Performance-based contracts found to be risky for industry
Research group says companies face higher bid and proposal costs and may have a harder time pleasing agencies.
A research firm has concluded that performance-based acquisition -- touted by the Bush administration as its preferred contracting model -- may prove too risky and expensive for many potential vendors.
The Reston, Va.-based firm INPUT released a report this week noting that vendors who want to do business with the government may face steeper bid and proposal costs and vague contract requirements as agencies struggle with implementing performance-based acquisitions.
Performance-based acquisition defines contract work in terms of required results instead of how work is to be accomplished or how many hours of work are to be performed. The initiative focuses on assessing accomplishments against measurable standards and uses those standards and financial incentives to encourage competitors to offer innovative and cost-effective proposals.
The Office of Management and Budget has pushed performance-based acquisition since 2001. A May 22 memorandum from Paul Denett, administrator of OMB's Office of Federal Procurement Policy, encouraged agencies to use performance-based acquisition for 45 percent of contract actions worth more than $25,000 for fiscal 2007, which ended Sept. 30. The eligible actions included new contracts, task orders, modifications and options.
OMB has offered help on implementing the technique, including an online guide called Seven Steps to Performance-Based Service Acquisition. The administration also has directed agencies to training programs at places like the Federal Acquisition Institute. But INPUT and the Acquisition Advisory Panel -- established under the 2003 Services Acquisition Reform Act to review and recommend changes to acquisition laws and regulations -- have concluded that agencies need further guidance.
"To streamline PBA guidance, significant work lies ahead," the report noted.
From the industry perspective, the bid and proposal process for performance-based acquisitions is an enormous drain on resources, INPUT said. As a result, smaller companies may be less inclined to absorb risks that come with making a bid, giving the larger, well-established companies an edge. To avoid this unfair advantage, agencies must provide a clear profit motive for a diverse group of vendors, according to the report.
Stan Soloway, president of the Professional Services Council, an industry association, said if agencies write solid statements of work and provide potential vendors with all necessary information, then performance-based acquisition could be beneficial to both government and industry.
"I think small and mid-tier businesses would see it as a great opportunity to be innovative, to propose and generate innovation rather than be contained in predesigned box," Soloway said. "It gives them an opportunity to demonstrate an agility."
Companies should be careful in assessing relative risk, because if agencies do not clearly delineate expectations or maintain their requirements throughout the project, "risk does shift inordinately to the company," Soloway said.
INPUT warned vendors to be wary of contracts with vague performance measures or poorly defined requirements that are not standardized across the organization. Those could make it difficult or impossible for contractors to satisfy their agency customers. INPUT recommended that government and industry avoid these situations by managing healthy relationships and aligning objectives and performance measures.
With uncertainty surrounding new performance-based contracts, INPUT said, vendors may be best advised to stick with more stable areas such as governmentwide acquisition contracts, multiple award contracts and the General Services Administration schedule.