Making the Grade: Fundamentals in Performance-Based Contracting

Do you make your own clothes, or do you buy them? Do you do your own auto maintenance, or take your car to an auto service center? Do you paint your house, or hire a painter?

In these and countless other areas, we have to make a decision: Are we better off doing or producing something ourselves, or by paying someone else to do it? There isn’t one right answer for everyone, since some people are much more capable and efficient at these tasks than others. If you’re very good at something, you’ll probably choose to do it yourself; if not, you’re better off paying someone else for it.

Individuals, businesses, nonprofit organizations, and government agencies, including public schools, face this decision. In recent years, there has been a growing trend toward contracting for goods and services needed in the schools rather than having them provided by school district personnel using assets owned by the district. Just as it may be less expensive for you to buy your clothes instead of trying to make them, it may be less expensive for school management to contract with companies that specialize in transportation, maintenance, food service and so on.

In doing this—which is often referred to as "contracting out"—schools are beginning to learn what companies have known for a long time: Some contracts are better than others. It used to be that when schools (and government units generally) contracted with the private sector, the contracts tended to emphasize the inputs, i.e., the procedures, processes, time, labor and equipment to be used and so on. That approach sometimes led to high costs at the taxpayer’s expense.

The trend today is toward performance-based contracting (PBC). In performance-based contracts, the objective of the contract is clearly spelled out, but how best to go about accomplishing it is left up to the contractor. The assumption underlying PBC is simple: The contractor has more knowledge about providing the good or service, so just give him an incentive to do it the best way.

A performance-based statement of work consists of a statement of required services in terms of an output or outcome and measurable standards to judge whether it's being achieved.

This does not mean, however, that schools should sit idly by and not take an active part in assuring that a quality job is performed. In order to avoid the pitfalls of contracting out, schools must be careful to obey PBC do’s and don’ts. After all, there are interest groups that want public-private partnerships to fail so they can say, "See, contracting out doesn’t work. Now let’s go back to the old way of doing things." The interest group in question may be a teacher or other public employee union.

When dealing with their own money, the unions often contract out, but when it comes to government officials dealing with the taxpayers’ money, they are adamantly opposed.

Here are some key points to successful PBC.

Good Job Analysis. Before a service can be contracted out, it is essential to have an accurate idea of the magnitude of the task. If, for example, school bus maintenance was being contracted for, the officials would need to have an accurate idea of the amount of maintenance necessary to get and keep the vehicles in optimal working order. Several years ago, Los Angeles County contracted with a firm for the maintenance of its entire vehicle fleet, but soon after the contract began, costs had risen significantly. Disputes arose and the contract was eventually terminated. The root of the problem was that county officials had badly underestimated the amount of work needed, since their records on the condition of vehicles and amount of backlogged maintenance were inaccurate.

Performance-Based Statements of Work. A performance-based statement of work consists of a statement of required services in terms of an output or outcome and measurable standards to judge whether it’s being achieved. If the desired outcome is safely delivering students to and from school, that should be the statement of work. It is important not to gum up the works by mixing in nonoutcome factors, such as types and numbers of vehicles, routes, etc.

Maximum Contractor Autonomy. Remember the premise of contracting out. The contractor is an expert in the field and knows or can figure out how to do whatever needs doing better than you can. It follows that the contract must give the contractor the maximum degree of autonomy to do that. To restrict a contractor’s autonomy, as with mandates that he comply with various hiring preferences, provide specified benefits, or obtain supplies from only certain sources, is to impede his ability to get the job done. For example, Baltimore at one time contracted with Education Alternatives, Inc. for the management of its schools, but insisted that the school board retain control over personnel. Many teachers were hostile to EAI and undermined its efforts—but the company could do nothing about it. Where EAI did have personnel authority, in janitorial work, its job was exemplary.

Incorporate Incentives into the Contract. Private sector contracts usually include carrots and sticks to reward especially good performance and penalize substandard performance. Traditionally, government contracts have done neither, but they should. In Minneapolis, the school board contracted for just $5,000 per month with Public Strategies Group to run its schools in the same capacity that a district Superintendent would. However, the company could earn far more depending on how well it did in meeting several goals, including increasing attendance and raising the degree of family involvement. The firm earned two-thirds of the maximum possible incentive compensation.

Contracting with outside providers frequently makes sense for schools and performance-based contracts may be the best way to ensure the highest quality products and services, at the lowest cost, and with the fewest managerial headaches for everyone.