PERFORMANCE BASED CONTRACTING -- A NEW MODEL

1. PERFORMANCE BASED CONTRACTING -- A NEW MODEL Keith K. Glatz, CPPO

2. The Value of Performance Based Contracting • Performance Based Contracting is a means by which Purchasing can enhance mission critical programs by adding VALUE via the contracting process. • Performance Based Contracting improved vendor RELIABILITY and ACCOUNTABILITY.

3. History of P.B.C. • A new idea developed because of greater emphasis on “contracting-out” of services. • Requirements for Higher Quality • Traditionally use a Request for Proposal & Criteria-based vendor selection.

4. P.B.C. -- The Beginnings • Mandated for Federal Government Agencies. • Requires Performance Requirements, Performance Standards & a Quality Assurance Plan. • Requires “positive” & “negative” incentives to be tied to the Q.A. Plan.

5. Issues to Date -- Federal • No standard definition -- I.e. no “one size fits all”. • Do we measure “outputs” or “outcomes” • Much misunderstanding and confusion, resulting in inconsistent practices.

6. State & Local Experiences • More freedom to experiment & innovate. • Do not have to abide by the Federal definitions. • Have discovered that there is no one best way to implement P.B.C. • Not all of the traditional P.B.C. “elements” need to be present for a contract to be Performance Based.

7. O.K., so how does THIS model work? • This model of Performance Based Contracting, used in COMPETITIVE SEALEDBID situations, is a “carrot and stick” approach to governmental contracting, which implies that a vendor’s right to maintain a contract is contingent upon successful performance by the vendor.

8. The Impetus for using this version of P.B.C. • Our Customers are Complaining about service! (In other words, the service “bugs” them.) • Simple “low bid” purchasing is just not working, but the purchase best lends itself to the competitive bid process.

9. Who Uses Performance Based Contracting? • Customerswho DEMAND that the level of SERVICE and ULTIMATE VALUE be more important than “low bid”. • Customers who have programs that are time-sensitive, and are significantly impacted by a vendor’s performance.

10. Conditions for Effective P. B. C. • Ongoing need for a term contract. • When the need for good service is extremely important. • Large dollar contracts when you can establish: • The overall dollar or quantity value of the contract • A reasonable minimum guarantee of business to the successful vendor relatively early in the contract period.

11. What Lends Itself to this type of P.B.C. • Ongoing Service Contracts which traditionally experience problems • Janitorial Services, Uniforms • Commodity Contracts which require strong service commitment • Desk-top delivery of Office Supplies. • Ongoing Printing Contracts (Newsletters, etc.) • Contracts which can have multiple year terms.

12. Conditions for Effective P.B.C. Continued • You have the ability to set-up a multiple year contract, or one that can be renewed for multiple periods in order to provide for more attractive incentives for continued positive performance. (Don’t renew forever - keep vendors on their “toes”.)

13. Basic Characteristics • What are the basic tenants for this type of Performance Based Contracting ?

14. The Right to Do Business • A contractor’s right to do business with the government is based on its ability to perform to the satisfaction of the customer, and not just to get by, by simply meeting the minimum specification requirement.

15. Minimum Guarantees • The agency guarantees a minimum amount of business to a contractor. • The value of this guarantee should be enough to attract the vendors • Should not represent the lion’s share of the contract. • Try to find a minimum value that can be reached quickly (2 to 3 months if possible).

16. The Right to Exclusivity • The Contractor’s right to exclusivity is contingent on their ability to perform well.

17. When the Contractor Performs Poorly . . . • Employ other means to obtain the needed products or services • Open Market Purchases • Award other contracts to other vendors • Do NOT cancel the contract or default the vendor

18. Implementing Performance Based Contracting • Establish channels of close interactive communications with your customers • Carefully explain the process of Performance Based Contracting to user agencies. • Train agencies on the concept of “partnering” with vendors. Begin this process BEFORE you start the bid process.

19. The Bid Process - Internal Issues • Involve agencies in the process of establishing criteria to facilitate ongoing evaluation of vendors during the contract period • Check with your legal staff • Invite the agencies to the pre-bid conference -- Let them tell THEIR story!

20. The Bid Process - Dealing with the Vendors • Hold a pre-bid conference and strongly encourage vendors to attend • Carefully explain the concept to vendors at the pre-bid conference • Include a comprehensive PBC statement of definition in your bid

21. P.B.C. Opening Statement • The (Your entity here) has embraced the concept of Performance Based Contracting. Under this model of Performance Based Contracting, satisfactory performance will result in the (entity’s) exclusive use of the contractor for all contractual purchases for the full period specified as the contract term. Unsatisfactory performance by the contractor shall result in the contractor’s loss of exclusivity. If, in the sole judgment of the (entity), the contractor is not providing satisfactory service, the exclusive contractual relationship between the (entity) and the contractor may be terminated, without penalty, by the (entity) at any time after it has purchased the guaranteed volume of goods or services as specified in the Specifications/Statement of Work herein. The principle of Performance Based Contracting, however, does not negate the right of the (entity) to terminate the contract under the standard terms and conditions covering “contract termination” herein

22. The Bid Should Also Contain . . . • Define everything up-front, in your bid ! • During the bid process, all vendors should be asked to hold bid firm for 180 days • State in your bid that you are using Performance Based Contracting • If you use bid bonds, request surety bonds, not cashier’s checks • In your bid document, reserve the right to go to the next lowest bidder, and beyond

23. Award Reservations Statement --(Example) • The City reserves the right to award additional contracts for newsletter printing services upon attainment of the minimum contractual guarantee. Awards may be made under this solicitation for a period of one-hundred eighty (180) days following the opening of bids, subject to mutual agreement between the City and the applicable contractor. The City shall attempt to award supplemental contracts to bidders in a sequential fashion, beginning with the lowest priced responsive and responsible bid. If supplemental bidder(s) is unwilling or unable to maintain pricing during the one-hundred eighty day period, then the City may award to the next higher responsive supplemental bidder. The award of subsequent additional contracts under this solicitation could be required based on changes to the City’s requirements, or if the original contractor fails to perform within the expectations of the City. Please note that additional awards shall not be made until the minimum contractual guarantee has been met, unless the original contractor is defaulted for non-performance during that period.

24. . . . And most importantly . . . • Be sure to carefully define measurable performance criteria in your bid specifications or statement of work !

25. Measurable Criteria - (An Example) • “6.1.1 Each edition of the newsletter shall exhibit excellent quality, shall be easy to read. Text shall be clear and crisp, free from streaks, smears, discolorations, poor assembly, poor paper quality, etc., and photographs and clip-art shall also be clear and crisp. The newsletter shall be free from significant typographical errors. • 6.1.2 Contractor shall be timely in meeting all required deadlines as determined by mutual agreement with the City. Deadlines shall include, but not be limited to, pre-press work and typesetting, creation of proof, correction of proof (s), final production of newsletter, and final delivery to the City mail distribution agent. The contractor shall not be responsible for delays resulting from delayed processing by the City. • 6.1.3 The contractor shall limit overruns to less than two percent (2%) of the normal 27,500 copies of the final document.”

26. O.K. , My Contract is Awarded. What now? • FOLLOW-UP, FOLLOW-UP, FOLLOW-UP !!! • Meet with vendor to establish criteria for evaluation of their contract IMMEDIATELY after award • Establish regular face-to-face meetings • Include members of your team. • Take staff to vendor’s site • Conduct group meetings with vendor and agencies to clear-up misunderstandings BEFORE any contract work starts

27. Ongoing Evaluation Required • “Contract Report Card” • Quarterly evaluations. • Meet with Contractor to discuss survey results, weaknesses, strengths, etc. • Create corrective action plans

28. Contract Report Card (Example) CONTRACT: Uniforms for Public Works #2002-05-02 VENDOR: Northern Uniforms, Inc., Chicago, Illinois Please rate the Vendor’s performance in the following areas: Excellent Good Fair Poor 1. Delivery is made when promised. ___ ___ ___ ___ 2. Orders are accurately filled (correct size, sewing & ___ ___ ___ ___ screening of emblems) 3. Vendor quickly replaces defective, poor quality, or incorrect ___ ___ ___ ___ items. 4. Indicate level of product quality of goods delivered. ___ ___ ___ ___ 5. How well do the items delivered meet your expectations ___ ___ ___ ___ for the products. 6. Vendor has good product knowledge, and is willing to provide ___ ___ ___ ___ appropriate solutions to problems. 7. Paperwork (order forms, invoices, receiving tickets, etc.) ___ ___ ___ ___ is easy to follow, provides all information necessary. 8. Vendor representative is prompt and courteous in ___ ___ ___ ___ answering calls and inquiries. 9. Vendor returns all calls, provides prompt follow-up, and reacts ___ ___ ___ ___ quickly to quickly to problems or complaints. 10. Please rate the overall quality of service. ___ ___ ___ ___ Please provide additional comments or feedback:____________________________________________________

29. So, the Contractor Messes up - What Now? • Use the THREE STRIKE rule! • Strike 1 - Provide immediate feedback to contractor • Strike 2 - Establish a corrective Action Plan • Strike 3 - Stop calling the contractor if they don’t improve • Call the NEXT low bid contractor on your list.

30. Remember -- • If the minimum quantity is realized, there is NO need to default. • (You may need to default if less than the minimum is reached.) • You have the right to make open market purchases. • Your other vendors are still “runner-ups”.

31. THE END RESULT • Your vendors become more responsive • Your Service improves • Your Customers are HAPPIER !

32. THANK YOU !!! • Any questions or Comments?