The Washington State Auditor's Office recently released a useful report on performance-based contracting (prepared by Berk & Associates) as part of its State Government Performance Review initiative. Here's a brief excerpt from the report's intro:
The Illinois Department of Children and Family services moved more children to adoption in 1999 than in the previous seven years combined and saw a 40 percent decline in caseload in three years. This achievement was accomplished not through changing contractors, but through changing the contracting approach to encourage contractors to move children to permanent homes rather than keeping them in foster care.
Could Washington gain similar improvements by changing its contracting approaches? After all, in the 2007-2009 biennium, Washington state spent more than $21 billion on contracts with social service providers, architectural, engineering, and construction firms, and other providers of goods and services. Because these contracts represent a significant part of state expenditures, the state should take every measure to maximize the return on that investment. Performance contracting approaches are an important tool to encourage improved efficiencies, greater focus on desired outcomes, and creative problem solving among vendors.
Governor Christine Gregoire issued Executive Order 10-07 on November 29, 2010, calling for all new state agency contracts for products and services to meet performance contracting standards. The order put into motion a series of initiatives to increase the use of performance contracts, including clear minimum standards consistent across contract oversight agencies. Initial efforts have focused on improving state contracting practices generally and establishing fundamental best practices, including increased use of performance measures and tying payment to the delivery of work products. At the Governor’s request, the State Auditor's Office is conducting an evaluation of performance contracting practices to establish an understanding of current practices.
This research paper provides an introduction to performance contracting and discusses its benefits. It covers two categories of performance contracts: deliverable-based contracts and results-based contracts. Deliverable-based contracts, with payment tied to achieving project milestones and completing work products, are a clear improvement over conventional time and materials contracts in which vendors are paid for hours worked, rather than deliverables or outcomes. The emphasis of our discussion is on results-based contracts, in which payment is tied to the successful achievement of desired results.
The full report is available here, and the full archive of the SAO's "2011 State Government Ideas List" series of reports is available here. Also, the full text of Gov. Gregoire's Executive Order 10-07 from November 2010—which requires the development of state standards for performance-based contracting and mandates the use of performance contracts by all cabinet agencies, among other provisions—is available here.
(hat tip: Jason Mercier @ Washington Policy Center)