OMB memo boosts performance-based contracts

A Bush administration plan to step up agencies' use of performance-based service contracts will bring new scrutiny to how the government measures performance-based work, according to experts. In a March 9 memo, Sean O'Keefe, deputy director of the Office of Management and Budget, directed agencies to use performance-based techniques on at least 20 percent of all service contracts worth more than $25,000 in fiscal 2002. Although guidance on the use of performance-based contracts has been on the books since 1991, O'Keefe's memo marks the first time OMB has required agencies to write performance-based contracts. Under such contracts, agencies describe to contractors the end results the government needs and leave it up to the vendor to figure out the best way to meet those requirements. While numerous studies and pilot projects have found that performance-based contracting yields gains in efficiency and saves money, agencies have been slow to adopt performance-based techniques. An informal study by the Office of Federal Procurement Policy found that in fiscal 1999, agencies' use of performance-based contracts was "negligible." But OMB's new requirement could make performance-based contracting routine in federal procurement shops, according to contracting experts. "It's always been the view of staff at the Office of Federal Procurement Policy that the only way you'll get people to do [performance-based contracting] is through pressure from OMB," said Allan Brown, a procurement consultant and former associate administrator for procurement innovation at OFPP. OMB's 20 percent threshold "is eminently do-able," said David Drabkin, associate administrator for acquisition policy at the General Services Administration. "This allows contractors to find innovative ways to solve acquisition requirements, which should result in savings to both government and contractors." OMB's requirement will also bring new attention to how the government measures performance-based work. At present, procurement officers code eligible contracts as performance-based into the Federal Procurement Data System. But this practice is prone to errors and inconsistencies, according to one expert. "Some folks call [contracts] performance-based when they really aren't," said Allan Burman, president of the consulting firm Jefferson Solutions and former administrator of OFPP. "Somebody has to look at [contract officers] to see if they are doing performance-based work when they are calling it that." Burman speculated that a central committee could standardize the reporting requirements of performance-based work across agencies. "Then there would be some way to tell if agencies are in general compliance," he said. Agencies should also work to integrate contracting activities with the programs they serve, experts said. That way, procurement officers can write contracts that provide meaningful incentives for both the contractor and the government program being served. "Contracting officers have got to be creative about linking financial incentives [with performance-based contracts]" said Brown. "But program people must understand that [these contracts] can be helpful to their programs." Contracting officers also need better training in performance-based techniques, according to procurement experts. A 1998 OMB study found that agencies were slow to award performance-based contracts because procurement officers weren't familiar with the process. In January, the Defense Department released a guidebook on performance-based techniques. Some details of the OMB requirement remain to be worked out, according to OMB spokesman Chris Ullman. O'Keefe's memo specifies that agencies use performance-based techniques for at least 20 percent of their "total eligible service contracting dollars." But Ullman could not say what, if any, contracts would be considered ineligible and exempt from the 20 percent requirement. "That's the kind of area where we will provide more information in the future," he said. Ullman also would not confirm whether O'Keefe's memo requires agencies to include outlines for how they intend to meet the performance-based contracting requirement in their annual performance plans due to Congress on April 3. O'Keefe's memo builds on Feb. 14 guidance from OMB Director Mitchell Daniels that directed agencies to add President Bush's management reforms to their annual performance plans.
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