These days mega-projects and giga-projects running into tens of billions of dollars mean huge risks for various players as they attempt to get a project finished on time and on budget. Whether a project is in commercial shipping, public transport, health services, energy generation, commercial airlines, manufacturing, or defense, Performance Based Contracting (PBC) is used to improve results, reduce costs, and manage risks.
In PBC, requirements of a contract are specified in terms of results, rather than methods. Factors such as quality, timeliness, and quantity are measured. When contracted performance is not up to expectations, prices are reduced according to agreed upon criteria. Finally, incentives are built into a contract to reward exceptionally good outcomes.
Let’s take a hypothetical example of a company asked to submit a bid to manage a large multi-billion dollar construction project in Saudi Arabia. The company would bid for the project with some or all of the following factors:
- Comprehensive capital needs assessments
- Project development, design, and construction
- Building systems commissioning
- Project financing
- Operations staff training and development
- Remote monitoring and control
- Legal risk management system
- Organizational management plan
- Contract management
- Contract control
- Contract risk management
- Performance evaluation and guarantees
PBC is being used more frequently by the U.S. Defense Department as it attempts to reduce costs associated with its many programs. To date, reports are that PBC has been working for all parties involved by setting expectations upfront and improving communications between players.
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References and related content:
- GAO: Performance-Based Contracts Are The Way To Go – Forbes
- MSHDA – Performance Based Contract Administration
- Performance-Based Contracting: Steve McKinzie, Don Philpott: 9780984403837: Amazon.com: Books
