Common contract types for instance, cost-plus, time-andmaterials,

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1 38 Contract Management June 2014

2 Contract Management June

3 Common contract types for instance, cost-plus, time-andmaterials, and firm-fixed-price have been used for decades to facilitate the delivery of goods and services to the U.S. federal government. Yet recently, a more effective approach to meeting the mission goals of U.S. public agencies has begun to gain traction with procurement officers and agency leaders the use of a particular type of incentive contract, the outcomesbased contract. Outcomes-based contracting is a procurement strategy that ties compensation to a contractor s ability to meet, or exceed, defined program outcomes in a meaningful and measurable way rather than simply linking contract payments to a contractor s ability to accomplish tasks on a project list. There are many ways outcomes-based contracts can be structured to ensure that the work performed meets program objectives. However, all rely on clearly defined performance goals, reporting and measurement, and the alignment of incentives or rewards to the successful achievement of program goals. When the focus is on results and outcomes, rather than on processes and outputs, procurement officers and agency leaders can better design contracts that drive innovative, cost-effective services; equitable risksharing; and measurable results. Unlike other contracting models, with outcomes-based contracting, the government doesn t assume all of the risk in fact, the contractor can be held fully accountable for its ability to achieve required outcomes. If the contractor does not deliver the outcomes stipulated in the contract, the government does not pay the outcome fee. This procurement strategy creates greater motivation for contractors to focus on helping achieve the program s desired outcomes rather than on simply completing tasks. THE TIME IS RIGHT FOR OUTCOMES-BASED CONTRACTING IN GOVERNMENT In today s environment of budget deficits, economic uncertainty, and increased public scrutiny, the government is increasingly under pressure to deliver better results with fewer resources. This pressure is driving 40 Contract Management June 2014

4 the need for a fundamental shift in the way the government acquires services, creating an opportunity to transition toward an outcomes-driven approach. Outcomes-based contracting grew out of the need to more equally distribute accountability and responsibility to the contractor. Governments in the United Kingdom, Australia, and other countries have been using this procurement methodology for years with remarkable success and the same principles can readily apply to U.S. government contracting. When executed effectively, this type of procurement model incents the contractor to more effectively leverage expertise and resources, thus yielding tangible, meaningful results. Amid growing skepticism about the implementation of massive public programs, outcomes-based contracting helps to ensure that agencies are good stewards of taxpayer funds by directly aligning contractor compensation to meeting project goals. As a result, little or no gray area exists between the contractor s delivery, the agency s mission, and the endcustomer s expectations. Whether driven by performance needs, budget realities, or both, outcomes-based contracting offers a risk-sharing mechanism that allows agencies to contract for measurable results or outcomes and it relieves them of the responsibility of paying for services that do not meet the program s performance expectations. This accountability helps agencies validate that taxpayer-funded programs are achieving value for citizens. A FOCUS ON THE FULL LIFE CYCLE OF SERVICE DELIVERY In the current contracting landscape, procurement officers often seek to mitigate risks by adopting procurement strategies that parcel out separate contracts spread across multiple contractors. In the case of a federal call center, for example, one company might do outreach, another might manage the contact center, and a third might handle automation. While each contractor may perform well in their specific domain, it remains complex and difficult to ensure that the initiatives across all contractors come together to meet project outcomes. In some instances, contractors have successfully delivered on their contracts, but the project failed at the key point of integration, leaving the government customer frustrated by disjointed processes and left paying for a project that didn t meet its goals. Contract Management June

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6 A holistic, outcomes-driven approach to service delivery projects can help avoid these breakdowns in the private sector s delivery of public services. Consider a scenario in which the desired outcome is to enroll eligible immigrants in a reform program. If the contractor is paid for successful enrollments, they are incented to find the best approach to locating and educating candidates including understanding language and cultural issues and then helping candidates collect the information required to apply for the program. The contractor s primary incentive would be to enroll immigrants efficiently and effectively in order to maximize program goals. The contractor then ties its success to enrolling a greater number of eligible constituents, which also happens to be the desired outcome for the program. STRIKING A BALANCE It is important to note that programs do not have to be exclusively outcomes-based to succeed. Procurement officers, agency leaders, and contractors can adopt a progressive or hybrid model, one in which the contract payments transition over time. By designing procedures that directly impact the desired outcomes and measures, the transition from traditional contracts to outcomes-based contracts is easier to attain, and fosters a balance between performing specific tasks and ensuring they contribute to the program or project goals. In any successful outcomes-based model, government and contractors must be completely aligned on how outcomes will be defined, tracked, and measured. Government entities must be able to clearly identify and prioritize their desired results as one of the first steps in developing a request for proposals. Ideally, the agency or contracting body should identify a few key performance measures that become pay points and are clearly aligned with its vision of success, rather than setting too many performance goals that divert attention from those that are really most important. Often with a new program, however, the desired outcomes are identified but the actual metrics are hard to gauge. A hybrid model enables the agency to transition to an outcomes-based contract when the data is available to establish metrics that align with program goals. MYTHS VERSUS REALITIES When considering the transition to a resultsbased procurement strategy, often misconceptions arise about what an outcomesbased contract is and what it is not: Myth: Outcomes-based contracting means losing control over how work is performed. Reality: The government has a clearly defined outcome that the contractor must achieve. Thus, the government has full control over the desired outcome, and is even more effectively able to hold the contractor accountable for results. This procurement strategy also does not limit the government from including specific required components or methodologies for how the work is performed. Contract Management June

7 OUTCOMES-BASED CONTRACTING Measures success, not in terms of what tasks were performed, but in the impact of what outcomes were achieved; Aligns with mission, program, and budget goals as identified in the contract structure and documented with performance targets; Motivates contractors to align their work with the program s goals; Facilitates cost predictability and reduced total cost of investment; and Contributes to a better return on investment of taxpayer funds. to pass on cost reductions to the government to help ensure they continue with the work. The long-term result for the government is lower costs due to an efficient and effective program. Myth: Outcomes-based contracting requires complex program management skills. Reality: In fact, a results-based approach often simplifies oversight and surveillance because the government is not responsible for tracking and managing the contractor s every task. The government is still responsible for providing the contract oversight needed to ensure the contractor is achieving outcomes defined and measured in the course of contract administration. But this strategy also allows the contractor the flexibility to apply knowledge and expertise to make the program successful and efficient. Myth: Outcomes-based contracting limits competition since many contractors are not willing to assume greater risk or accountability. Reality: Implementing a progressive model can help to open the competitive landscape by attracting contractors who are capable to do the job effectively and efficiently, as it can be more profitable than fixed-fee contracts when they can successfully deliver the defined outcomes. It helps to discourage contractors who may have difficulty achieving the program s goals, because if they fail, they will not be fully compensated. Myth: The most cost-effective model for government procurement is costplus-fixed-fee. Reality: While cost-based contracts have a place when buying commoditized services that require little subject matter expertise, they also provide little to no incentive for efficiency, timeliness, or effectiveness. In an outcomes-based contract, the contractor is incented to achieve the program s outcomes in a timely and efficient manner, as this leads to earning contract incentives. When those contracts are up for re-bid, the incumbent contractor will be incented Myth: It is too complex to design an outcomes-based contract. Reality: Outcomes-based contracts can take many forms. A cost-plusaward-fee in which the award fee is tied to outcomes could lie at one end of the spectrum, with a fixedpayment-per-outcome at the other end. While the fixed-payment model would give the contractor much more incentive to meet program objectives and improve efficiency, the cost-plus model could still tie some portion of the payment to outcomes if defined appropriately. The most successful contracts tie payments to a few critical outcomes. Myth: It s too hard to utilize an outcomes-based contract on a new program because there are too many unknown factors. Reality: In such case, the contract can be initially set up on a cost-basis and then include the option for the agency to switch to an outcomes-based contract once a baseline is established. 44 Contract Management June 2014

8 OUTCOMES-BASED CONTRACTING IN ACTION: LEVERAGING FLEXIBILITY AND RISK-SHARING TO ACHIEVE PROGRAM SUCCESS Nothing is more powerful than seeing real results. Several federal, state, local, and international governments have already begun employing an outcomes-based procurement strategy and benefiting from its success. The following are just a few examples. District of Columbia: Achieving Permanent Results for Temporary Assistance for Needy Families Using an outcomes-based approach to its jobs programs, the District of Columbia Temporary Assistance for Needy Families (DC TANF) Program supports participants and their families in overcoming barriers to employment. Traditional government employment programs are evaluated by metrics such as the number of interviews an applicant is granted by potential employers or how quickly they are placed in a job. Yet, because that traditional approach rewards the process, and not the result, it encourages the contractor to send the candidate on many interviews but not necessarily ones that could lead to employment that will build long-term self-sufficiency. In contrast, the DC TANF Program measures its success based on long-term job placement, and compensates contractors according to their efforts to support the program at four milestones: Initial engagement, Job placement, 45-day job retention, and 90-day job retention. This focus on finding sustainable employment for the candidates versus merely achieving specific tasks puts the onus on the contractor We will teach you how to research, read, interpret, and apply the FAR REGISTRATION OPEN NOW FOR THESE UPCOMING CLASSES (503) Arlington Denver Seattle On-site June 9 13, 2014 Arlington, Virginia July 14-18, 2014 Arlington, Virginia July 21-25, 2014 Denver, Colorado August 4-8, 2014 Seattle, Washington August 18 22, 2014 Seattle, Washington October 27-31, 2014 Arlington, Virginia November 17-21, 2014 Arlington, Virginia This was the most intellectually stimulating course I have EVER taken!! Contracting Officer, Uniformed Services University of the Health Sciences Bring pen, paper, and your mind We will provide the rest! Enlist today at Short on travel funds? We will come to you. Call for private on-site information Contract Management June

9 to help individuals establish routines, achieve stability, position themselves for career advancement, and ultimately transform jobs into sustainable careers. United Kingdom: Compensating Contractors for Helping Citizens Transition to Economic Independence through Longterm Employment The U.K. Department of Work and Pensions launched an aggressive welfare reform initiative in 2010, referred to as The Work Programme. The Department s primary objective is to transition people off of public benefits into long-term employment so that these individuals would achieve economic independence. When the focus is on results and outcomes, rather than on processes and outputs, procurement officers and agency leaders can better design contracts that drive innovative, cost-effective services; equitable risk-sharing; and measurable results. As another example of a major outcomesbased procurement strategy, the Work Programme aims for long-term positive results. Thus, under the program, contractors are required to meet a minimum level of service, but are more heavily compensated for achieving the desired program goal of long-term employment and job sustainment. The Department pays contractors a small upfront attachment fee when job seekers are enrolled into the program. This is simply to meet minimum service requirements and support the job search over the two-year period. However, contractors do not receive another payment until long-term employment is achieved, as defined by the program, which in most cases is six months. Once job seekers achieve the long-term employment outcome, contractors are further incentivized through sustainment payments. Sustainment payments are paid to contractors if the NationalEducationSeminars NATIONAL CONTRACT MANAGEMENT ASSOCIATION 100 Worst Mistakes in Government Contracting Pittsburgh Chapter June 12, 2014 Butler, PA National Office June 12, 2014 Reston, VA Solicitations, Bids, Proposals, and Source Selection Monmouth Chapter June 3, 2014 Eatontown, NJ Led by expert presenters, NCMA s National Education Seminars provide a full day of in-depth and in-person instruction on current issues and trends in contract management. With important titles such as 100 Worst Mistakes in Government Contracting, Contract Types, and Risk Management, it s obvious why these seminars are in high demand. NCMA offers 8 essential education titles nationwide. Find out about upcoming seminars in your area. Visit to view the upcoming calendar and to learn more about each seminar. Visit us online at CM/NES or call x Contract Management June 2014

10 job seeker remains in employment beyond the six-month time period. Sustainment payments can be paid for up to 17 weeks to achieve the desired outcome of getting the long-term unemployed to transition off public benefits into employment and to ultimately achieve economic independence. Contractors have the flexibility to design the program that best suits the needs of the population groups they are serving the process is not mandated; the outcome is. Outcomesbased payment amounts also vary among the different population groups not only to acknowledge the fact that job placement for certain populations can be more difficult, such as the recently incarcerated, but also to ensure that the contractor isn t targeting the low-hanging fruit and is serving all populations. This program fully leverages the flexibility inherent in outcomes-based contracting. Online Contract Management Program Earn a minor or certificate in 17 months or less from top-ranked Saint Louis University. Fulfills NCMA educational requirements for professional certifications. Accelerated, eight-week courses. Apply online at or call A PHILOSOPHICAL SHIFT: THE FUTURE OF OUTCOMES-BASED CONTRACTING Delivering quality outcomes will become even more important in the future as constituents expect a government customer experience that mirrors the private sector one. Understanding the best mode of communications to reach constituents and meet their needs may necessitate an investment in new technologies. But it is also prudent to ensure that investments are made to deliver the desired results of meeting the needs of consumers rather than of simply following the latest technology trends. Right now, leaders across the political spectrum are engaged in the bold and necessary legislative thinking that may result in immigration reform. This would have major significance for federal, state, and local governments that would be responsible for enacting the resulting mandates. It would also involve engaging millions of people many of whom have no permanent U.S. government records under their true identities and lack proper documentation or formal legal status in a new government program. Immigration reform may also significantly impact worker Visa programs, thus forcing new registration, program outcome monitoring, and labor market assessment activities. The outreach and associated efforts that will be necessary to communicate these new rules and regulations can be complex and confusing. Moreover, successful implementation of immigration reform will certainly require dedicated public education efforts to ensure the public understands the process and their options. During the passage of the Immigration Reform and Control Act of 1986, the U.S. government was not able to reach and educate applicants (and many still felt distrustful of the process). The result was a much lower turnout than expected. To ensure success for future programs, leadership teams need to be focused on how they will structure these programs to deliver the best results for the public. If immigration reform becomes law, the government is likely to turn to contractors for help in implementing ensuing regulations, since the private sector can provide the expertise and flexible, scalable solutions. Whether reform occurs via sweeping legislation or piece by piece, these are significant changes that can impact immigration in a time of great fiscal challenge. Immigration reform is an ideal arena for outcomes-based contracting. It offers the promise to make a positive contribution to the overall effort to manage costs, achieve measurable results, and stand the tests of rigorous public and budget scrutiny. To meet demands and expectations of the American people, government agencies must demonstrate cost-effective results and value for public expenditures supported by proven outcomes. Costs must be managed, efficiencies must be identified, and results must be ranked as the top priority. Outcomes-based contracts have a role to play as vehicles that drive performance, encourage innovation, share in both risk and reward, and finally, motivate positive change in program operations for the long-term success of both government and industry. CM ABOUT THE AUTHOR THOMAS ROMEO is president of MAXIMUS Federal Services, a subsidiary of MAXIMUS, Inc., dedicated to providing business process management solutions to federal government agencies and programs. Send comments about this article to cm@ncmahq.org. Contract Management June