Reform 6.6: Fixed-Price and Performance-Based Contracts

Expanding Use of “Fixed-Price” and “Performance-based” Contracts.

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Another powerful reform that can save government money and improve program results is to implement “performance-based contracting (PBC)” for as many contracts as possible. Performance-based contracting is the soliciting of bids based on what results government wants accomplished, rather than what activities it wants of results. This is a significant change. By compensating a contractor for results rather than effort or activity, the transaction becomes more efficient for both the vendor and government. The vendor has the freedom and flexibility to do what they do best (produce the service) without micromanagement on activities from government. If it takes 10 hours or 10 months to deliver the service to government consistent with the quality standards of the contract, the payment is the same. And if the contractor does not perform the service according to the quality standards, it must re-do its work until the job is done. Period. The contract is structured under a “fixed price” for each service purchase and no payment until performance is delivered. As a consequence of this payment method, transaction costs are reduced for both government and the vendor as paperwork and auditing requirements are streamlined. And of course, the focus on performance is likely to improve chances that government gets quality service. This scenario stands in stark contrast to the preferred contracts used by government today: “cost-reimburse,” “time and materials,” and “fee-for-service” contracts. Under these contracting vehicles, government pays every time a contractor “works” on a project—encouraging a contractor to drag on the contract for as long as possible and take every opportunity to engage in an authorized activity under the contract. As each and every city contract comes up for renewal, city departments should explore any and all ways to make new contracts “performance-based.” The city might want to consider a variety of other innovative contracting vehicles. Not all of these vehicles are appropriate for every service provided by government, but should at least be given consideration to see if a good fit can be made: Share-in-Savings Contracts: As referenced in the reorganization chapter, share-in-savings contracts limit the liability of government by paying contractors through the cost savings realized from a particular service. For example, the city might want to convert many information technology into share-in-savings contracts whereby the vendor provides the information technology services for free, but collects a percentage of the cost savings to the government from use of the technology. Fee-Based Service Delivery: Under this model, firms would be allowed to design a better process for delivering a city service (such as a license). The firm would then “sell” the service to the market at a fee. If the service provided was not faster and better, the market would not pay. However, if the firm could provide better services, then it would generate revenue. The city would still offer the service, but at a reduced staffing need. Reverse Auctioning Online: The city can tap the power of the internet to procure many goods and services using online auctions similar to those seen on eBay. Here’s how it works: suppose the city wanted to print new letterhead for a department. A city department could advertise for a bid for new letterhead over the Internet with a set time period for submission of bids. The “current” bid price would fall as each vendor submitted a new, lower bid to win the contract.

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