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Chapter 21 - Performance-Based Contracting and Service Level Agreements

21.9 Selecting the PBC incentive strategy

21.9.5 Payment strategies

A payment strategy is not limited to incentive or award fees, but may include payments tied to performance and acceptance. For instance, a payment incentive schedule may include 100% payment for on-time deliveries that are validated to exceed or conform to performance requirements; while delinquent deliveries or those with diminished performance may have payment reductions based on calculated increments or percentages tied. See sections 21.3.4, 21.5. 2 and 21.8 for other examples.

An award fee is earned incrementally during performance and is in addition to and separate from any other fees available under the contract, and is available only when the supplier earns a performance rating of excellent for the award fee period. The amount of the fee earned is based upon a formula established by the contract, and no fee can be earned during any period when the actual contract costs exceed the should-cost estimate. Also the VPPA prohibits the awarding of contract with pricing based on the supplier's cost plus a percentage of cost. (Refer to § 2.2-4331 of the Code of Virginia.)

Another payment incentive strategy is to include a set withholding percentage from each milestone deliverable, with payment of the retained amount is paid to supplier after final acceptance, billed to the agency on the final invoice. The holdback can be any percentage, but it is advisable to begin with no less than 10-15%. This holdback incentivizes supplier to perform well all the way through to the end so it is ensured to get the held back amount. It also acts as a protection to the agency, should the supplier not perform well, not satisfy all contractual requirements, or slip schedule and/or budget.