Assessment of Performance-Based Contracting

© 2007 Noblis, Inc.

Assessment ofPerformance-Based Contracting

Presented to: 2007 REGION 4 ENVIRONMENTAL PROTECTION AGENCY / DEPARTMENT OF DEFENSE / STATES / ENVIRONMENTAL CONFERENCE

Date: June 20,2007 Authors: Jon Horin, Cathy Vogel, Fred Price, Bob EdwardsNoblis

2Company Confidential/Proprietary

Introduction

• Performance-Based Contracting (PBC) vs. Other Contract Vehicles

• Criteria for Determining When to Use PBC

• Achieving Best Value With PBC

• Evaluating Strength of PBC Offerors

• Lessons Learned from Past PBC Efforts

• Key Information Sources


PBC vs. Other Acquisition Approaches• With PBC, the Air Force buys results instead of

compliance, and contractors have maximum flexibility to select and implement the best practice to achieve the goal

• Air Force shares the risk with the contractor in order to encourage accelerated completion of goals

Contract Type Risk to Contractor

Completion Incentive

Sites Best Suited to This

Situation

Typical Payment Format

Time and Materials

Low Low Poorly Characterized or Variable Scope

Hours Worked at Set Rates

Cost Plus Fee Low to Medium

Medium Poorly Characterized or Variable Scope

Payment for Costs Incurred

Process Oriented Firm Fixed Price

Medium High Well Characterized with Firm Objectives

Payment Linked to Completion of Scope

Performance-base Firm Fixed Price

Medium to High

High Well Characterized with Firm Objectives

Payment Linked to Performance Objectives


Criteria for Determining When to Use PBC

Possible PBC Criteria Include:– Extent of site characterization

– Degree of regulator support

– Flexibility of legal agreements

– Clarity and achievability of government goals

– Adequacy of time for preparation and award of contract

– Impact on the government of failure

– Grouping sites for PBC results in risk acceptable to contractors and government


Achieving Best Value With PBC

• Review the draft Statement of Objectives (SOO) to determine:

– Clear, measurable objectives and goals

– Potential for modifications

– Financial requirements

• Consider additional factors such as previous experience with fixed-price contracts, and innovative solutions

• The solicitation must require that the offeror propose a clear and comprehensive explanation of what will be accomplished and in what amount of time for a fixed amount

• The Independent Government Estimate (IGE) should be in line with the cost to complete (CTC); the offeror’s proposed cost should be in line with these numbers. Large deviations should be evaluated


Evaluating Strength of PBC Offerors

Evaluation factors can include:– Contractors Qualifications

• Financial resources• Financial stability• Staff qualifications• Past performance• Technical approach

– Risk of Proposed ApproachFinancial risk mitigation through:

– Contingency planning– Teaming arrangements – Environmental insurance

» Cleanup cost cap» Pollution and legal liability

– Proposed Milestone and Payment Schedules– Cost/Price


Financial Stability

• The Federal Acquisition Regulation (FAR) states “Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only”

• An offeror must have adequate financial resources to perform the contract—or the ability to obtain them—to be determined to be responsible


Evaluating Financial Stability

FAR Section 9.104-1 Standards

– An offeror must have a satisfactory record of integrity and business ethics to be determined to be responsible

– An offeror must have the necessary accounting and operational controls

– Special standards can be developed and set forth in the solicitation


Financial Requirements for Small Businesses

Small businesses found "not responsible" (i.e., unable to achieve the minimum financial requirements) are referred to the Small Business Administration (SBA)

– SBA conducts further assessment

– SBA can issue a Certificate of Competency (COC) if the small business is found to be competent, preventing elimination on the basis of non-responsibility


PBC Execution with Insurance: Cost Elements

Cost risks determined by Monte Carlo analysis by contractor and insurance vendor

Contingency calculated to cover 98% probability of completion. Insurance kicks in at 99.9% probability of completion.

Co-pay influenced by exclusions

Insurance Claim Payment

Co-

Pay

10-

15%

Deductible 15-20%

Insurance Premium 10-15%

Fee and Overhead

Contingency 10%

Cost

Gua

rant

eed

Fix

ed P

rice

Rem

edia

tion

(GF

PR

)/P

BC

G

over

nmen

t C

ost

Insu

ranc

eC

over

age


PBC Execution with Insurance:Dollars vs. Time

$

Time

Best Outcome

Government Payments

Contractor Share

Exp

ecte

d C

ompl

etio

n of

Rem

edia

tion

Goa

ls

Per

iod

of

Per

form

ance

/T

erm

of

Insu

ranc

e


PBC Execution with Insurance:Dollars vs. Time (Continued)

$

Time

“Insurance Payments”

Expected Outcome with Insurance

Contractor Share

Government PaymentsE

xpec

ted

Com

plet

ion

of R

emed

iatio

n G

oals

Per

iod

of

Per

form

ance

/T

erm

of

Insu

ranc

e


PBC Execution with Insurance:Dollars vs. Time (Concluded)

$

“Insurance Payments”

When Things Go Wrong

Contractor Share

Government Payments

Time

Exp

ecte

d C

ompl

etio

n of

Rem

edia

tion

Goa

ls

Per

iod

of

Per

form

ance

/T

erm

of

Insu

ranc

e


Lessons Learned from Past PBC Efforts• Select sites for PBC only after careful analysis – must be sufficiently

characterized

• Involve the installation staff early in the process

• Dense, non-aqueous phase liquid (DNAPL) in groundwater may be difficult for PBC because it is hard to achieve site closure – soil contamination often presents less uncertainty

• Remedial Process Optimization analysis prior to PBC acquisition “primes the pump” for innovative solutions

• SOO must have clear and achievable objectives (reflected in the Quality Assurance Surveillance Plan [QASP]) and milestones, but must also allow the contractor adequate flexibility to encourage innovative proposals

• Significant payment must be reserved for final milestone to maintain completion incentive


Lessons Learned from Past PBC Efforts (Concluded)

• Provide for adequate time and resources for the acquisition effort

• Participation of Major Command and Installation staff is critical to the success of PBC

• Regulator response or input is desirable during the solicitation process

• Post-award efforts must begin immediately and require Air Force involvement

• Soon after award, the PBC contractor should meet with Installation staff and regulators

• Air Force must have current knowledge of ongoing efforts by contractors and should not be surprised by contractor actions


Key Information Sources

Environmental Restoration Performance-Based Contracting Guidebook, US Air Force Office of the Civil Engineer, Air Force Center for Environmental Restoration, December 2005.

Environmental Restoration Performance Based Contracting (PBC) Concept of Operations, Air Force Center for Environmental Excellence, Final, 22 February 2007.

US Army Environmental Center Performance-Based Contracting Guidebook, rev. 1, 27 January 2006.

Use of Environmental Insurance by the Military Departments, Department of Defense Office of the Inspector General (D-2006-080), 27 April 2006.

Memorandum from SAF/IEE “Air Force Cleanup Program Performance-Based Management Policy,” 27 October 2004.

Memorandum from HQ USAF/ILEV “Performance-Based Contracting (PBC) Guidebook,” containing goals for percentage of PBC contracting each fiscal year and PBC goal calculation guidance, 22 December 2005.


Environmental Restoration Performance Based Contracting (PBC) Concept of Operations

http://www.afcee.brooks.af.mil/products/pbc/meeting/downloads/AFCEE%20PBC%20CONOPs%20FINAL%20v2.1%2002222007.pdf

http://www.afcee.brooks.af.mil/products/pbc/insurance.asp


Summary

• PBC is one option for environmental contracting but is not always the best approach and must be evaluated in each instance

• The acquisition process can take longer for PBC but is a critical step for success

• A PBC contract may be awarded on best value, not simply lowest cost


Summary (Concluded)

• Best value is established based on consideration of a variety of factors

• The financial strength of an offeror should be considered to reduce failure due to risk

• Future PBC should take advantage of the lessons learned in past and ongoing PBC efforts.

Documents

Assessment of Performance-Based Contracting