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WA State Auditor Issues Second Report on Performance-Based Contracting

Last week, the Washington State Auditor's Office released an excellent new report that should be required reading for policymakers and government administrators interested in performance-based contracting (PBC). The report, prepared for the Auditor by the management consulting firm FCS Group, offers a pragmatic and comprehensive review of PBC in practice, by way of presenting the results of a survey of contracting practices in 34 state agencies in Washington, a review of 461 state contracts, and over 100 interviews with state procurement staff and managers.

The PBC report was prepared at the behest of Gov. Christine Gregoire, who issued an executive order last November requiring new state standards for PBC and mandating its use by all cabinet agencies (see discussion here. It also follows on the heels of a separate Auditor's Office report released earlier this year that presented an introductory overview of the PBC concept.

There's a lot to digest in the new report, so I'd recommend a full reading. It basically paints a picture of a state that's evolving in its procurement aptitude as it shifts from "Procurement 1.0" (standard time-and-materials, or input-based, contracts) to "Procurement 2.0" (PBC, which shifts the focus of procurement to purchasing deliverables, outcomes and results). Like any shift from the simple to the more powerful and complex, it's a maturation and growth process that naturally takes time. Accordingly, the report shows that agencies in Washington State are starting down the path towards PBC and making progress, with significant opportunities to drive PBC further in terms of scope, sophistication and execution. Some of the key takeaways from the research:

  • 31 of 34 agencies (91%) had already started using PBC contracts before 2010, and over half report using PBC for most or all of their contracts. Only one agency reports not having begun to use PBC at this point.
  • 92% of the contracts reviewed met the state’s basic PBC standard of identifying deliverables and tying payment to successful completion or delivery.
  • 50% of contracts included performance measures or outcomes. However, only 15% tied payment to achievement of those measures or outcomes.
  • 8% of contracts included performance incentives (e.g., bonuses for exceeding performance standards), and 22% included penalties for non-performance.

The report goes on to focus in-depth on a range of issues that arose from its surveys and staff interviews, including current contracting monitoring practices (and suggested improvements), challenges implementing PBC and lessons learned, bringing performance to contracts for federal pass-through grants, and the use of standardized templates and master contracts to ease PBC implementation.

The report concludes with an overview of best practices in PBC implementation and a set of recommendations for Washington State that collapse down into four general categories:

  • increasing the use of performance/outcome measures for payment,
  • improving contract management and contracting processes,
  • increasing staff expertise and capacity with PBC, and
  • educating and collaborating with contractors.

As Jason Mercier at the Washington Policy Center noted in his recent overview of the report, one of the key recommendations (among many good ones) identified as a "leading practice" was:

Establish a centralized office or staff with a high degree of expertise in performance measurement and performance-based contracting to provide technical assistance to agencies in developing and improving their use of performance measures and outcomes.

Establishing a dedicated PBC team—a "center of excellence" in procurement, if you will—is a best practice based on global experience in privatization and public-private partnerships, as my colleague Adrian Moore and I discuss at length in this 2010 Heartland Institute/Reason Foundation report. For more, see here and here.

Among other benefits, the "center of excellence" can be quite helpful at advancing several of the report's other recommendations, particularly with regard to expanding agency staff training and technical assistance in implementing PBC. The basic idea is to establish a center of excellence that can disseminate best practices and innovations in PBC across state agencies in an enterprise-wide approach, with key areas of focus in two critical and tricky areas: the mechanics of PBC, and how to conceptualize and measure performance in the first place.

There's much more in this valuable report, and it's worth a detailed read whether you're in Washington State or elsewhere. PBC is akin to a new sweater that looks great but is itchy when worn at first. It takes some time for the itching to go away and the sweater to feel comfortable, but it's worth it in the end, because that sweater is of a lot higher quality than the old one it replaced.

Kudos to the authors and the Auditor's Office for advancing the ball forward on PBC (again)—and to Gov. Gregoire as well for her leadership on the issue—because it will ultimately drive better value for taxpayer money by focusing state contracting squarely on maximizing results and outcomes. To drive even more value, I hope that the focus on higher quality contracting will lead to the expanded use of contracting in Washington State, as there are certainly a lot of untapped opportunities there, but that's another story.

Leonard Gilroy is Director of Government Reform


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