What is performance-based contracting?

A reader raised the following questions: During the past couple years there has been a lot of talk about "performance-based contracting" in federal procurements. What does this mean in practice? Are there any guidelines for this kind of contracting?

The concept of performance-based service contracting has been a part of government contracting for a long time. Detailed guidelines for the implementation of performance-based contracting techniques were included in the Office of Federal Procurement Policy (OFPP) Pamphlet No. 4 "A Guide for Writing and Administering Performance Statements of Work for Service Contracts " which was published in October 1980. For nearly 17 years many government agencies have referred to this guide when conducting many kinds of acquisitions. The approach has proved its worth and has been reinforced many times over the years.

On April 9 1991 President George Bush's administration issued OFPP Policy Letter 91-2 to re-emphasize the government's commitment to the use of performance-based requirements and quality standards in contracting. The goals were incorporated into the Federal Acquisition Regulation.

The letter defines performance-based contracting as a means of "structuring all aspects of an acquisition around the purpose of the work to be performed as opposed to either the manner by which the work is to be performed or broad and imprecise statements of work." According to the letter "It is the policy of the federal government that (1) agencies use performance-based contracting methods to the maximum extent practicable when acquiring services and (2) agencies carefully select acquisition and contract administration strategies methods and techniques that best accommodate the requirements."

The Clinton administration endorsed this approach in a May 19 1994 memorandum issued by the Office of Management and Budget that asked federal agencies to "formally endorse performance-based service contracting as the preferred methodology when acquiring services by contract." Later 26 agencies signed a pledge committing themselves to the use of performance-based contracting techniques.

Congress in sections 2001 and 2051 of the Federal Acquisition Streamlining Act of 1994 authorized agencies to tie progress payments to the achievement of performance objectives. Although agencies already had this authority some believed congressional acknowledgment worthwhile.

In March 1996 OMB replaced OFPP Pamphlet No. 4 with a new document "A Guide to Best Practices for Performance-Based Service Contracting." This guide incorporated much of the general guidance from the previous pamphlet and added a considerable volume of anecdotal commentary supporting the idea of performance-based service contracting. Unfortunately much of the detail on how to accomplish the general guidance that made the previous pamphlet so valuable was left out of the new guide. But copies of the earlier pamphlet still are widely available.

The General Accounting Office has looked at the issue of performance-based services contracting in several noteworthy decisions. In Logistical Support Inc. [B-244285 Sept. 23 1991 91-2 CPD Paragraph 267] GAO refused to consider a protest involving an alleged violation of OFPP Policy Letter 91-2. In this case the protester challenged the minimum-staffing requirements of a Navy solicitation for mess attendant services on the basis that the requirements violated the policy letter and overstated the agency's minimum needs. GAO dismissed the part of the protest that was based on the policy letter and denied the rest.

In Ogden Government Services [B-253794 Dec. 27 1993 93-2 CPD Paragraph 339] GAO addressed the disparities of the broadly stated requirements found in performance-based services acquisitions. First GAO rejected a challenge to the evaluation of the awardee's proposed staffing plan finding that the awardee "proposed an approach [that] relied on a more efficient use of personnel than that proposed by Ogden."

GAO then rejected the protester's alternative argument that the agency failed to conduct meaningful discussions by not advising it that its own proposed staffing level exceeded the agency's needs. According to GAO the agency did not establish any particular staffing level that it required or expected offerors to provide. Instead the solicitation stated the agency's requirements in terms of the particular tasks to be performed and the standards of quality to be maintained and it advised each offeror to prepare its proposal on the basis of its own analysis and proposed technical approach.

Finally GAO found that "it would have been inappropriate for the agency to address and discuss Ogden's staffing levels on the basis of a different technical approach proposed by a competing offeror."

By contrast even the most flexible statement of work is likely to include some minimum mandatory requirements that must be met as a condition of eligibility for contract awards. In Solarwest Electric [B-207573.3 April 13 1983 83-1 CPD Paragraph 390] GAO noted: "While performance-based specifications provide greater latitude in the manner in which offerors may perform the required task than definitive specifications offerors must still meet the RFP's minimum requirements."

And in Suncoast Associates Inc. [B-265920 Dec. 7 1995 95-2 CPD Paragraph 268] GAO denied a protest by the higher technically rated incumbent contractor against an agency decision to award a follow-on contract to a slightly lower-priced competitor. In so doing GAO accepted the agency's argument that a change to performance-based contracting methods in the follow-on procurement minimized the value of the incumbent's experience under the more detailed specifications of the predecessor contract.

Based on these and similar rulings it is apparent that GAO will accord considerable although not unfettered discretion to agency procurement officials as they try to implement the government's policy of using performance-based services contracting techniques.

-- Peckinpaugh is a member of the government contracts section at the law firm of Winston & Strawn in Washington D.C. This column discusses legal topics of general interest only and is not intended to provide legal advice. Should you have a specific question or legal problem consult an attorney.

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