IRF Executive Seminar Series

Performance-Based Contracts
(March 6 – 12)
London, UK

Performance Based Contracting

Introductory Concepts and Operational
Framework

Asif Faiz, Ph.D., P.E., F.ASCE, FIE(Pak), M.REAAA

Former Highways Adviser and Sector Manager ( Infrastructure)
World Bank. Washington DC

Hon. Professor , National University of Science and Technology, Islamabad, Pakistan

Performance Based Contracting
Introduction and Key Concepts
What is performance-based contracting?
• It is an outcome or performance –based approach to
contracting, where a client pays for results
delivered by a service provider (contractor) , rather
than for defined activities, tasks or assets.
• The contract focuses on the desired outcome of the
work to be performed (the “what”) rather than the
manner in which it is to be performed (the “how”).
• The service provider decides how it will deliver on
the client requirements – and thus a degree of both
control and risk shift to the service provider.
 Main Elements of a PBC
• It describes work requirements in terms of results
required rather than the methods of performance.
• It uses measurable performance standards and quality
assurance surveillance plans.
• It specifies procedures for penalties (when services
are not performed) or price reductions (when targets
are exceeded) on fixed-price contracts.
• It includes performance incentives where appropriate.
 Traditional vs. Outcome Based Contracts

Source: J.North and B. Keane; Corrs Chambers Westgarth, Australia, 2014

 Fundamental Characteristics of Performance
Based Contracts
• A focus on business outcomes rather than activities and tasks.
• The use of measurable performance standards that are tied to the
required outcomes.
• A pricing strategy that includes rewards and risks.
These three key elements of a performance-based contract are inter-linked:
• outcomes need to be translated into measurable performance standards; and
• delivery against the performance standards is used to determine the
contractual payments.

They are also usually the same elements that present parties with the most
difficulties in successfully preparing, negotiating and documenting a
performance or outcome based contract.
Source: Source: J.North and B. Keane; Corrs Chambers Westgarth, Australia, 2014
 Use of PBCs in Delivery of Public Services
Examples from US States
• Energy Management in Buildings
 Tennessee Schools continue to save money following contracts for
managing lighting, heating and cooling services.
• Tax Collection
 California has used performance based contracting to collect
millions of uncollected business tax dollars
• Human Services
 Illinois has used performance based contracting to increase
adoptions.
• Highway Maintenance
 Florida has used performance based contracting for highway
maintenance.

Source: ICMA 2001

 Benefits of Performance Based Contracting
• Cost savings
• Supporting innovation on the part of the service provider
• Closer alignment of objectives between the customer and the
service provider
• Increased motivation for the service provider to achieve the
best outcome to maximize its financial gain
• Higher responsiveness to customer requirements
• Greater efficiency in service delivery, by allowing the service
provider flexibility in its method of delivery and an ability to
adapt to technological advancements
• Better outcomes for customers.

Source: J. North and B. Keane; Corrs Chambers Westgarth, Australia, 2014

 Challenges for Performance Based Contracting

• Defining the desired outcomes

• Measuring performance
• Pricing
• Cultural Shift
Source: J.North and B. Keane; Corrs Chambers Westgarth, Australia, 2014
 Common Obstacles
Internal Barriers External Barriers
Resistance to Change Lack of potential contractors or lack of
Ignorance of the potential benefits supplier interest
Anticipated contract risk that exceeds
Thinking “inside the box”
the anticipated return
Additional time required on the front end
to develop performance based contracts
An excessive focus on current/initial costs
as opposed to life-cycle costs
Outcomes that are difficult to quantify

Most of the barriers can be overcome through education,

training, and networking with stakeholders.

Source: ICMA 2001

 Summary of Key Requirements
• Shifting government’s management role from telling a service provider (contractor)
what actions it must take to telling the service provider (contractor) what impact its
actions must have.
• Specifying required performance outcomes in measurable terms.
• Inviting interested parties to propose to the government how they, if awarded a
contract, would work with the entity to produce the required results.
• Giving contractors more autonomy in proposing solutions, yet at the same time
holding them more accountable (if hired) for the impact of their work.
• Considering in the selection process the extent to which each party that wants to
provide the service for the government will meet or exceed the government’s
performance expectations.
• Agreeing with the selected proposer on how the attainment of outcomes will be verified.
• Figuring out precisely how the contract document should be structured and written in
order to assure the best possible results
• Properly monitoring the contractor’s performance in order to assure that payments
are commensurate with the achievement of required impacts.
Source: ICMA 2001
Performance Based Contracting
for Road Maintenance
Road Maintenance:
Transition from Force Account to PBC

1970s 1980s 1990s

Typology of PBCs for Road Maintenance, Rehabilitation and
Improvement Works
Scope of Works Physical Coverage Type of Contract

PBMC Single Activity: e.g. sign replacement or Road network; Specific Performance-based; Unit
striping; street/roadway lighting; grass class of roads (e.g. Price (Output-Based) for
mowing and vegetation control. national roads); Road some Emergency Works.
Group of Related Activities: routine corridor
maintenance, winter maintenance, preventive
maintenance.
Asset Class: e.g. pavements, bridges,
roadsides, rest areas, road furniture.
CREMA Periodic Maintenance added to scope under Sub-Network; Area- Performance-Based; Unit
PBMC. wide Price (Output-Based) for
some Emergency Works

Hybrid Combination of maintenance, rehabilitation Road Corridor(s); Performance-based for

and betterment works , including safety Specific Links maintenance; Output-Based
improvements. for other activities (includes
contracts with extended
defect liability period,
construction warranties,
etc.)
Design and Reconstruction and Improvement Works Road Corridor(s) Performance-Based for
Build (BOT design and construction
and its many phase; may include post-
variations) construction O&M.
Seven Steps for Performance Based Maintenance Contracting

Source: NCHRP Synthesis 389

 (DC,FL,MD, ID, VA,
TX, UT; Unsuccessful-
CA, PA, OK),

Source: Cesar Queiroz, World Bank, Feb 2011

 http://www.nap.edu/catalog.php?record_id=14266
NCHRP Synthesis 389
Performance-Based Contracting for Maintenance
William A Hyman; Transportation Research Board, 2009
 http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_syn_426.pdf

NCHRP Synthesis 426

Performance-Based Highway Maintenance and Operations Management
Michael Markow;; Transportation Research Board, 2012
http://www-esd.worldbank.org/pbc_resource_guide/index.html
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