing, how does the company plan to determine the existing level of roofing? Also inquire about the specific services to be provided. With roofing, will the company perform routine maintenance, fix leaks in a timely manner, and so on? Inquire about quality assurance. Does the company adhere to ISO 9000 standards or does it at the very least have a quality assurance program? It can be as simple as its process to document repairs and schedule inspections by supervisors.

Performance-based contracting can offer better service at a reduced cost with fewer headaches, yet many procurement officials continue to write detailed specifications on how to perform the service rather than explain the level of required performance. One example of cost savings with performance-based contracting is roofing. In roofing, a standard performance level is a leak-free environment that includes maintenance and repairs as part of the contract. The cost of the performance contract is based on square footage. Without the performance contract, if a roof leaked a roofing contractor would be called out to repair the leak. And if two days later another leak would occur, another service call would be required. Each service call adds cost to the already incurred cost of the original roof system. You can see how costs would increase and service levels decrease because a contractor is paid only to fix the existing leak, not prevent future leaks.

The concept of performance-based contracting is easy to understand and writing the contracts should be easy as well. The key to a solid performance-based contract is understanding and agreeing to the level of performance required.

Editor's Note: James Buckley is general manager of Weatheringproofing Technologies, Inc., the service division of Tremco, Inc., a GSA service provider of performance-based contracting for roofing and building envelope services. He has more than 20 years in public procurement as a contracting officer and consultant. Contact him at buckleji@tremcoinc.com.