Performance-Based Contracting

Performance-based contracting means structuring a contract around the results or outcomes the buyer needs, rather than prescribing how the contractor performs the work. The buyer states the purpose of the work, sets measurable standards, and leaves the choice of method to the supplier.

The U.S. Department of Defense describes the approach as structuring an acquisition around "the purpose of the work" rather than the manner in which it is performed (DFARS change notice). A closely related term, performance-based acquisition (PBA), carries the same meaning: an acquisition built around results to be achieved rather than how the work is done.

The building blocks of a performance-based contract

Performance-based contracts share a set of characteristic elements:

• Requirements are written as results, not as methods or step-by-step instructions.
• Measurable performance standards define what acceptable delivery looks like.
• Quality-assurance surveillance plans give the buyer a structured way to check performance.
• Fees or fixed prices can be reduced when services are not performed or do not meet contract requirements.
• Financial incentives can be added where appropriate.

These elements work together. The standard says what is expected, the surveillance process shows whether it was delivered, and the payment terms respond to the result.

How it differs from a prescriptive statement of work

A prescriptive statement of work tells the contractor which tasks to carry out and how. A performance-based approach specifies the required outcome, service level, deliverable or performance standard, and gives the contractor flexibility over the process used to reach it.

The model is mainly associated with services acquisitions and defence sustainment. Terms that appear alongside it include performance-based services acquisition (PBSA), performance work statement (PWS), performance standards, quality-assurance surveillance plan (QASP), performance incentives and performance-based payments. A PWS, for example, is the document in which the buyer sets out the results and standards instead of a task list.

Performance-based contracting in Canadian defence sustainment

Public Services and Procurement Canada states that large-scale procurement is moving toward models that include performance-based contracting. Its summary review of cost principles places the model in the context of large-scale procurement and sustainment.

The review explains that, under this model, contract effectiveness is measured through value for money and price rather than through cost and profit alone. It identifies Canada's sustainment initiative as the vehicle through which performance-based contracting is being studied for implementation. It also notes that existing Canadian rules did not provide guidance on its use at the time of the review, even though the United Kingdom and Australia were using it more often.

The Canadian source discusses study and possible implementation in defence sustainment. It does not establish performance-based contracting as a universal requirement across Canadian procurement.

What it means for a supplier bidding on Canadian public contracts

Read solicitations for how the buyer describes the work. If the documents describe required outcomes instead of prescribing every method, you are likely looking at a performance-based structure. In that case, expect the following:

• You will need to meet measurable performance standards and allow the buyer to assess your performance through a surveillance or quality-assurance process.
• Payments, fees, price reductions or incentives can be linked to meeting specified performance requirements.
• In defence sustainment, the buyer may assess the arrangement on price, value and incentives, not only on an examination of your cost and profit (see the PSPC review).

Bid teams should price against the standards they will be held to, and should explain in the proposal how their chosen methods will deliver the stated results.