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FREQUENTLY ASKED QUESTIONS ABOUT PERFORMANCE MEASUREMENT

By Ralph Fox,2014-06-18 09:53
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FREQUENTLY ASKED QUESTIONS ABOUT PERFORMANCE MEASUREMENT

FREQUENTLY ASKED QUESTIONS ABOUT PERFORMANCE-

    BASED INCENTIVES

    ? What are performance-based incentives?

    ? Why are performance-based incentives used?

    ? How are performance-based incentives constructed?

    ? How are incentive payments structured?

    ? What are the review and approval requirements for performance-based incentives?

    ? How are performance-based incentives different from other contract incentives?

    ? Are cost and schedule incentives one in the same?

What are performance-based incentives?

Performance-based incentives should be used when they will motivate the contractor to

    accomplish critical requirements and induce better quality performance. Much of the DOE

    Performance Based Contracting Guide which can be found at

    http://management.energy.gov/documents/pbiguide.doc, is devoted to the subject of incentives.

Performance measures and their associated requirements which are to be specifically

    incentivized, fall into at least three classifications:

    ? Those significant performance measures for which the desired performance will achieve,

    but not exceed, the specific performance level stated in the SOW;

    ? Those performance measures for which the desired performance would exceed the

    performance level stated in the SOW (performance which would directly benefit the

    government); and

    ? Those performance measures which are remedial in nature (described below).

Performance measures could be deemed to be "significant" if their accomplishment is on a

    baseline’s critical path, if they must occur in order to accomplish other performance measures, or

    if they are complex, or they are highly visible and politically sensitive. They may be deemed to

    be of a "remedial" nature if they focus the site contractor's attention to an area where satisfactory

    performance has not been achieved in the past and such continued performance could jeopardize

    the program.

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Why are performance-based incentives used?

Appropriate incentives are created to motivate contractors to meet and exceed higher levels of

    performance than have been expected in the past. Criteria are included to require or incentivize

    contractors to pursue opportunities to subcontract for tasks that other entities may better perform

    at less expense than the management contractor. In addition, provisions may be included that

    create specific incentives for cost savings and improved financial accountability. For reference

    see Department of Energy’s Reference Book for Contract Administrators.

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How are performance-based incentives constructed?

There are three general categories of incentives: subjective, objective and hybrid.

    o Subjective Incentives are associated with performance measures that are not well

    defined (i.e. subjective performance measures). The success with which a contractor

    meets the performance measure is determined by the government which will consider the

    related conditions under which the work was performed and the contractor's specific

    performance as measured against the government's objectives. Care must be taken not to

    force a subjective incentive into an objective form.

    o Objective Incentives are associated with performance measures that tend to be specific

    in nature and lend themselves to evaluation against quantifiable measures (i.e. objective

    performance measures). To the extent that a performance measure is defined and

    measured in objective terms, the fee associated with its achievement is earned based on

    the extent to which the contractor's performance meets those objective terms.

    o Hybrid Incentives are incentives which contain both subjective and objective elements.

    An example of such an incentive might be the achievement of an acceptable Safety

    Program by a specific date. The extent to which it is acceptable will be determined

    subjectively, while the date of achievement will be determined objectively.

Performance-based incentives may include rewards and penalties which are employed to

    motivate a contractor to achieve higher levels of performance under a given contract. Incentives

    may be of a monetary nature (e.g. fee) or a non-monetary nature (e.g. additional work).

    Incentives may apply to performance or schedule, and cost performance measures and incentives

    may be subjective, objective, or a combination thereof. They may be incremental or continuous.

    Several types of incentives may be included in one contract and applicable to one performance

    measure or group of performance measures or they may be separated into individual contracts

    along with related work scope. Incentives may be used in contracts with for-profit and non-

    profit contractors. The Performance Based Contracting Guide which can be found at

    http://management.energy.gov/documents/pbiguide.doc and the Department of Energy’s

Reference Book for Contract Administrators provides more information regarding categories,

    types, and structure of incentives.

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How are incentive payments structured?

Depending on the contract type incentive payment structure can be structured to be paid upon

    completion of the PBI, with the award fee plan criteria on a quarterly, semi-annual, or annual

    basis. For example, a CPAF contract is generally structure to make payment on a semi-annual

    basis for the award fee plan criteria, while the PBI’s are paid upon completion. However, under a CPIF contract the incentives usually cost and/or schedule are generally structured on a quarterly

    provisional basis for payment. The Performance Based Contracting Guide which can be found at

    http://management.energy.gov/documents/pbiguide.doc provides more information regarding

    payment of incentives.

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What are the review and approval requirements for performance-

    based incentives?

The Office of Contract Management reviews and approves performance-based incentives

    (Acquisition Guide Chapter 71). The following information shall be provided with the

    documents submitted to Office of Contract Management for Headquarters Business Clearance

    review and approval prior to commencement of negotiations with an offeror, or in the case of an

    existing contract, the incumbent contractor:

    ? Name and telephone number of the cognizant Headquarters program official;

    ? Name, telephone number and email address of the cognizant Contracting Officer and

    Contract Specialist;

    ? The Performance Evaluation and Management Plan/Award Fee Plan (or equivalent

    document);

    ? Documentation supporting the fee methodology;

    ? Documentation supporting the selection and/or changes to performance-based

    requirements, objectives, measures and incentives; and

    ? Evidence of local independent review and approval including legal review. This includes

    submission of comments and resolution thereof.

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    How are performance-based incentives different from other

    contract incentives?

D. Types of Incentives

In addition to the three categories of incentives described above, incentives may also be

    defined by type. These types include performance, schedule, management and cost.

o Performance Incentives may be both subjective or objective in nature or some

    combination thereof. Their main intent is to focus the contractor's performance on those

    performance measures deemed significant for the period being evaluated. Performance

    incentives may reward the contractor for exceeding expected performance in some

    performance areas, achieving significant baseline performance, or for correcting poor

    past performance.

o Schedule Incentives may be both subjective or objective, however, subjective schedule

    incentives are of questionable value. To place an incentive on schedule, DOE should

    receive a benefit (e.g. the achievement of a significant milestone with an ambitious

    delivery date or the early completion of a milestone allowing additional work to be

    performed). The reward for achievement of a schedule incentive should be conditioned

    on the satisfactory achievement of all related performance measures.

o Management Incentives may be both subjective or objective, and may address such

    things as the contractor's overall judgment, responsiveness to stakeholder concerns, etc.

    They may be inherent within other incentives. Due to the nature of the DOE site

    contracts, it may be desirable to incentivize management separately from other

    performance incentives. Often management incentives will be subjective in nature

o Cost Incentives may also be subjective or objective in nature. Subjective cost incentives

    should be avoided if possible in that the subjective evaluation of cost reductions or

    increases is not nearly as effective as objective cost incentives. Such goals as "... perform

    in a cost efficient manner..." or "...reduce costs 10% below the previous baseline...”

    without further definition are hard to verify effectively. Objective cost incentives can

    lead to more efficient performance, but only to the extent that several conditions are met:

o The work to be performed must be defined and estimated.

o A cost baseline must be established (preferably negotiated at a fair and reasonable price

    for the work scope).

o The contractor must have an accounting system that will accurately allocate and track

    costs.

o A method of sharing cost savings or overruns must be agreed to.

Besides these conditions, there are several other factors that must be considered. These include

    the relationship between the cost incentives and any other incentives that may exist, the extent to which the contractor has control over the work scope and the susceptibility of the work scope to

    change, etc. Objective cost incentives may apply to the total work scope, a specific severable

    effort, or a well-defined process improvement or change.

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Are cost and schedule incentives one in the same?

Cost and schedule incentives are two separate types of incentives. Schedule Incentives may be

    either subjective or objective; however, subjective schedule incentives are of questionable value. To place an incentive on schedule, DOE should receive a benefit (e.g. the achievement of a

    significant milestone with an ambitious delivery date or the early completion of a milestone

    allowing additional work to be performed). The reward for achievement of a schedule incentive

    should be conditioned on the satisfactory achievement of all related performance measures.

    Objective cost incentives can lead to more efficient performance, but only to the extent that

    several conditions are met:

? The work to be performed must be defined and estimated.

    ? A cost baseline must be established (preferably negotiated at a fair and reasonable price for

    the work scope).

    ? The contractor must have an accounting system that will accurately allocate and track costs. ? A method of sharing cost savings or overruns must be agreed to.

The Performance Based Contracting Guide which can be found at

    http://management.energy.gov/documents/pbiguide.doc provides more information regarding the

    different types of incentives. Also the Department of Energy’s Reference Book for Contract

    Administrators Acquisition Guide DOE/HR-0137 Appendix to Chapter 70 provides information.

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