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Low Bid vs Negotiated Performance Based Facility Management Contracting

By Andy Fuhrman, IFMA Fellow, Chief Operating Officer – Impec Group

Optimizing Costs, Quality and Achieving a Win-Win Scenario for Client and Service Provider

Being competitive in the Silicon Valley and San Francisco Bay area for a mid-size full service facility management services provider is extremely challenging. On one end of service provider market there are the shops with less than 50 employees that don’t have the additional financial burden of the Affordable Care Act (ACA) and on the other side of the market are the large national and international firms who can service clients facilities with a broader geographic footprint beyond Central California. Often times these large firms do not sole source all aspects of what they bill the client for. Instead they may outsource certain scopes of work to the small and mid-size firms that work at razor thin margins. And while Impec Group is very appreciative for the work we receive from these large firms, they only account for a small percentage of our total revenue.

Like all businesses, we need to compete for clients business either by responding to Requests for Proposals (RFP) or Negotiated Contract. Conventional wisdom regarding outsourced and/or out-tasked facility services costs holds that the only way to get the lowest price is to get competitive bids from several service providers via the low-bid RFP model.

While contracting professionals are facing increasing pressure to purchase goods and services as cheaply as possible, often times using low bid contracting leads to an adversarial ‘them vs us’ relationship from the start between client and service provider based on the quality of the specifications stated in the RFP and the interpretation by service provider. Differences in the number of buildings, floor area, supplies, occupant levels, building infrastructure, staffing requirements, service level frequency and work times may not be discovered until after the service provider has mobilized their workforce that may result somewhere during the contract period in change orders, differences in expected performance levels or in the extreme case, termination of the contract by either party.

A preferred method resulting in a ‘win-win’ for both sides is a negotiated performance based contract that allows the client to specify the desired outcome and allows the service provider to design the delivery method that best meets and exceeds client expectations.

The following information provided by the State of California Performance Review – ‘Increase the Use of Performance Based Contracting[i] describes the benefits and structure of this method.

Typical procurement documents are prescriptive in nature, specifying how the contractor should perform the work. When the client issues a prescriptive procurement, the contractor is unable to find better, more cost-effective ways of doing business, such as performance-based contracting. As an example, the US Air Force found that it saved 50 percent on its maintenance agreement by specifying that floors must be “clean, free of scuff marks and dirt, and have a uniformly glossy finish,” rather than requiring its contractor to strip and wax floors weekly[ii].

About $7.6 billion per year of the state’s budget is spent on the purchase of goods and services[iii]. Various types of contracts are used for these purchases, depending on agency needs and applicable state laws and rules.  Based upon the state’s current budget crisis, a dramatic change in the nature of government requires fundamental organizational changes. The state cannot afford doing business as usual. With fewer budget dollars available, the state needs to look for more innovative ways to reduce costs and increase service quality.

For example, some of the performance-based contracting opportunities the state can consider include the following:

  • Janitorial services;
  • Landscaping and maintenance services;
  • Information Technology (IT);
  • Health services; and
  • Other non-IT services (food services, security guards, laundry services, elevators, etc.)

Performance-based contracting objectives

By describing requirements in terms of performance outcomes, and not requiring detailed specifications, agencies can help achieve all of the following objectives:

  • Maximize performance—allow a contractor to deliver the required service based on its own best practices and the customer’s desired outcome;
  • Maximize competition and innovation—encourage innovation from the supplier base using performance requirements;
  • Minimize burdensome reporting requirements and reduce the use of contract provisions and requirements that are unique to the state;
  • Shift risk to contractors so they are responsible for achieving the objectives in the Statement of Work through the use of their own best practices and processes; and
  • Achieve cost savings through performance requirements.

Elements of performance-based contracts

Traditionally, government service contracts have emphasized inputs rather than outcomes. Performance-based contracts clearly spell out only the desired end result expected of the contractor. These types of contracts typically detail the procedures and processes to be used in delivering a service; amount and type of equipment; and time and labor to be used. At a minimum, there are five elements of performance-based contracting:

  1. Performance Statement of Work—describes the requirements in terms of measurable outcomes rather than by means of prescriptive methods.
  2. Measurable Performance Standards—determines whether performance outcomes have been met. Measurable performance standards define what is considered acceptable performance.
  3. Quality Assurance Plan—describes how the contractor’s performance will be measured against the performance standard.
  4. Remedies—procedures that address how to manage performance that does not meet performance standards. While not mandatory, incentives should be used, where appropriate, to encourage performance that will exceed performance standards. Remedies and incentives work hand-in-hand.
  5. Performance Assessment Plan—describes how contractor performance will be measured and assessed against performance standards. (Quality Assurance Plan.)[iv]

Types of incentives and remedies

Incentives can be monetary, non-monetary, positive or negative. They can be based on cost, schedule, or quality of performance. It is important that incentives are built upon performance objectives and performance standards. Regardless of the final composition and structure of the incentives, the goal is to encourage and motivate the best quality performance.

Exhibit 1

Types of Incentives and Remedies

Type of Incentive/Remedy Description
Cost-based Relate profit or fee to results achieved by the contractor in relation to identified cost-based targets.
Award Fee Allows contractors to earn a portion (if not all) of an award fee pool established at the beginning of an evaluation period.
Share-in-savings Contractor pays for developing an end item and is compensated from the savings it generates.
Share-in-revenue Generates additional revenue enhancements; compensation based on sharing formula.
Balanced Scorecard Used when performance is less tangible, i.e., quality of lead personnel or communication and resolution of issues.
Past Performance Information used as part of the decision process to exercise contract options or to make contract awards.
Non-performance Remedies Specified procedures or remedies for reductions in payment when services are not performed or do not meet contract requirements.

The types of incentives utilizing performance-based contracting arrangements include the following:

Schedule incentive

After the Northridge earthquake, Caltrans offered the contractor substantial performance incentives, as well as penalties for rebuilding a freeway overpass damaged by the quake. Caltrans proposed a $200,000 per day bonus for completing the project ahead of schedule, and a $200,000 a day penalty for each day the project was delayed. The contractor finished the project significantly ahead of schedule.[v]

Share-in-savings

The U.S. Department of Energy (DOE) needed to identify facility improvements that would not only reduce operational costs, but also help achieve a 20 percent reduction in federal energy use by year 2000 as mandated by the Energy Policy Act of 1992. The Department of Energy knew even greater savings were possible, especially in the area of inefficient lighting. The DOE was able to achieve a 27 percent annual savings for the first three years of the performance-based contract in its 13-building headquarters. The remaining four years of the contract produced a total of 85 percent savings. Through various changes and modifications in lighting throughout the buildings, the contractor was able to achieve a reduction of 5.8 million kilowatt hours per year. This translated into electric rebates of more than $1 million from the power company and a savings of $400,000 per year for DOE.[vi]

Share-in-revenue

In May 1996, Jersey City, New Jersey turned over the operation of its water system to United Water. When the system was run by the city, the actual amount of water being paid for was only 66 percent. The new contract provides financial incentives for the contractor to increase this percentage. If the percentage rises to 70–75 percent, United Water keeps 5 percent of the increased collections. If the percentage rises to 75–80 percent, the water company keeps 10 percent of the increase in collections, and if the collection rate exceeds 80 percent, the company’s percentage rises to 25 percent of the increase in collections.[vii]

Share-in-savings

At the Illinois Department of Children and Family Services Foster Care each caseworker is assigned 33 cases per year. Caseworkers are automatically paid for processing 25 cases. If they place eight of the 33 children assigned, they “break even.” If they place less than eight of the 33 children, they “lose” in that they must service 26–33 cases and get paid for 25 cases. If they place more than eight of the 33 children, they share in the savings. In the first year, the number of placements increased by 120 percent. By the second year, the increase was 390 percent. The home care caseload declined by 41 percent while the number of placements doubled.[viii]

Share-in-revenue

The California Franchise Tax Board initiated its Accounts Receivable Collection System project to solve several business problems including the following:

  • Separate collection system within Franchise Tax Board generated individual billings resulting in taxpayers or debtors receiving separate bills for each debt type;
  • Duplication of effort in contacting taxpayer or debtor regarding the various liabilities owed; and
  • Automated account modeling to select accounts for collection activity was limited and inflexible.

The Accounts Receivable Collection System benefits were projected to be $35 million annually. Since implementation in 1998, the actual results have continued to exceed the projected annual benefits.[ix]

Regardless if you’re a Public or Private sector business, Impec Group along with our partners would appreciate an opportunity to meet with you and your team to discuss how we can tailor a program designed to optimize your requirements and budget to deliver a higher-level quality workplace environment for your most costly asset – your workforce.

To schedule an appointment, please call us at 408.330.9350 or contact us at info@impecgroup.com


References:

[i] State of California SO71 Increase the Use of Performance-Based Contracting http://cpr.ca.gov/cpr_report/Issues_and_Recommendations/Chapter_7_Statewide_Operations/Procurement/SO71.html

[ii] Reason Public Policy Institute and Performance Institute, “Performance Based Contracting: Designing State of the Art Contract Administration and Monitoring Systems, How to Guide No. 17,” by William D. Eggers (Los Angeles, California, May 1997), p. 1.

[iii] E-mail from the California Department of General Services, a three-year average total expenditure of $7.6 billion in state contracts based on total expenditures for FY 2000–2001—$7.2 billion, FY 2001-2002—$10.3 billion, FY 2002–2003—$5.5 billion.

[iv] Office of the Deputy Under Secretary of Defense for Acquisition Reform, Defense Pentagon, “Guidebook for Performance-Based Service Acquisition (PBSA)”, (Washington, D.C., March 2001), p. 1, (last visited June 10, 2004).

[v] Reason Public Policy Institute and the Performance Institute, “Performance Based Contracting: Designing State of the Art Contract Administration and Monitoring Systems, How to Guide No. 17,” pp. 11–12.

[vi] Alliant Energy Integration Services, “U.S. Department of Energy”, (last visited June 10, 2004).

[vii] Reason Public Policy Institute and the Performance Institute, “Performance Based Contracting: Designing State of the Art Contract Administration and Monitoring Systems, How to Guide No. 17,” pp. 12–13.

[viii] Reason Public Policy Institute and the Performance Institute Presentation, “Federal Outsourcing, Beyond A76: Linking Competitive Government with Performance-based Government Concepts in Outsourcing Initiatives”, by Carl Demaio, (last visited June 10, 2004).

[ix] Interview with Joan Rabang and Maria DeAngelis, Accounts Receivable Collection System project and Balanced Scorecard Approach, Procurement Office, California Franchise Tax Board, Sacramento, California (April 8, 2004).