Assessment of Performance-Based Contracting

1. Assessment ofPerformance-Based Contracting Presented to: 2007 REGION 4 ENVIRONMENTAL PROTECTION AGENCY / DEPARTMENT OF DEFENSE / STATES / ENVIRONMENTAL CONFERENCEDate: June 20,2007 Authors: Jon Horin, Cathy Vogel, Fred Price, Bob Edwards Noblis

2. Introduction • Performance-Based Contracting (PBC) vs. Other Contract Vehicles • Criteria for Determining When to Use PBC • Achieving Best Value With PBC • Evaluating Strength of PBC Offerors • Lessons Learned from Past PBC Efforts • Key Information Sources

3. PBC vs. Other Acquisition Approaches • With PBC, the Air Force buys results instead of compliance, and contractors have maximum flexibility to select and implement the best practice to achieve the goal • Air Force shares the risk with the contractor in order to encourage accelerated completion of goals

4. Criteria for Determining When to Use PBC Possible PBC Criteria Include: • Extent of site characterization • Degree of regulator support • Flexibility of legal agreements • Clarity and achievability of government goals • Adequacy of time for preparation and award of contract • Impact on the government of failure • Grouping sites for PBC results in risk acceptable to contractors and government

5. Achieving Best Value With PBC • Review the draft Statement of Objectives (SOO) to determine: • Clear, measurable objectives and goals • Potential for modifications • Financial requirements • Consider additional factors such as previous experience with fixed-price contracts, and innovative solutions • The solicitation must require that the offeror propose a clear and comprehensive explanation of what will be accomplished and in what amount of time for a fixed amount • The Independent Government Estimate (IGE) should be in line with the cost to complete (CTC); the offeror’s proposed cost should be in line with these numbers. Large deviations should be evaluated

6. Evaluating Strength of PBC Offerors Evaluation factors can include: • Contractors Qualifications • Financial resources • Financial stability • Staff qualifications • Past performance • Technical approach • Risk of Proposed Approach Financial risk mitigation through: • Contingency planning • Teaming arrangements • Environmental insurance • Cleanup cost cap • Pollution and legal liability • Proposed Milestone and Payment Schedules • Cost/Price

7. Financial Stability • The Federal Acquisition Regulation (FAR) states “Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only” • An offeror must have adequate financial resources to perform the contract—or the ability to obtain them—to be determined to be responsible

8. Evaluating Financial Stability FAR Section 9.104-1 Standards • An offeror must have a satisfactory record of integrity and business ethics to be determined to be responsible • An offeror must have the necessary accounting and operational controls • Special standards can be developed and set forth in the solicitation

9. Financial Requirements for Small Businesses Small businesses found "not responsible" (i.e., unable to achieve the minimum financial requirements) are referred to the Small Business Administration (SBA) • SBA conducts further assessment • SBA can issue a Certificate of Competency (COC) if the small business is found to be competent, preventing elimination on the basis of non-responsibility

10. PBC Execution with Insurance: Cost Elements Insurance Claim Payment Cost risks determined by Monte Carlo analysis by contractor and insurance vendor Contingency calculated to cover 98% probability of completion. Insurance kicks in at 99.9% probability of completion. Co-pay influenced by exclusions Co-Pay 10-15% Insurance Coverage Deductible 15-20% Insurance Premium 10-15% Contingency 10% Guaranteed Fixed Price Remediation (GFPR)/PBC Government Cost Fee and Overhead Cost

11. PBC Execution with Insurance:Dollars vs. Time Best Outcome Contractor Share $ Government Payments Time Expected Completion of Remediation Goals Period of Performance/ Term of Insurance

12. PBC Execution with Insurance:Dollars vs. Time (Continued) Expected Outcome with Insurance “Insurance Payments” Contractor Share $ Government Payments Time Period of Performance/ Term of Insurance Expected Completion of Remediation Goals

13. PBC Execution with Insurance:Dollars vs. Time (Concluded) When Things Go Wrong “Insurance Payments” $ Contractor Share Government Payments Time Expected Completion of Remediation Goals Period of Performance/ Term of Insurance

14. Lessons Learned from Past PBC Efforts • Select sites for PBC only after careful analysis – must be sufficiently characterized • Involve the installation staff early in the process • Dense, non-aqueous phase liquid (DNAPL) in groundwater may be difficult for PBC because it is hard to achieve site closure – soil contamination often presents less uncertainty • Remedial Process Optimization analysis prior to PBC acquisition “primes the pump” for innovative solutions • SOO must have clear and achievable objectives (reflected in the Quality Assurance Surveillance Plan [QASP]) and milestones, but must also allow the contractor adequate flexibility to encourage innovative proposals • Significant payment must be reserved for final milestone to maintain completion incentive

15. Lessons Learned from Past PBC Efforts (Concluded) • Provide for adequate time and resources for the acquisition effort • Participation of Major Command and Installation staff is critical to the success of PBC • Regulator response or input is desirable during the solicitation process • Post-award efforts must begin immediately and require Air Force involvement • Soon after award, the PBC contractor should meet with Installation staff and regulators • Air Force must have current knowledge of ongoing efforts by contractors and should not be surprised by contractor actions

16. Key Information Sources Environmental Restoration Performance-Based Contracting Guidebook, US Air Force Office of the Civil Engineer, Air Force Center for Environmental Restoration, December 2005. Environmental Restoration Performance Based Contracting (PBC) Concept of Operations, Air Force Center for Environmental Excellence, Final, 22 February 2007. US Army Environmental Center Performance-Based Contracting Guidebook, rev. 1, 27 January 2006. Use of Environmental Insurance by the Military Departments, Department of Defense Office of the Inspector General (D-2006-080), 27 April 2006. Memorandum from SAF/IEE “Air Force Cleanup Program Performance-Based Management Policy,” 27 October 2004. Memorandum from HQ USAF/ILEV “Performance-Based Contracting (PBC) Guidebook,” containing goals for percentage of PBC contracting each fiscal year and PBC goal calculation guidance, 22 December 2005.

17. Environmental Restoration Performance Based Contracting (PBC) Concept of Operations http://www.afcee.brooks.af.mil/products/pbc/insurance.asp http://www.afcee.brooks.af.mil/products/pbc/meeting/downloads/AFCEE%20PBC%20CONOPs%20FINAL%20v2.1%2002222007.pdf

18. Summary • PBC is one option for environmental contracting but is not always the best approach and must be evaluated in each instance • The acquisition process can take longer for PBC but is a critical step for success • A PBC contract may be awarded on best value, not simply lowest cost

19. Summary (Concluded) • Best value is established based on consideration of a variety of factors • The financial strength of an offeror should be considered to reduce failure due to risk • Future PBC should take advantage of the lessons learned in past and ongoing PBC efforts.