Deploying Performance-Based Contracts for Outcomes

Deploying Performance-Based Contracts for OutcomesPresentation to 2015 IACCM Australasia Forum

Dr Andrew JacopinoExecutive Director Contracting - Performance Based Contracting /

Department of Defence

Dr John DaviesDirector Parallax Project Management Pty Ltd, Associate Partner ICCPM

Content

• Introduction to CASG

• What is a Performance Based Contract (PBC)?

• Defining Generic Performance Measure Hierarchy inc.:

– types of Performance Measures

– Key Result Areas (KRAs)

• Proposed KC-30A Performance Measure Hierarchy inc. defining:

– Strategic Performance Measures (SPMs)

– Key Performance Indicators (KPIs)

– System Health Indicators (SHIs)

• Rewards and Remedies

• Next Steps

Deploying PBCs for Outcomes – 28th July 2015

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Introduction to CASG

The Australian CASG has the following characteristics:

• employs over 7,100 people in more than 70 locations across Australia and overseas.

• Annual budget of $9.7 billion in 2013–14, the CAGS is managing:

– over 180 major capital equipment projects,

– over 70 minor projects,

– sustains and upgrades over 100 existing fleets.

• Signs approximately 2,500 contracts of $100,000 or more a year.

• Relationships with industry suppliers are critical to performance; managing contracts is one of the key challenges for the CASG.


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The International Centre for Complex Project Management (ICCPM) is a not-for-profit organisation developing research and delivering education and support services to businesses and government to get the world’s most complex projects back on track.

We represent Buyers, Suppliers through a global network of corporate, government and institutional partners.


Introduction to ICCPM

What is a PBC?

A Performance Based Contracting (PBC) is:

“An outcomes-oriented contracting method that ties a range of

monetary and non-monetary consequences to the contractor based on their accomplishment of measurable and achievable performance requirements.”

Five key characteristics of a PBC:

1.Requirements focused on the contractual outcomes, and not how the work is performed

2.Set of indicators tied to the outcome

3.Achievable performance standard for each indicator

4.Defined process to collect, analyse and report data for the selected indicator

5.Range of monetary and non-monetary consequences, either rewards or sanctions for the contractor, based on performance


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What is a PBC? (2)

Supporting a PBC is the Performance Management Framework (PMF) which:

“. . . the ultimate goal of any PMF is to ensure that the delivery of the Enterprise outcome by creating a self-regulating agreement which uses a range of incentives to guide and disable choice.”


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What is a PBC? (3)


Relative Weightingof each KPIY% Z%X%

Contract ValueAt Risk Component

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Required Contract Outcomes

KPI - 2KPI - 2KPI - 2KPI - 2KPI - 2KPI - 2KPI - 2


KPI - 2KPI - 2KPI - 2KPI - 2KPI - 2KPI - 2


KPI - 2Key

Performance Indicators (KPIs)


KPI - 3KPI - 2KPI - 1

Payment

Performance

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Requirements, Rewards and RemediesPossible rewards and remedies that could be used to influence contractor performance:

• Award Payments

• Award Terms

• Incentive Payments

• Performance Incentives

• Performance Payments

• Pain Share / Gain Share

• Substituted Performance

• Withholding Payments

• Stop Payments

• Remediation Plans

• Repatriation of Services

• Liquidated Damages

• Warranties

• Performance Securities

• Deed of Substitution and Indemnity

• Termination for Default


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Requirements, Rewards and Remedies (2)


Satisfactory

ContractorPerformance

Unsatisfactory

Time

SHI Performance provides confidence in Contractor’s ability

to deliver Contract outcomes as

represented by KPIs

Good KPI Performance through delivery of Contract outcomes

resulting in no adjustment to Contractor payment

Poor KPI Performance through failure to deliver

Contract outcomes resulting in permanent

withhold (adjustment) to Contractor payment

Continuous Good Contractor Performance through

continued good KPI, SHI and SPM performance potentially

resulting in the award of additional Contractor term

(Award Term /Rolling Wave)

Continued / Significantly Poor KPI Performance

through continued and/or significant failure to deliver

Contract outcomes resulting in Stop Payment

Continued / Significantly Poor KPI Performance

through continued and/or significant failure to

deliver Contract outcomes resulting in right of

Termination for Contractor Default

Following an initial contract

term, then assessed and

awarded every 1 – 3 years

If remediated

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Types of Performance Measures – Gen 1 and 2 PBCs


Required Contract

Outcomes

represented by Performance

Fee ($)

outcomes

Award Term / Rolling WaveDetermination

confidence

StrategicPerformance

Measures (SPMs)

Other PerformanceMeasures (OPMs)(non-payment related)

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Types of Performance Measures – Gen 3 PBCs


PerformanceFee ($)

Award TermDetermination

Enterprise Performance• Focus on capability delivered to the warfighter regardless of scope

Behaviours• Focus on positive, constructive behaviour supporting capability

StrategicPerformance

Measures (SPMs)

KeyPerformance

Indicators (KPIs)(payment related)

Other PerformanceMeasures (OPMs)(non-payment related)

Supplier

outcomes

confidence

Enterprise Performance& Behaviours

Partner

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Definition of a Relational Contract

Relational Contracting is a method to achieve mutually successful outcomes through an alignment of contracting party interests and processes that tackle the most frequent sources of suboptimal performance, covering more complex and project based sales/purchase arrangements and relationships in which governance is driven primarily through both the parties.


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Why do we want positive relationships?

a. Superior cost, schedule, and performance outcomes;

b. More effective risk management opportunities;

c. Better Goal alignment;

d. Improved transparency

e. Dispute minimisation;

f. Reduced transaction costs;

g. Enhanced flexibility;

h. Increased likelihood for industry participation;

i. Increased prospects for repeat business;

j. Improvements in skills and knowledge transfer between parties to the contract; and

k. Enhanced personal satisfaction for all project parties.


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Approach to Designing Behavioural SPMs

• Methodology – Exploration of Best Practice– Relational Contract Literature

– Company Scorecards

– BS 11000 Collaborative Business Relationships

– PBC Handbooks and guides

– Audit Reports (what went wrong or ‘worst practice’)

– Better Practice Guides (e.g. UK NAO Gold Standard for Relationship Management)


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Key Attributes of Positive Behaviours

Final Behavioural SPMs (1)


Relationship

• monitor the Contractor’s performance in demonstrating positive working relationships with the CoA and other third parties where the Contractor is:

– committed to resolving disputes and issues fairly and at the lowest possible level, and where issues arise, the Contractor focuses on fixing the problem and not the blame;

– committed to accurately informing the Capability Representative of material issues in a timely fashion; and

– key leaders within the Contractor’s organisation are actively involved, adopting positive relationship management at all levels of the organisation.

Best for Projector Capability

• monitor the Contractor’s performance in demonstrating ‘Best for Project’ behaviours cognisant of commercial imperatives and acknowledging that successful project delivery requires an integrated ‘one team’approach where the Contractor will adopt common tools, systems and procedures on a best for project basis and display a willingness to share resources including staff, facilities and equipment where appropriate.

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Final Behavioural SPMs(2)


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Superior

• The contractor always resolves disputes at the lowest possible level• The contractor always resolves disputes reasonably and equitably• The contractor always approaches problem solving in a joint manner• The contractor will only consider the contract liability framework as a last resort• The contractor always provides prompt notification of material issues and risks• The contractor always displays a willingness to share critical information• The contractor always ensures key management participation is provided and leaders continually demonstrate collaborative

behaviours• A common understanding of the capability principles and relationship goals is effectively established throughout the organisation

(shared vision)

Good

• The contractor often resolves disputes at the lowest possible level• The contractor often resolves disputes reasonably and equitably• The contractor often approaches problem solving in a joint manner• The contractor often provides prompt notification of material issues and risks• The contractor often displays a willingness to share critical information• The contractor often ensures key management participation is provided and leaders often demonstrate collaborative behaviours• A common understanding of the capability principles and relationship goals is established throughout most of the organisation

(shared vision)

Fair

• The contractor infrequently resolves disputes at the lowest possible level• The contractor infrequently resolves disputes reasonably and equitably• The contractor infrequently approaches problem solving in a joint manner• The contractor rarely provides prompt notification of material issues and risks• The contractor rarely displays a willingness to share critical information• The contractor rarely ensures key management participation is provided and leaders rarely demonstrate collaborative behaviours• A common understanding of the capability principles and relationship goals is not shared throughout most of the organisation

(shared vision)

Poor

• The contractor frequently raises disputes and escalates these to higher levels of management• The contractor fails to resolve disputes reasonably and equitably• The contractor is not commitment to collaboratively resolving disputes• The contractor fails to provide prompt notification of material issues and risks• The contractor will not share any information that is outside of the contract boundary• The contractor’s key management and leadership team are not active participants and leaders continually demonstrate

uncooperative behaviours• There is no common understanding of the capability principles and relationship goals within the contractor’s organisation.

Measurement of KRAs – Issues and Opportunities


360 Degree Assessment

Both customer and supplier are scored against the KRAs. This allows for continuous improvement, mutual understanding and ‘bedding-in’ behaviours.

Extrapolation of Behaviours

Just because one business unit of a company displays positive or negative behaviours, does not mean that all business units in that company will perform to the same standard.

Select a Suitable Sustainment Strategy – Do not:

a. Transfer risks to suppliers where the suppliers have little control over those risks;

b. Place significant amounts of the contract value at risk;

c. Make suppliers accountable for outcomes that they do not control;

d. Place too much emphasis upon price competition in selection processes and renewal periods; and

e. Adopt a short term focus with rolling waves that do not provide suppliers an opportunity to achieve outcomes and improve.

- Make sure the KRAs are integrated as a whole to the capability outcomes!

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Generic Performance Measure Hierarchy


Horizontal

Perspective

•examines which

performance

measures

are linked to which

consequences

Vertical Perspective

•examines coverage

of the KRAs

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Key Result Areas (KRAs)


KRA Description

Safety

More than simply complying with legislation, rather, it focuses on all aspects of materialsafety through the proactive management of material safety enabling more effective andsuccessful Outcomes.

CostUnderstanding the total cost of ownership, and the underlying cost drivers, in order tooptimally balance user requirements with budget.

AvailabilityProviding users with material that is in a known state and ready to meet operationalpreparedness requirements.

Reliability and Quality

Understanding material reliability, and the underlying drivers including configuration controland quality of workmanship, in order to maximise both successful Outcomes and overallmateriel availability by minimising failures and configuration issues.

MaintainabilityUnderstanding both scheduled and unscheduled maintenance, and the underlying drivers, inorder to maximise materiel availability by minimising repair times.

Supportability

Understanding the materiel support requirements and underlying drivers, to ensure theeffective and efficient delivery of maintenance and engineering services, in order to maximisematerial availability and optimally balance user requirements with budget.

Behaviours

Is more than the consistent delivery of materiel performance; it also focuses on aligning thelong-term delivery of materiel support with a variety of strategic initiatives through adoptionof a continuous improvement environment enabled by collaborative relationships.

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PBC Centre of Excellence (CoE)

• Purpose is to foster PBC better practice in the DMO through the direct support to projects in the development, evaluation, negotiation, transition and execution of PBCs.

• Based on 4 main areas:1. Support – provide direct support to projects through delivery of consulting

services (e.g. facilitating workshops, contract drafting, tender evaluation and negotiation support, etc.) and Subject Matter Expertise (SME) input (e.g. document review, coaching/mentoring, etc.).

2. Guidance – provide PBC standards, methodologies, tools and knowledge repositories for the DMO and the wider Department of Defence (DoD).

3. Training – provide a range of certified training products aimed at developing DMO knowledge in PBC skills.

4. Knowledge Management – benchmark and report the implementation of PBC related projects across the DMO

• Also to positively contribute to the wider PBC Community of Practice (CoP) through the establishing and maintaining non-defence and international ties


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Summary

• Successful PBCs have proven to result in better performance to the warfighter, better value for money to the government and a better commercial deal for the contractor

• CASG has been developing and refining our approach to PBC since the late 1990’s resulting in:

– over $1B under PBC regimes, and

– within the next 5 years this is likely to increase by another 50%

• While deceptively simple in approach the practical application resulting in success can be more complicated

• To ensure PBC success CAGS has:

– developed and continues to refine a dedicated support contract framework with tightly integrated performance requirements, rewards and remedies

– developed and continues to refine specific PBC training at all levels from practitioners through to executive

– established the PBC CoE


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PBC Centre Of Excellence

E-Mail: [email protected]

Documents

Deploying Performance-Based Contracts for Outcomes