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By Steve Kelman

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A new way to use past performance in contracting

I have, more or less forever (actually, since I published a book on government information technology procurement back in 1990), argued that consideration of vendor past performance in the award of new contracts has the potential, if used well, to dramatically improve the quality of vendor performance. It’s common sense – a key way any market economy works is that if you have a good experience with a product or service, you go back for more. If you don’t, you don’t.

I do believe that introducing consideration of past performance in government procurement in the 1990s improved the process, though I have also extensively written about problems and shortcomings in the system as used in the real world of government contracting.

At any rate, I also believe there are lots of ways to use past performance to improve various intractable, or hard to get a handle on, elements of the procurement process. I wrote recently on that theme in a column on making better use of past performance evaluations in sole-source spare parts pricing. Today I want to suggest another idea – using past performance evaluations to encourage vendors to share cost savings on fixed price contracts.

What’s the issue here? There is an increasing emphasis in the government on using fixed-priced contracts for service contracting, a trend that on balance in my view is a good thing (though I am aware of the criticisms and downsides). One virtue of fixed-price contracting is that it encourages vendors to come up with lower-cost ways to meet contractual requirements, since the contractor’s payment is independent of their costs, and if they can lower their costs, their profits will go up.

At the same time, though, currently there is no way for the government to get any of the benefits of such contractor cost reductions. Since the contractor is entitled to receive the full fixed price agreed to as long as the contract requirements are met, there is no sharing of cost-savings benefits as with an incentive fee or share-in-savings contract.

Here’s my proposal: if a contractor, at the end of the contract where performance has met requirements, returns 3 percent of the fee on a fixed-price contract to the government customer (maybe make it 5 percent for a contract under $500,000), the contractor will automatically be given the highest-possible rating on the cost control element of the past performance evaluation, with an explanation in the evaluation of why the rating was received. With the increased attention these days to cost control, this may be a valuable incentive for contractors to return money (to which, it should be remembered, they are entitled to by the contract) to the government

A few points: First, I suggest a specific percentage return, rather than “at least,” because you want to tell the contractor in advance exactly what will earn them the highest possible rating. (I realize that no contractor is likely ever to return more than the 3 percent or 5 percent, even if they had saved 30 percent.) Second, one thing I like about this approach is that it recognizes the idea of rewarding a contractor who goes “above and beyond” contract requirements, rather than expressing the view one hears sometimes that contractors should do only what the contract specifically says, nothing more.

Note that an agency, or even an individual office working on an individual contract, could implement my proposal with absolutely no statutory or Federal Acquisition Regulation changes – although I think if an agency plans to do this, it should announce the policy in its solicitation. But this will be more powerful if adopted as a policy at an agency or even a government level. Maybe an Office of Federal Procurement Policy letter or something on this? This certainly would tie in with the administration’s emphasis on cost savings from contracting, as well as being a complement to the administration’s effort for more fixed-price contracting.

I raise this proposal partly because I think it’s a good idea, and partly to get others to think about other good ideas for how to improve the way we use the procurement system to deliver value to the government.




Posted on Jul 09, 2012 at 12:09 PM

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Reader comments

Tue, Jul 17, 2012

How would one rate a contractor's Past Performance for cost control on a Fixed Price contract for a contractor that DID NOT return any of their profits? They have performed in accordance with the contract and are not required to return any profits, so do not believe that you would have grounds to penalize them in your past performance rating. At worst you could just rate this category as not applicable. Vern Edwards should be writing this column. His argument is more logical.

Fri, Jul 13, 2012

I have to agree with Vern on this one.

Fri, Jul 13, 2012 Vern Edwards

In order to sell the fee reduction idea to contractors, you would have to show that they would be getting a good return on their investment, because that's what you would be asking them to make. Three percent might not sound like much, but it could be quite a lot in terms of dollars. What would they get in return? What would the highest possible past performance rating on cost control be worth? How often is past performance on cost control a deciding factor in a competitive procurement, or even a significant discriminator? If its not a deciding factor very often, then the incentive will not be very effective. We would be asking them to give up three percent of the profit, PROFIT, earned under a fixed-price contract in return for a guarantee of what, exactly? Now, if you could show that excellent past performance for cost control has frequently been a deciding factor in competitions in their market, you might have something. But take a look at GAO Report 09-374, April 2009, "Better Performance Information Needed To Support Agency Contract Award Decisions," pp. 2-3: "Though agencies considered past performance information in evaluating proposals, many of the officials we spoke with noted that past performance rarely determined their contract award decisions. Generally, officials relied on technical approach or cost when awarding the contract." In any case, how much would a good past performance rating for cost control be worth in a competition for a firm-fixed-price contract?

Fri, Jul 13, 2012 Steve Kelman

Thanks for these comments. The value engineering suggestion is intriguing -- in general, I would love to see the government make more use of VE. I guess my worry -- which is what prompted the original blog in the first place -- is what would be the incentive for the contractor to offer a VE change proposal that would require sharing the savings with the government given that under a fixed-priced contract they are entitled to 100% of savings they generate. Wilson, I'm not saying the government is entitled to contractor savings on fixed-price contracts, I'm suggesting the government provide a reward for contractors who do share savings. The Project on Government Oversight for some reason of all my recent blogs chose this one to comment on, and were worried that contractors would pad their initial prices -- a viewpoint suggesting a lack of understanding of how competition works: if contractors could get away with a higher price than they bid, they would do it without the past performance reward. As a general matter, if there are shortcomings in this idea, the idea should not be compared with perfection but with the current situation -- which has the enormous shortcoming of making it impossible for the taxpyer to benefit at all from contractor cost efficiencies on fixed-price work (I agree a contractor should be able to keep most of the benefits, and under my proposal they would still be entitled to keep them all -- I'm just suggesting an incentive, which currently doesn't exist, for savings.)

Thu, Jul 12, 2012 Vern Edwards

I cannot tell you how awful I think the "fee" return idea is. Truly awful.

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