Chapter 21 - Performance-Based Contracting and Service Level Agreements

21.3.4 Payment for performance

An effective payment to performance incentive structure is to stipulate a maximum total payment, for example, and the supplier would get components of that based on meeting certain metrics. Performance-based metrics change over the length of the contract and must be continually reassessed.

A prudent guideline is to always tie payment to performance, not just by the use of incentive and award fees, but also by tailoring the acceptance provisions (and thus payment) for contract deliverables to performance objectives. If the requirement is framed as a series of deliverable products or specific services, then performance and acceptance precede payment. This is in sharp contrast to time-and-materials contracts, labor-hour type contracts, and some task orders. If an agency sets a goal for the procurement, such as savings in operations, some of the supplier's payment could be a percentage of the savings achieved by the project. Timelines and quality improvements could be other options for performance-based payments. All those options require good service-level agreements.