Challenges and Opportunities for Performance-based Contracting

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Andrew Ballard and Anne Salorio
February 26, 2018

Each year, the federal government alone spends between $400-500 billion on contracted goods and services. Add the hundreds of billions in state, county, local and all other forms of government contracting and you get somewhere around five percent of U.S. GDP is spent every year in government contracts. In recent decades, stories of waste, fraud and abuse in the world of contracted services have hit the headlines seemingly every week. These range from billions in unaccounted expenditures by the Department of Defense to emergency relief funds meant to rebuild Puerto Rico going to unproven and unprepared firms. There is little doubt the concept of performance-based contracting is gaining traction in the academic and practitioner worlds. This article is meant to give a brief overview of the research into performance-based contracting (PBC) and present some possible challenges and opportunities to its adoption and utilization.

Performance-based contracting currently lacks a concrete definition. It can mean different things based on the organization and the stage of contracting in which it is being deployed. Indeed some research has shown that performance-based contracting and performance reforms in general have been used as a political tool to increase the contracting-out of services, regardless of the rationale. For example, a 2010 paper from Jessica Terman and Kaifeng Yang suggests that PART weighted contracting out of services highly in the performance scoring scheme, regardless of how rigorous the contract was monitored. In general, though, a working definition of performance-based contracting is as follows: The collection and use of service delivery performance data in the bidding, monitoring, and evaluation of contracts.

First, we have the initial bidding and request for proposal process. Several papers have suggested a shift away from the traditional low-bidder practice in RFPs and towards a “best-value” approach. This approach involves not only considering the cost of the bid, but the technical capacities and qualifications of the bidder. Much of this qualification data comes from evidence of past projects. Performance indicators like citizen satisfaction, reliability of cost estimates and reliability of time estimates based on previous work has been used to inform bid acceptance and rejection decisions. The primary goal of performance-information use in the bidding process is to reduce the problem of asymmetrical information between agents. Public managers should recognize the possibility of a private vendor exploiting an imbalance in available information and utilize tools like best-value bidding to try and even the scales.

There are several cases studies examining the use of performance-based contracting (PBC) during the contract monitoring period from which to draw inspiration. Health services offer a unique intersection of high rates of contracting with an abundance of patient and operational data, given the long track record of public health data collection. This evidence provides a mixed-bag in terms of effectiveness. In the case of Maine’s substance abuse treatment system, outpatient engagement and retention actually performed worse after the implementation of PBC and other operational metrics went unchanged. One potential reason for this was the incentive to fully implement PBC and the sanctions for not implementing were too small to encourage a robust effort, suggesting buy-in within the organization is a key element. Very different results were seen when New York State adopted a PBC framework for its social services. This system, referred to as “Getting to Outcomes” or GTO and its adoption was accompanied by nine month training and technical support process that walked the implementing agencies through the process of PBC. Results included improved contract quality and higher levels of collaboration and communication between the funder (NY district offices) and service providers. These two examples suggest a “commitment” to PBC is required by both the agencies adopting the practice and, in the event of a policy mandate, the organization mandating the reform.

Lastly, it’s important to note the existence of unintended consequences in performance-based contracting. The first one of the fundamental traps of performance, the perversion of incentives. Take the City of Miami Gardens, Florida who adopted CompStat and wound up performing tens of thousands of unnecessary random stops. This type of incentive perversion can happen in PBC as well. Research has shown that, in the case of public residential services, information on things like program discharges can be underreported or even suppressed in order to hit a target that incentivizes occupancy.

To sum up, performance-based contracting is a potentially powerful tool to improve the delivery of public services, however, without serious planning and dedication it may in fact do more harm than good. When taking on PBC, significant time and effort needs to be spent training everyone involved on the process and an ongoing monitoring system of those involved needs to be established. Likewise, a balanced series of metrics need to be used. PBC should incentivize both efficiency and quality and focus on the real-world outcomes of a program rather than the day-to-day activities of program administrators.

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Authors:

Andrew Ballard is the Director of the National Center for Public Performance and a lecturer in public management at Rutgers University. [email protected], @AP_Ballard

Anne Salorio is a recent graduate of the MPA program at Rutgers University and the assistant director of the National Center for Public Performance. Her areas of specialization include non-profit performance management and community outreach.

The National Center for Public Performance (NCPP) co-located at Suffolk University and Rutgers University is a research organization devoted to improving productivity in the public sector.

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