Chapter 21 - Performance-Based Contracting and Service Level Agreements

21.5.2 Developing performance requirements and standards

In describing the specific requirements which must be met in performance of the contract, the customer will provide a standard of performance for each required task and identify a quality level the agency expects the supplier to provide for each task. The QCP (see 21.6 below), which directly corresponds to the performance standards and measures supplier performance, is needed to determine if supplier services meet contract SOW requirements. Positive and/or negative performance incentives based on QCP measurements should be included. Application of only selected aspects of the total PBC methodology is not likely to be successful and may even cause a reduction in the value of goods/services provided. Federal agencies report negative experiences due to the failure to: define work in completion terms, to develop or enforce measurable agency quality control plans, and to place sufficient financial risk on the supplier. For performance-based services the SOW should establish:

• A statement of required services in terms of output, referred to as performance requirements;
• A measurable performance standard for output; and
• An acceptable quality level (AQL) or allowable error rate.

Required services should be described in terms of output and should identify only those outputs that are essential. The performance requirements should be written clearly and succinctly, yet with sufficient flexibility for the supplier to determine the best manner in which to perform the work. It is critical to set forth a measurable performance standard for output which establishes the performance or service level required by the agency/project. The performance standards are the criteria used to assess whether the supplier has satisfied the performance requirements. The performance standards should also be written to provide "what, when, where, how many, and how well the work is to be performed."

Be sure that the standards are not only clearly defined, but also necessary, not unduly burdensome, and carefully chosen. The agency should include an AQL or a maximum allowable error rate which establishes what variation from the performance standard is allowed. For example, in a requirement for software as a service, a performance standard might be "the response time for technical assistance requests must be within 4 hours of any email request and the AQL might be a 2% per incident one-time reduction in the monthly subscription fee, to be calculated on the next month’s invoice." 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 a disincentive to good contract performance.