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Various government organizations, private companies and businesses prefer to hire people on performance-based contracts. Even online businesses prefer to acquire desired services and reward them based on performance only. What are the procedures involved and what are the advantages of this method over regular contracting?

Definition Of Performance Based Contracting

Performance based contracting defines measurable outcomes for a service requirement in terms of performance objectives. This method allows contractors the flexibility to meet those objectives within the timelines and structure provided. What this entails is that the employer determines service requires and places the responsibility of achieving it on the contractor.

Elements Of A Performance-Based Contract

A performance-based contract should contain the following elements:

1. Performance Work Statement: This describes the service requirement in terms of measurable outcomes.
2. Measurable Performance Standards: These standards are used to define acceptable performance. It is also used to determine whether performance outcomes have been met.
3. Remedial Procedures: These procedures detail how to manage performance that does not meet defined standards. Remedial procedures should contain incentives to encourage performance that meets expectations.
4. Performance Assessment Plan:  This plan details how contractor’s performance will be assessed and measured against the defined performance standards. This plan is also referred to as the Quality Assurance Surveillance Plan or the Quality Assurance Plan.
5. Quality Control Plan: This plan is developed by the contractor to ensure high-quality service parameters. A contractor can use the quality control plan as part of their original proposal while applying for the contract.

Assessment Methods

The following methods are used to assess contractor’s performance:

1. Random Sampling: A sampling of the contractor’s work at any random point within the contract period.
2. Periodic Sampling: A sampling of the work in pre-set periodic intervals known to both contractor and employer.
3. Trend Analysis: Used to assess contractor’s performance over time.
4. Customer Feedback: Customer feedback should be considered for assessment purposes only after validation and only if it’s related to the actual requirements of the contract.
5. Third-Party Audits: Evaluation of contractor’s performance by a third-party organization not connected to either party.

Orientation Program Post Contract

Once the contract is awarded, the orientation program ensures that all parties involved understand their respective roles in the contract arrangement. These sessions encourage a strong business relationship at the beginning of the contract itself. All interested parties can discuss the contract and achieve a clear understanding of contract terms, requirements, and conditions. Parties can identify and resolve problems, both potential and current.

Contract Administration

All the activities that the employing agency performs after awarding contract to ensure performance comes under contract administration. The specifics vary from contract to contract. Contract administration can range from minimum acceptance of delivery, payment for delivery to audit. The nature and complexity of the contract dictates the elements and degree of contract administration. Customer satisfaction surveys are used in  contract administration to notify the contractor when specified aspects of the contract are not being met.

Documentation

All issues discussed during orientation conferences should be documented, along with performance assessment activities, payment records, incentives, customer feedback and so on. A checklist should be used to record observations of the contractor’s performance. All acceptable and unacceptable performances should be documented, in accordance with the performance assessment plan.

Payments And Incentives

Positive Performance: Payment can be made on a monthly or quarterly basis, as decided between contractor and employer, if the performance meets standards. Incentives are paid for performance that exceeds expectations, based on x% of agreed payment.

Negative Performance: If performance is found below standard for a given period, x% of that period’s payment is withheld. The contractor is asked to re-perform the service at no additional cost to the employer. If performance is below standard for X number of consecutive months, surveillance is increased.

Advantages To Hiring Company

The following are the advantages of defining service requirements in terms of performance outcomes:

1. Maximizes Performance: Contractors can adjust their processes during the contract period as long as outcome complies with the contract. Incentives help motivate performances as well, which helps deliver better performances overall.
2. Maximizes innovation and competition: Performance based contracting allows for greater innovation and therefore attracts a broad classification of contractors. This encourages healthy competition among individuals and contract services groups, which only increases performance and overall benefit to employer.
3. Employers Face Less Risk: A lot of the risk is shifted from the employer to the contractor. The contractor is responsible for achieving the objectives in the work statement through their own best practices and processes.
4. Cost Savings: The employing agency saves the cost of employment, providing a work base, tools and utilities, initial investments and so on. These costs are a part of hiring employees or regular contractors, over hiring performance-based contractors.

About the Author: Dean Gannon is a conversion rate optimization expert and enjoys writing about topics related to landing page optimization, conversion optimization and affiliate marketing.