Performance Incentive Strategies for Improved Contract Management

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Continuing the conversation started by Dr. Steve Kelman on FCW and from mylast post on improving contract management, one way highlighted was better use of performance-based contracts.

During some research for a project this week, I couldn't help notice the supposed incentives these performance work statements (PWS) included. I reviewed the PWS for almost five contracts across several agencies, and what was almost the universal incentive?

...Satisfactory contract performance will result in a positive past performance review...

The negative incentives were almost all the same as well, namely:

...Unsatisfactory contract performance will result in a negative past performance review...

I suppose you can categorize this "incentive/disincentive" plan as non-monetary. However, this is nothing short of mandatory contract management functions required under Federal Acquisition Regulation Part 42.

However, the reality is that incentives should motivate a contractor to achieve higher than average performance levels, consistent with economic efficiency and risk. To this end, incentives need to ensure that they are effective, and that they reflect value both to the government and to the contractor.

As I previously stated, effective contract management starts in the beginning. Early planning is essential in determining and defining requirements in clear, concise language. Further, there needs to be a focus on specific work outcomes to ensure that they are to the greatest extent practicable based on the SMART acronym: 

• Specific – target a specific requirement. 
• Measurable – quantify an indicator of progress. 
• Achievable – specify outcomes that are possible and can be successful. 
• Realistic – state what results can realistically be achieved, given available resources. 
• Time-phased – specify when the result(s) can be achieved. 

Collaboration with industry is also essential. Through market research (i.e. industry days, one-on-one sessions, draft solicitations, etc.), industry feedback needs to be solicited regarding performance objectives, requirements, standards, and incentives.

I always prefer monetary incentives, again keeping in mind SMART. Working in conjunction with industry partners to achieve the desired outcomes, incentives should be consistent with the effort and the contract value. They also must be carefully structured to consider the overall impact for providing value in achieving the mission, and to avoid any unintended consequences. Further, if the incentives are not clearly communicated, or through a lack of communications between the government and the agency regarding desires and expectations, there will be little chance of achieving the desired outcome.

Positive incentive examples: 

• When performance exceeds standard, pay x% of monthly payment into pool. At end of y months, pay contractor amount accrued in pool. 
• When performance exceeds standard, pay x% of monthly payment into pool. When pool has reached y dollars, pay contractor amount accrued in pool.

Negative incentive examples: 

• When performance is below standard for a given time period, x% of that period’s payment will be withheld. 
• When performance is below standard for a given time period, require the contractor to re-perform the service at no additional cost to the government.

Simply stating that a negative past performance rating will be the result of poor performance, with little information or desire about how the contract will be managed, is a recipe for mediocre performance and not an effective way to execute performance-based acquisition.

A very effective tool is the Guidebook for Performance-Based Services Acquisition (PBSA) in the Department of Defense. It is worth a read, and provides a good roadmap to helping ensure a contract has a better chance of success through the upfront work necessary to realize better contract management outcomes.