Vern:

I recently read in NCMA Magazine that you had published an article(that I cannot locate) dealing with subject above. Would you please send me the article or tell me your thoughts relative to this issue?

As I understand the Letter to the Editor which referenced your article, you felt that Performance Based Contracts are not exactly the way to go and that Relational Contracts are much a much better vehicle.

Your thoughts please, thank you.

By Vern Edwards on Monday, March 25, 2002 - 04:36 pm:

DSWms:

The article was "The Challenge of Service Contracting," published in the October 2001 edition of Contract Management magazine.

I have three problems with performance-based contracting, as currently defined in FAR 2.101. First, the requirement for specific, ex ante specification. Second, the requirement for objective performance standards. Third, the requirement for measurable performance standards.

Specific Ex Ante Specification
In my opinion, long-term (one year or longer), complex (multi-function or multi-task) service requirements are too complicated and ad hoc in nature to permit the development of specific, ex ante (in advance) descriptions of requirements. Thus, the appropriate contracting solution is to write the statement of work in a manner that will enable the parties cooperate to determine the government's requirements after award on an ad hoc basis, rather than to specify them in advance. This is the relational contracting approach.

Objective Performance Standards
Marketing research about service contract quality indicates that customer assessments of service quality are highly subjective in nature. See, for example, Service Quality: New Directions in Theory and Practice, by Roalnd T. Rust and Richard L. Oliver (Sage Publications, 1994). Given the subjective nature of service quality00, I think that it is impractical and unwise to require agencies to develop objective (i.e., not subject to judgment) quality standards. It is essential that contracting officers be allowed to terminate service contracts for convenience when, in their judgment, the contractor cannot or will meet its customer's subjective standards. That, too, is a relational approach to contracting.

Measurable Performance Standards
Assuming that the policy makers have used the word "measurable" literally, that means that they want agencies to specify standard units and numerical scales for the measurement of service quality. While this may be possible for some service requirements it is difficult or impracticable for the most important ones, even when agency personnel have received training in how to develop constructed scales. Thus, we see performance work statements which set measurable standards for the timeliness of contractor-submitted reports, but not for the quality of the reports. The requirement for measurability leads to the establishment of performance standards for the more trivial aspects of performance.

Relational contracting theory recognizes the impracticability of ex ante specification of long-term, complex service requirements and the need for an ad hoc, cooperative approach to contracting. My article cites several references to more extended discussions of those ideas. If you send an email to me with your fax number I will send you a copy of the article. I wrote a related article, "The Service Contracting Policy Mess," which appeared in the November 2001 issue of The Nash & Cibinic Report. I will send you a copy of that, as well.

A relational approach to contracting is generally results-oriented, but it does not entail the ex ante specification of specific requirements or the ex ante development of objective and measurable performance standards. Rather, it may well rely on ad hoc, post award specification and subjective, nonquantified standards.

By Rose McWms on Tuesday, March 26, 2002 - 09:32 am:

Does using "relational contract" specifications limit the type of contracts (fixed price, cost type, etc.) that can be employed?

By Vern Edwards on Tuesday, March 26, 2002 - 10:57 am:

Hi Rose:

No. But the use of a firm-fixed-price contract will necessarily limit the ad hoc nature of the relationship.

However, one way to deal with that problem is to negotiate what I call a "manage to budget" contract. The parties agree to a contract budget (in effect, a ceiling price) and then work together to decide how to spend the money, with advance agreements about significant costs and rates as discussed in FAR 31.109.

By Rose McWms on Tuesday, March 26, 2002 - 12:51 pm:

Thanks Vern. Your "manage to budget" contract would appear to dovetail nicely with using Cost as an Independent Variable (CAIV); do you agree?

By Vern Edwards on Tuesday, March 26, 2002 - 01:34 pm:

Rose:

You bet. That's a good idea.

Vern

By Vern Edwards on Tuesday, March 26, 2002 - 02:42 pm:

Think about a "manage to budget" contract with a share-in-savings incentive and an award-term incentive.

Instead of a clear, specific Performance Work Statement with objective and measurable performance standards and a fixed-price, the contract would include a Statement of Service Functions and Objectives and a budget amount set by the government. Price competition would be based on proposed advance agreements about direct and indirect cost rates.

After award, the parties would work together on an ad hoc basis to identify requirements, specify performance threshold and objective standards (Rose, that's your CAIV), set priorities, allocate budget, schedule activities, make adjustments and assess results. In this kind of relationship the parties would share risk, rather than allocate it in advance.

If the contractor is able to deliver the required results under budget, then it gets to share in the savings and receives an award-term extension. The contractor's share in savings would vary depending on whether it met the threshold or objective standards, with a higher share for meeting objectives. If the contractor does not deliver the required results, then the government would have the option to terminate the contract without cause (for convenience), with settlement determined on the basis of an advance termination settlement agreement proposed and negotiated prior to contract award. The government's decision in this regard would turn on the question of whether the thresholds and objectives were, in hindsight, realistic and whether the contractor performed competently and in good faith.

This kind of contract would require the utmost in professionalism and business acumen on the part of all parties, including both contracting and noncontracting personnel.

In the right hands -- knowledgeable, competent, mature -- this would work very well. And I believe that it would be easier to implement and would produce better results than the current emphasis on writing, ex ante, clear, specific, objective and measurable performance work statements.

If anybody would like to try this and can get the support of their management (contracting and technical) to give it a try, I would be happy to help write their Statement of Service Functions and Objectives, their share-in-savings provision, and their award-term provision, at no charge. I am also willing to come to your office to brief your decisionmakers (contracting and technical) about the concept if they will agree to show up.

By Anonymous on Tuesday, March 26, 2002 - 04:15 pm:

Vern,

The fatal flaw in your proposal is the necessity for "the utmost in professionalism and business acumen on the part of all parties ... knowledgeable, competent, mature".

What's needed is active, engaged, flexible and knowledgable contract/performance management of the contract after it is awarded.

In my experience most of those who generate the contract requirements and are the contract users want to either award the contract and forget about it, turn things over to the contractor without any real oversight and beat the contractor up if results aren't what they want (even if desires were unclear); or the users really want a personal services contract so they can treat the contractor as direct employees without civil service protections and tell them what to do on an ad hoc basis.

There are exception to this where you have real program managers on real programs, but these tend to occur in environments so overblown with bureaucracy and risk avoidance that they would never try your approach even if they understood it.

By Anon2U on Tuesday, March 26, 2002 - 10:40 pm:

Anon 4:15Pm is right in my experience.

No one in my organization has the time to administer that complicated a contract. We mostly award IDIQ labor hour and let the program offices calculate the hours worked and sign the invoices. One large contract like you are discussing might require a full time administrative contracting officer (or more).

We are cradle to grave. I have 9 contracts plus do simplified Acqs, BPAs, and extra details. Its so nice to be needed :>)

By Vern Edwards on Wednesday, March 27, 2002 - 12:21 am:

Anonymous and Anon2U:

Should I take your comments to mean that you won't be calling me any time soon?

By DSWms on Wednesday, March 27, 2002 - 08:43 am:

Vern:

Thank You so much for responding to my question in such a timely manner. I thought I had included my EMAIL address but being a first time "chatter" I may not have done everything just so. Joel Hoffman (I know you know him)and I work together and he suggested I write you because he knew you would be very responsive and very helpful.

Thanks again,
EMAIL: Darralyn.S.Williams@hnd01.usace.army.mil
FAX: (256) 895-1247

By Vern Edwards on Wednesday, March 27, 2002 - 08:53 am:

DSWms and Mike:

I'll fax the articles to you this afternoon. I prefer to fax them so you can see them in the form in which they were published.

Vern

By Anonymous2 on Wednesday, March 27, 2002 - 11:36 am:

Anonymous and Anon2U note an attitude that is all too common. I believe it may be a common confusion between the receiving agency's responsibility when buying commodities, easily specified items (possibly simple services) and that when entering into a more complex relationship. Differences are covered in various training courses and literature without seeming to soak in to the level of understanding for management and even the acquisition people in some agencies. I want to say it is only in those inexperienced agencies where complex service contracting is new or rare. That desire hasn't proven to be sound.

Continued attempts to do complex contracting with simple outlooks and inappropriate tools is expensive and wasteful. I don't know what the solution might be. Current training and education certainly has little effect at the problem's source. I believe that is the agency management level. Anonymous' comment that the attitude is "award the contract and forget about it, turn things over to the contractor without any real oversight and beat the contractor up if results aren't what they want (even if desires were unclear); or the users really want a personal services contract so they can treat the contractor as direct employees without civil service protections and tell them what to do on an ad hoc basis" is not uncommon in my first and second hand observations.

Training and testing the contracting professionals will do little good as long as their masters remain ignorant of basic cause and effect rules in contracting. One of those is that you get out of a contract the quality you put into your share of the work. Does anyone support the idea that proven capability in acquisition basics should be an absolute requirement for promotion in management? With increasing dollars going to outsourceing that seems a reasonable requirement. I saw no sign of that in the Services Acquisition Reform Act 0f 2002 language on training.

By Anonymous on Wednesday, March 27, 2002 - 11:48 am:

For the manage-to-budget idea .. Interesting. Would Sections L and M look any different (other than price, as you mentioned)? Seems as though flexibility would be a key discriminator (but how to demonstrate?) as well as past performance managing to cost/schedule. Would the Statement of Service... look similar to a Statement of Objectives? Would you recommend an escape clause for the contractor to exit the contract (letting my imagination run wild .. what if the Govt wasn't active, flexible, mature)?

By Vern Edwards on Wednesday, March 27, 2002 - 12:38 pm:

Anonymous:

Some preliminary responses:

Statement of Service Functions and Objectives

1.O Introduction
1.1 Agency Mission and Organization
1.2 Performance Context
1.3 Performance Budget
1.4 Government-Contractor Relations During Performance

2.0 Scope of Service Functions
(Brief, general descriptions of the kinds of tasks that the contractor will have to perform)

3.0 Applicable Documents

4.0 Government-Furnished Property, Facilities and Services

5.0 Required Reports and Deliverable Data

RFP Section M

Evaluation would be based on a "due diligence" approach and would include factors such as: organizational experience, organizational past performance, organizational factors and resources (including subfactors such as accounting system, personnel system, and key personnel qualifications), and price (based on proposed advance agreement on salaries, labor rates, fringe benefits, and other costs).

RFP Section L

The proposal instructions would describe the manage to budget approach and request the information relevant to the evaluation factors. Offerors would not be asked to submit technical proposals that describe a "proposed approach."

By Mike Wolff on Thursday, March 28, 2002 - 09:14 am:

Vern,

Thanks for the fax - it was very enlightening. The service contracts I deal with are for maintenance to real real property. Do you agree with Ralph Nash's comment that these type of contracts "do not fit [your] description of service contracts"?

Mike

By Vern Edwards on Thursday, March 28, 2002 - 09:42 am:

Mike:

You're welcome. No, I don't agree with Ralph entirely.

For the benefit of other readers, Ralph Nash wrote a response to my article in The Nash & Cibinic Report in which he stated that while relational contract theory applies to professional, administrative, and management support services, he does not think it applies to maintenance, repair, and rebuilding or alteration of equipment and real property. I don't agree entirely.

I think that relational contract theory applies to any long-term (one year or longer), complex (multi-function or multi-task) contract, including contracts for supplies. (The original articles about relational contract theory discussed long-term supply contracts.)

But I believe that Ralph was not referring to the kinds of long-term, complex maintenance and repair contracts that we often see today.

What do you think about John's comments?

Vern

By Anonymous on Thursday, March 28, 2002 - 12:17 pm:

Who is John and where are his comments?

By Mike Wolff on Thursday, March 28, 2002 - 01:29 pm:

Anon 3/28 12:17 - John is John Cibinic, and his comments are in response to Vern's article referenced in the posts above.

Vern,

I do agree with John that a CO ultimately has to make a proper business decision about whether perfomance based contracting is applicable to the procurement they are working on; however, I do agree with you that OMB is putting undue pressure to make everything performance based. (Just as they are obsessed with calling everything a Commercial Item.)

I am a little concerned with John's discussion regarding specifications. I am concerned with his example about using funtional specs (or performance based specs for that matter) in security services for a Government installation. I know this is only an example, however guard/security services is an example of one area where I think we should be prescriptive. I also want to get more info. on his statement that "the contractor's proposal should not be made a part of the contract requirements." If anyone has a copy of the article, "Performance-Based Contracting: Incorporating the Proposal in teh Contract, 14 N&CR 47) I'd appreciate it if they would e-mail or fax it to me.

Frequently I find that people discuss performance based contracts vs. prescriptive based contracts as if they are mutually exclusive. In reality, at least with the contracts I deal with, I find that a blending of the two approaches works best.

By Vern Edwards on Thursday, March 28, 2002 - 09:02 pm:

Mike:

I didn't like John's idea about security services, either. Last year an agency asked for my input to an S.O.W. for security services and I told them that I didn't think a pure performance-based S.O.W. for security was a good idea. Should the government let a contractor decide whether or not to arm the guards, or let the contractor select the method of inspecting the persons and personal belongings of government employees and visitors? I don't think so. Sometimes the government has to tell the contractor how to do the job, or at least provide a list of acceptable methods.

By formerfed on Friday, March 29, 2002 - 08:13 am:

Vern

Thanks for faxing the articles. I really like the concept. The only potential pitfall is the lack of actual experience in crafting performance thresholds and objective standards might result in less than an ideal situation. For example, a contractor might find themselves in a situation where its to their advantge to keep costs low and share in a large potential savings than delivering top performance. I think too often enough thought doesn't go into formulating these factors, and that people with the expertise and experience aren't involved. Consequently, what motivates and doesn't motivate is a gamble. Of course, you advocate making adjustments and that would work with the right contractor. I hope someone takes you up on your offer to help so it can be tried.

By Vern Edwards on Friday, March 29, 2002 - 08:51 am:

formerfed:

That's the kind of problem that the parties will have to discuss openly under a relational contract--the tradeoff between performance and cost.

There are several possible solutions to the problem that you have identified. Share-in-savings might in addition to other sources of profit or fee, such as award-fee. Also, the award-term incentive might offset the loss of some profit.

But you are right--this type of contract would require knowledge and know-how on the part of both parties. As John Cibinic said, "Therein may lie the rub."

Isn't it a shame that so many people (including some Anonymouses in this thread and the Administrator of OFPP) think that the government's options are limited because it doesn't have enough contracting officers who are capable of negotiating and administering complex deals? I wonder if they are right.

By formerfed on Friday, March 29, 2002 - 09:19 am:

Vern,

Your question made me think about how many contracting officers I know capable of doing this. I know several with the abilities and knowledge, but they got promoted to positions where they now couldn't afford to do it. Another group of contracting officers are in such demand and so overworked, their management would be reluctant to free them up. That leaves a very small remainder. This also reminded me of the prior thread on training and the question is why are there so many contracting officers who aren't capable of doing what's really important?

By Vern Edwards on Friday, March 29, 2002 - 10:16 am:

formerfed:

I often hear that contracting officers are overworked. This is the kind of claim that you have to take at face value, since we don't have any empirical data on which to base an analysis.

If the claim is true, it might be due to any or a combination of four factors:

(1) Drastic cuts in the 1102 workforce during the 1990s, which have left many offices understaffed.

(2) The clericalization of 1102 work which has resulted from office automation and the reduction of contracting clerical support. Contracting officers and contract specialists are required to spend too much of their time doing clerical work, such as preparing announcements for FedBizOps and completing various forms, such as SF279 and DD3350.

(3) Poor contracting process design and management, which absorbs needlessly large amounts of time and energy, not only by contracting folks, but by requisitioning offices, too, and which is due to contracting officer incompetence. Witness the Finlen Complex, Inc. decision, B-288280, October 10, 2001, and the more recent Kathryn Huddleston and Associates, Ltd., decision, B-289453, March 11, 2002.

(4) Poor office management by many of those promotees you mentioned, who got promoted because they were good contracting officers, but who don't have a clue about how to manage people.

I'm sure that others could identify other causes.

By Mike Wolff on Friday, March 29, 2002 - 10:29 am:

One reason COs don't have time to try these complex methods is because they are too busy dealing with nuisance protests. The current system makes it way too easy to protest. Even when you have an airtight award, if you get a protest you still have to respond to it. Even if you win 100% of your protests, you cannot help but get a little conservative. Win or lose, protests eat up a lot of time. I believe that losing protesters should be required to reimburse the Government for reasonable administrative costs incurred to defend against the protest, and to pay for court costs if the protest is to GAO. This may stop some of the ridiculous protests that we receive.

By Vern Edwards on Friday, March 29, 2002 - 10:33 am:

Mike:

I'm surprised to hear this. Protests are way down in number from what they were in the late 1980s and early to mid 1990s. The reduction in numbers has been dramatic and well-documented.

By anon29 on Friday, March 29, 2002 - 10:35 am:

Why do you think capability to do serious contracting well is really important? According to one economic theory the only indicator of importance is money willingly spent. "Good" things suffering lack of cash are just posturing, not important.

If great skill in effective contracting (or teaching, child care, nursing and any number of other "worthy," low paid careers) were really important the public and their elected representatives would put the cash behind the importance. Instead, as you say, those who can leave and cannot afford to go back to effective contracting. Isn't this like teaching? The great classroom teacher either vows eternal low pay and career ceiling unless they leave to become administrators in the system or leave it entirely. A contracting person who can leaves, those who cannot or suffer from some strange and rare dedication stay and cope with poor tools and overwork. Those conditions lead to increasing population in the field by those who can't.

Perhaps the only real importance here is obligating funds on time. An acquaintance, a "conservative" editor of a national magazine that helps form public opinion, surprised me with such a view. I mentioned being pleased with how effective and professional a contracting organization I was working with seemed. He discounted the idea of effective contracting with a view that federal contracting was nothing more than a mechanism for taking money from people and businesses that had earned it and passing it to those who fed at the government's table. The real purpose was to keep constituents thinking they were getting something from Washington, the jobs and dollars in local contracts announced so proudly.

Perhaps it is just the obligation flow that is really important. Which contracting officer or agency will be in more trouble:

(a) failed to obligate before expiration because requirements were still unclear and contract would be ineffective

(b) perfect obligation record with long history of problematic and failed contracts

By Vern Edwards on Friday, March 29, 2002 - 11:05 am:

anon29:

If you think that great classroom teaching doesn't pay well, you'd better think again. That may be true for grade school teachers, but as for the university level and the private sector, you are way off the mark. I'm a classroom teacher and I'm paid very well. At least I think I am. Do you know something that I don't?

Your views are deeply cynical. Of course, that alone doesn't invalidate them. But it seems clear to me than not everyone shares them, since a great deal of energy and money is and has been invested in improving the government's contracting processes. While it is true that many think that obligating money is a key objective, it is also true that many think that spending them it is important.

Democratic government is a complex, cumbersome institution that pursues many conflicting objectives, e.g., full and open competition and socio-economic set-asides. Conflicting objectives make it hard to optimize government performance. But the only way to get rid of the conflicts is to submit to government by people like the Taliban.

I am no glossy-eyed optimist; but I'm no cynic, either, and I don't buy your cynical views.

By Vern Edwards on Friday, March 29, 2002 - 11:07 am:

I'm getting worse at typing all the time. I had meant to say that many think that spending the money well is important.

By Mike Wolff on Friday, March 29, 2002 - 11:09 am:

Vern,

Up until approximately 1992, the office I work in primarily procured through sealed bidding, and from 1992-approx. 1997 we procured through negotiated contracts, but made award to the low responsible offeror, with only a handful of "best value" procurements being done. We now do approximately 90+% of our procurements as "best value" awards - usually only evaluating price and past performance. This obviously opens the door to more protests than simply awarding to the low offeror/bidder.

By Vern Edwards on Friday, March 29, 2002 - 11:21 am:

Mike:

I agree that the tradeoff process approach opens the door to more protests, but are more people going through the door? I really thought that nuisance protests were way down in number. Are you folks experiencing high levels of nuisance protests?