Chapter 21 - Performance-Based Contracting and Service Level Agreements

21.3.0 Performance measures

In PBC, the customer states all desired results or outcomes and the supplier is responsible for producing them. To encourage even higher levels of performance when using PBC, performance incentives are made a part of the contract. They may be monetary or non-monetary and should be SMART as follows:

• Specific
• Measureable
• Accountable
• Results oriented
• Time-bound

For PBC to be successful, the actual performance of the supplier must be measured against specific standards established by the agency before the solicitation is issued so that suppliers can propose in a way that will meet the standards. There are two types of performance measures:

• Performance indicators specify essential characteristics of performance that are acceptable.
• Performance standards describe a definite level or degree of quality for measuring performance. Performance standards must be measurable, achievable, relevant, and controllable.

The agency should determine at least one performance indicator and standard for each task and deliverable and link them to a description of acceptable quality. An acceptable quality level (AQL) must be determined by the agency so that the supplier can be evaluated against this pre-established level as work on the contract proceeds. The AQL establishes a maximum allowable variation, or error rate, from the standard. The AQL must be realistic and determinable. Quality surveillance methods are used to evaluate whether the contract’s performance standards have or have not been met. PBC performance measures should measure what is important including:

• Total cost of ownership
• Quality of goods/services
• Proposed technical performance
• Financial stability
• Cost of training
• Qualifications of individuals employed/utilized by supplier
• Risk assessment
• Availability and cost of technical support
• Past performance
• Cost/price

Performance analysis assigns a performance requirement to each task, which involves determining how a product/service can be measured and what performance standards and quality levels apply. The performance standard establishes the performance level required by the agency. Correspondingly, the AQL establishes a maximum allowable error rate or variation from the standard. Agencies should insure that each standard is necessary, is carefully chosen and not unduly burdensome. Failure to do so can result in unnecessarily increased contract costs. There are often established industry performance standards for repeatable services, uptime/downtime reliability, hardware and packaged software that the market providers publish online or with their documentation. These can be used as a guide for agencies in developing a project's specific performance needs versus the agency's specific or unique business needs.

Agencies should carefully and methodically establish the quality level at which performance standards are set. The minimum acceptable performance standard should rarely be 100 percent, since the standard directly affects the cost of the service. Conversely, if the quality level is too low, it may act as disincentive to good contract performance. Where appropriate, agencies may provide either a specific performance standard or allow the supplier the option to propose different target levels of standards of service along with the appropriate price adjustment. This allows suppliers an opportunity to propose what they consider to be the most cost-effective performance standard level. In order to properly evaluate alternative levels of standards proposed by the supplier, agencies need to do market research into the feasibility of accepting these alternative levels, i.e., discuss contracting methods and acceptable levels of standards for the same type of service with other commercial entities.

Standards may be published or well recognized, industry-wide standards, or may be developed by the agency. Agency standards should have industry input to ensure they are realistic and effective. This may be done through public meetings, public comment on proposed standards, or Requests for Information.