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Performance Contracting Framework
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Project Selection

Performance contracting is not ideal for every construction contract. However, it may hold significant advantages over traditional contracting when the following conditions are met:

  • The Owner Agency and the local contractor community support the concept
  • Both the Owner Agency and the contractors are educated on the risks, the rewards, and the rules
  • The project is goal oriented, and the goals are under the influence of the contractor
  • The risks are balanced by adequate rewards
  • The contractor will be allowed to be flexible in their approach
  • The Owner Agency has adequate resources available for performance measurement
  • The Owner Agency can legally use an award process other than traditional low-bid, and
  • The Owner Agency has sufficient time for contract development.

One myth is that the construction project has to be large to fit under performance contracting. This is not true. This framework can be applied to any size contract, and the work can be performed by any appropriately sized contractor.

The Owner Agency should hold an initial conversation with stakeholders and then decide whether the project is suitable for performance contracting. A sample project selection process for use in this conversation is shown in Figure 2.

Pros and Cons of Performance Contracting

There are a number of pros and cons of performance contracting that owner agencies need to be aware of. Pros include:

  • Defined outcomes
  • Immediate response to safety-critical problems
  • Contractor flexibility and the introduction of innovation
  • Contractor incentives for taking on the risk of meeting the defined outcomes.
  • Project disputes are solved primarily through partnering instead of Contract Appeals Boards.

Cons include:

  • Desired results might not be achieved if the performance goals do not fully or adequately describe the desired outcomes
  • Resources are required to monitor and measure performance to make sure that goals are being met and that you are getting your money's worth

Outreach is needed to get both Owner Agency and contractor personnel familiar with the concept, the risks, and the rewards.

Figure 2. Sample Project Selection Decision Tree
Click here for text version

Flow chart showing sample project selection decision tree.

Innovation and Value Engineering

Performance contracting is based on allowing the contractor to have flexibility in how it performs the work. This flexibility often takes the form of introducing innovative practices/technologies and/or introducing new/different approaches through the value engineering process.

For performance-contracting to be successful, the Owner Agency must cultivate an environment for innovation and remain open to new ideas, both at the proposal/bid stage, and throughout the contract. However, in the interest of public trust, the Owner Agency must ensure that the innovations/new ideas are suitable for use and will result in acceptable quality. To accomplish this, the Owner Agency should set up a formal procedure for reviewing/approving innovations and value engineering proposals. A sample procedure is provided below.

Sample Procedure/Contract Language for Approval of Innovations

The following wording is a sample of RFP wording that describes one approach to the approval of innovations.

"All work performed under this contract must meet or exceed the standards contained in the Owner Agency's Standard Specifications, where applicable. Contractors are highly encouraged, however, to propose new and innovative technologies, processes, and materials that may not be encompassed within the Standard Specifications or the Standard Design Manual. These innovations must be highlighted in the Contractor's Quality Control/Quality Assurance plan and in the Contractor's Work Plan. Innovations that are standard practices in industry, or that are used by other States have a strong chance of approval.

Prior to the installation or deployment of any innovation, the Contractor must request and receive the Contracting Officer's approval. To facilitate this approval, Contractors must provide assurances to the Contracting Officer's Technical Representative (COTR) that performance goals shall be achieved or exceeded. The Owner Agency may ask the Contractor to make an oral presentation on the innovation to a panel of Owner Agency employees. The Contractor shall provide the following information to the COTR regarding all proposed innovations:

  1. The purpose of the proposed innovation;
  2. Advantages/disadvantages of the proposed innovation;
  3. Impact on cost and service life (i.e. life cycle costs) over the project life;
  4. Use or application in similar successful situations or conditions;
  5. Detailed specifications (where appropriate) or other data that shall assist the COTR in evaluating the potential innovation and its potential use in the project, and
  6. Other States/localities that are using the innovation and its' effectiveness in those locations."
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Jerry Yakowenko
Office of Program Administration

Updated: 04/04/2011

United States Department of Transportation - Federal Highway Administration