Performance-based Contracts Research Articles

Can PPP Contracts Improve the Performance of the National Road Sector?

This article attempts to answer two questions. The first is whether Public-Private Partnership (PPP) contracts can be easily implemented for national road preservation projects. The second is how the PPP contracts can increase the value for money (VfM) of the national road preservation budget. The institutional environment of national road sector is discussed first in order to highlight the particular role of road preservation contracts between the Government and the business sectors in that environment. Then, the discussion continued with types of contracts that have been used in this sector, historically. At the time of this writing, PPP contract has not been used in this sector. To approach this matter the next discussion is about PPP and VfM definition in the current regulation as well as their features in literature. Based on this discussion, characteristics comparison of the available types of contract is developed, including how these types of contracts, especially KPBU contracts, can be used to achieve VfM. The following section presents a simple simulation method to assess VfM achievement based on comparison of present value cost of public service comparator and PPP. The simulation is used to understand how the variables that determine VfM interact with each other in determining the final result. Finally, the last section contains the conclusions on how PPP contracts can increase the VfM of national road preservation project. Value for Money can be achieved using PPP contract if risks transferred from the Government to business / private entity is significant enough so that the combination of both incentives and the entity’s capability can reduce the total cost of risks more than to compensate the difference between the entity’s cost of capital and the Government cost of capital. In this case, the scale of the project is also important, given the complexity of PPP contract resulted in relatively higher transaction costs compare to other types of contracts. This article does not discuss the design of performance-based incentive-oriented contract for national road preservation projects. In addition, the risks analysis done in the numerical simulation is simplified and, thus, requires further data collection for more detailed application. The externalities come from the construction phase to the operational and maintenance phase have not yet based on empirical evidence in this sector. This article also does not address issues on how to create level of competition in the procurement stage as well as in the operational stage that can promote value for money. Lastly, the risks discussed in the types of contracts only limited to supply risks. The use of PPP contracts to replace conventional procurement contracts will not automatically reduce primary balance deficit. Assessments and steps to ensure the achievement of value for money from the PPP contract must be done and planned in advance. This is the first article discussing value for money from PPP contract for Indonesian national road preservation projects.

Weigh-in-motion at implementation risk sharing on performance-based contract in Indonesia national road

The Government of Indonesia has implemented an integrated contract, performance-based contract (PBC) to preserve national roads since 2011. Comparing with conventional agreements that prioritize input and maintenance processes, PBC prioritizes the output and outcome of clear and measurable road performance. In the performance-based contracts are required WIM (weigh in motion) tools to monitor the overloading vehicles throughout national roads with PBC and should be provided by the contractor as stated in the contract. However, the installation of WIM tools with the high budget has not been beneficial for the contractor because not followed by punishment for the “overloading” vehicles. PBC is the risk sharing between government as road authority and the contractor as the private sector. So, in PBC practice not allowing any significant losses on either party. This study resulted in a performancebased contract simulator by combining WIM technology and dynamic system methods. If the government succeeds in stopping the overloading vehicle entering the road with PBC contract but the contractor still fails to meet the minimum performance, that is the own risk of the contractor and resulted in the imposition of a fine to the contractor as established in the PBC contract. .

Developing the simulation model towards sustainability of implementing performance-based contract

Performance-based contracts (PBC), one kind of the delivery system has been conducted in Indonesia starting in 2011. The aim of the implementation of PBC in Indonesia is to solve the premature deterioration of national roads in Indonesia that still occur to date and to achieve the best level of service. Implementation of performance-based contracts is not as easy as imagine since many contractors still don’t understand to control the risk if they are given work with performance-based contracts. In this study used the system dynamic approach, the choice of this method because PBC is a long-term contract, where past events can affect current and future events, as well as future events, can be avoided by evaluating today’s events and events in the past. In this paper will show the interface generated after the base model Stock Flow Diagram (SFD) is verified. After the model has been validated, the model is ready as a simulation tool to get the best performance-based contracting mechanism and implementation in Indonesia. So, it can be used in developing countries.

Contracting outsourced services with collaborative key performance indicators

AbstractWhile service outsourcing may benefit from the application of performance‐based contracts (PBCs), the implementation of such contracts is usually challenging. Service performance is often not only dependent on supplier effort but also on the behavior of the buying firm. Existing research on performance‐based contracting provides very limited understanding on how this challenge may be overcome. This article describes a design science research project that develops a novel approach to buyer–supplier contracting, using collaborative key performance indicators (KPIs). Collaborative KPIs evaluate and reward not only the supplier contribution to customer performance but also the customer's behavior to enable this. In this way, performance‐based contracting can also be applied to settings where supplier and customer activities are interdependent, while traditional contracting theories suggest that output controls are not effective under such conditions. In the collaborative KPI contracting process, indicators measure both supplier and customer (buying firm) performance and promote collaboration by being defined through a collaborative process and by focusing on end‐of‐process indicators. The article discusses the original case setting of a telecommunication service provider experiencing critical problems in outsourcing IT services. The initial intervention implementing this contracting approach produced substantial improvements, both in performance and in the relationship between buyer and supplier. Subsequently, the approach was tested and evaluated in two other settings, resulting in a set of actionable propositions on the efficacy of collaborative KPI contracting. Our study demonstrates how defining, monitoring, and incentivizing the performance of specific processes at the buying firm can help alleviate the limitations of traditional performance‐based contracting when the supplier's liability for service performance is difficult to verify.

Optimizing wind turbine's maintenance policies under performance-based contract

A sound maintenance policy of wind turbine occupies an important position in reducing the operations and maintenance (O&M) costs. However, few papers consider system performance, e.g. system availability, reliability, mean time to failure, into the maintenance policy. A novel optimal maintenance policy based on the performance-based contract (PBC) is presented to maximize the profit of suppliers meanwhile improving the system availability. Here, three maintenance actions are adopted: opportunistic maintenance, preventive maintenance and corrective maintenance. In precious researches where the objective was to minimize the O&M costs or maximize the system availability, while in this paper the maximum profit was used. To compare the proposed policy with conventional policies, three criterions are presented: maximum profit, greenhouse gas emissions and system availability. Finally, an illustrative numerical example is provided to demonstrate the applicability and superiority of the proposed model.

Effective management of performance-based contracts for sustainment dominant systems

Performance-based contracting (PBC) is becoming the favoured procurement strategy among suppliers and customers of sustainment dominant systems (SDS) such as aircraft, weapon systems, mining equipment, etc. Under a PBC, supplier profit is linked to how well the SDS meets customer expectations in terms of relevant performance metrics. System availability is a common, contractually agreed upon performance metric that measures customer expectations. In this paper, we analyse performance contracts from the perspective of the supplier, where system availability serves as the performance metric. We develop single-period and multi-period supplier performance models and demonstrate how these models are used to maximise a supplier's profit in the context of a PBC. We provide empirical evidence from a mining and construction equipment industry and demonstrate how PBC overcomes the information asymmetry and moral hazard that is common in SDS principal agent models. Practically, our models can be used to increase the likelihood of success for both the supplier and the customer when they embrace PBC. Our main contributions include establishing the optimal availability that an original equipment manufacturer (OEM) can provide by considering their own probability of loss; analysing the properties of an OEM's future net profit function using first order autoregressive moving average (ARMA) process; and performing marginal analysis and providing bounds for the net profit function for linear and non-linear revenue functions. We derive a relationship between macro-level availability and micro-level parameters such as failure rate, fleet size and base stock levels.

On Contract Design for Incentivizing Users in Cooperative Content Delivery With Adverse Selection

Cooperative content delivery using multiple air interfaces (CCDMI) is a powerful solution to mitigate congestion in cellular networks. In CCDMI, the operator distributes content to selected users that further distribute it locally among its nearby users. However, a user that is capable of contributing to CCDMI might act selfishly and refuse to participate. Although the operator can encourage user participation by offering incentives, it has incomplete information about the users’ willingness to participate. In order to overcome this problem of adverse selection in CCDMI, we propose two contract-based methods under information asymmetry. In both methods, the operator designs a performance-based contract set for the users that are capable of local content distribution. Using a mathematical analysis, we show that the optimal contract under information asymmetry achieves close to optimal utility for the users and the operator, compared with the information symmetry case. Moreover, the users with high willingness to participate get positive utility and the users with low willingness get zero utility. Hence, by assigning contracts, the operator can motivate user participation, despite the information asymmetry between them. Our results verify that the proposed methods improve the system performance in terms of the utility of the operator and the users.

A two-phase preventive maintenance policy considering imperfect repair and postponed replacement

This paper investigates a novel two-phase preventive maintenance policy for a single-component system with an objective of maximizing the revenue generated by the performance-based contracting (PBC). The system undergoes a defective state before failure, and produces signal hinting the condition. The maintenance policy consists of two phases: imperfect maintenance phase followed by postponed replacement phase. In the imperfect maintenance phase, inspection is performed to reveal the defective state, leading to a possible repair. Both the inspection and the repair are imperfect. In the postponed replacement phase, preventive replacement is performed during the upcoming scheduled maintenance window, before which no inspection or repair is executed. The expected net revenue under PBC is maximized via the joint optimization of the inspection interval, number of inspection and preventive replacement interval. We apply the model to a case from a steel converter plant, and the results show that our proposed maintenance policy outperforms some existing maintenance policies in terms of the net revenue.

Performance-based contract for non-revenue water reduction – case study Bahrain

Abstract A performance-based contract (PBC) for non-revenue water (NRW) reduction was executed in the Muharraq Governorate of the Kingdom of Bahrain between 2013 and 2016. The contract included a mixture of fixed and performance-based payment terms. The performance element included the establishment of 35 District Metered Areas (DMAs) and the targeted reduction of NRW by 15 percentage points within the project catchment. The contract was a partnership between the contractor and the utility, whereby the contractor undertook the investigative work, while the utility was responsible for executing all resulting construction activities. A number of important lessons were learnt that should be applied to future projects. The contract design arguably placed too much risk upon the contractor. The original project timescale proved to be completely unrealistic. The data collected following DMA establishment enabled the cause of NRW in each DMA to be determined and the appropriate action taken. The quick win for real losses was automated pressure control, while permanent monitoring of large industrial users represented the same for apparent losses. Knowledge transfer to the utility proved to be arguably more important than achievement of contractual NRW targets. The contractor–utility working relationship proved crucial in facilitating eventual project success.

Analyzing manufacturer and the insurance-based risk mitigation policy with equipment service contracting

ABSTRACTManufacturing are recently investing in performance provision for customers focusing on equipment availability. However, performance-based contracts (PBC) between them suffer from the risks of downtime, opportunistic behavior, financial distress etc. We study the PBC strategy considering insurance-based risk mitigation policy. The service process with increasing failure rate is focused on where manufacturers decide to repair and replace by the equipment retirement age. The business interruption (BI) insurance is jointly purchased. Results show that insurance and PBC incentive exist partial substitutes and interactions. BI insurance not only mitigates PBC-induced risks but also provides a feasible way for improving the usage life.

Fostering innovation in public procurement through public private partnerships

PurposeThe prevailing view in the studies on Public Private Partnerships (PPPs) is that PPPs can improve the quality and efficiency of infrastructure services and facilitates innovation in infrastructure developments. Although researchers highlight the potentiality of PPP models for stimulating innovation, they do not prove whether and in which conditions the PPP model is capable of developing innovative solutions. This paper aims to provide answers to the following key research questions: Which are the PPP features that favor innovation? How properly structure a PPP to foster innovation?Design/methodology/approachWith this aim, drawing upon the main streams of studies on innovation, the authors develop a conceptual framework that identifies the PPP features that can influence the innovativeness. Second, they define how these PPP features have to be structured to foster innovation.FindingThe authors find that a wider involvement of the private sector will increase the level of innovation. The industry structure exerts opposite forces on innovation: the dominance of large-sized firms is positively related to innovative output, whereas the market concentration negatively affects innovation. Performance-based contracts should be used in the context of PPP instead of traditional contracts. Finally, the authors find that, to fully exploit the networking effects on innovation, cooperation and trusting among partners involved in PPPs should be enhanced.Originality/valueThe developed framework identifies the relations existing between each PPP feature and the level of innovation and allows to define how these PPP features have to be structured to foster innovation. The authors contribute to fill the gap in the academic literature on PPP and innovation by proving whether and in which conditions the PPP model is capable of developing innovative solutions. Furthermore, they provide meaningful guidelines to those called to structure the PPP arrangements.

Comparing the why, what and how of performance-based and Vested outsourcing models in CRE

The concepts of Vested outsourcing® (as developed by University of Tennessee [UT] researchers) and performance-based contracting have significantly gained in popularity as more and more corporate real estate (CRE) organisations look to increase the value of their outsourcing relationships. This paper builds on ‘Choosing the right sourcing model for CRE outsourcing agreements’ which was featured in Corporate Real Estate Journal (CREJ) Vol. 7, No. 3 by providing a comparison of performance-based and Vested models. Both models share many of the same principles such as focus on the supplier’s expertise and considering value above ‘price’. However, performance-based contracts and vested are distinctly different in their focus, application, methodology and resulting relationships. This paper explores the similarities and major differences between these two proven approaches. It also provides guidance relative to when to use each model.

Friends or foes? Optimal incentives for reciprocal agents

Widely used performance-based contracts put (positive or negative) externalities on co-workers. These externalities have been proven to shape an organization’s working climate especially when workers exhibit social preferences. However, it is a priori unclear whether a more friendly or a more competitive working environment should be encouraged. In this paper, we develop a theoretical model in which a self-interested principal has to motivate a set of agents to work hard. Agents are symmetric, potentially risk-averse, and exhibit reciprocity concerns towards each other. We show that the principal reduces the cost of achieving high effort provision by designing a psychological gift-exchange game, thereby replacing monetary with psychological incentives. We find that the optimal incentive scheme depends on the interplay between the agents’ attitudes towards risks and their preferences for reciprocity. In particular, the optimal scheme implements (i) a relative performance compensation scheme which induces an exchange of unkindness if agents are relatively little risk averse and (ii) a joint performance compensation scheme which induces an exchange of kindness if agents are sufficiently risk averse. Our findings can explain some puzzling empirical results.

After-sales services optimisation through dynamic opportunistic maintenance: a wind energy case study

After-sales maintenance services can be a very profitable source of income for original equipment manufacturers (OEMs) due to the increasing interest of assets’ users on performance-based contracts. However, when it concerns the product value-adding process, OEMs have traditionally been more focused on improving their production processes, rather than on complementing their products by offering after-sales services, consequently leading to difficulties in offering them efficiently. Furthermore, due to both the high uncertainty of the assets’ behaviour and the inherent challenges of managing the maintenance process (e.g. maintenance strategy to be followed or resources to be deployed), it is complex to make business out of the supply of after-sales services. Aiming at helping the business and maintenance decision-makers at this point, this paper proposes a framework for optimising the income of after-sales maintenance services through: (a) implementing advanced multi-objective opportunistic maintenance strategies that systematically consider the assets’ operational context in order to perform preventive maintenance during the most favourable conditions, (b) considering the specific OEMs’ and users’ needs and (c) assessing both endogenous and exogenous uncertainties that might condition the after-sales services’ profitability. The developed case study for the wind energy sector demonstrates the suitability of the presented framework for optimising the after-sales services.

The Overarching Themes From the CLER National Report of Findings 2018.

The Overarching Themes From the CLER National Report of Findings 2018.

Management Practices to Build Evidence-Based Decision-Making Capacity for Chronic Disease Prevention in Georgia: A Case Study.

BackgroundResearch shows that training can improve skills needed for evidence-based decision making, but less is known about instituting organizational supports to build capacity for evidence-based chronic disease prevention.Community ContextThe objectives of this case study were to assess facilitators and challenges of applying management practices to support evidence-based decision making in chronic disease prevention programs in the public health system in Georgia through key informant interviews and quantitatively test for changes in perceived management practices and skills through a pre–post survey.MethodsLeadership of the chronic disease prevention section hosted a multiday training, provided regular supplemental training, restructured the section and staff meetings, led and oversaw technical assistance with partners, instituted transparent performance-based contracting, and made other changes. A 65-item online survey measured perceived importance of skills and the availability of skilled staff, organizational supports, and use of research evidence at baseline (2014) and in 2016 (after training). A structured interview guide asked about management practices, context, internal and external facilitators and barriers, and recommendations.Capacity-Building Activities and Survey FindingsSeventy-four staff members and partners completed both surveys (70.5% response). Eleven participants also completed a 1-hour telephone interview. Interview participants deemed leadership support and implementation of multiple concurrent management practices key facilitators to increase capacity. Main challenges included competing priorities, lack of political will, and receipt of requests counter to evidence-based approaches. At posttest, health department staff had significantly reduced gaps in skills overall (10-item sum) and in 4 of 10 individual skills, and increased use of research evidence to justify interventions. Use of research evidence for evaluation, but not skills, increased among partners.InterpretationThe commitment of leaders with authority to establish multiple management practices to help staff members learn and apply evidence-based decision-making processes is key to increased use of evidence-based chronic disease prevention to improve population health.

Performance-based contract design under cost uncertainty: A scenario-based bilevel programming approach

ABSTRACTThis article considers a principal agent model for structuring a performance-based contract in the presence of fixed cost and cost-plus contracts. A scenario-based bilevel programming approach is considered to determine the values of key contract parameters. Additionally, the risk of cost uncertainty is considered in the model in the form of conditional value at risk (CVaR). The incorporation of risk of cost uncertainty can mitigate the impact of extreme events in the tail of the customer's total cost distribution. The numerical results find that at higher risk aversion levels, the customer is willing to pay more to the supplier and at the same time accept a smaller percentage of the shared cost between the supplier and the customer, which indicates the shift of the risk to the supplier. Although the customer is paying more in higher risk aversion levels, less cost is incurred in cases of realization of extreme events compared to the lower risk aversion levels. At lower risk aversion levels, the customer sets a smaller value of incentives for the supplier.

"Pay for Success" Financing and Home-Based Multicomponent Childhood Asthma Interventions: Modeling Results From the Detroit Medicaid Population.

Pay for Success has emerged as a potential financing mechanism for innovative and cost-effective prevention programs. In the PFS model, interventions that provide value to the public sector are implemented with financing from private investors who receive a payout from the government only if the metrics identified in a performance-based contract are met. In this nascent field, little has been written about the potential for and challenges of PFS initiatives that produce savings and/or value for Medicaid. In order to elucidate the basic economics of a PFS intervention in a Medicaid population, we modeled the potential impact of an evidence-based multicomponent childhood asthma intervention among low-income children enrolled in Medicaid in Detroit. We modeled outcomes and a comparative benefit-cost analysis in 3 risk-based target groups: (1) all children with an asthma diagnosis; (2) children with an asthma-related emergency department visit in the past year; and (3) children with an asthma-related hospitalization in the past year. Modeling scenarios for each group produced estimates of potential state and federal Medicaid savings for different types or levels of investment, the time frames for savings, and some overarching challenges. The PFS economics of a home-based asthma intervention are most viable if it targets children who have already experienced an expensive episode of asthma-related care. In a 7-year demonstration, the overall (undiscounted) modeled potential savings for Group 2 were $1.4 million for the federal Medicaid and $634,000 for the state Medicaid programs, respectively. Targeting children with at least 1 hospitalization in the past year (Group 3) produced estimated potential savings of $2.8 million to federal Medicaid and $1.3 million to state Medicaid. However, current Medicaid rules and regulations pose significant challenges for capturing federal Medicaid savings for PFS payouts. A multicomponent intervention that provides home remediation and medical case management to high-risk children with asthma has significant potential for PFS financing in urban Medicaid populations. However, there are significant administrative and payment challenges, including the limited ability to capture federal Medicaid savings and to use them as a source of investor repayment. Without some policy reform and clear guidance from the federal government, the financing burden of PFS outcome payments will be on the state Medicaid program or some other state-level funding source.

Guidelines for evaluating the environmental performance of Product/Service-Systems through life cycle assessment

Product/Service-Systems (PSS) such as integrated solutions, performance-based contracts or sharing systems are often proposed as means to enable improved environmental sustainability. However, PSS are not necessarily environmentally benign compared to conventional systems. Quantitative environmental performance evaluations of PSS are hence needed. Life cycle assessment (LCA) is a commonly used method for environmental performance evaluation. However, applying LCA in the context of PSS requires specific considerations, which are not sufficiently addressed by current LCA guidelines. In this article, we propose a set of guidelines consisting of six steps, which elaborates the LCA process with respect to the specific consideration for PSS assessment. The guidelines were developed based on identified challenges for the application of LCA on PSS, a review of existing LCAs on PSS case studies, expert consultations, case study applications, and structured user feedback. The use of the guidelines is demonstrated on three exemplifying cases, covering three different scopes for PSS evaluation. By applying the guidelines, the risk of biased results, predictable rebound effects and significant cut-of errors should be reduced. Future work includes evaluating the guidelines through full-scale case applications and further development of dynamic and prospective modelling approaches for assessing systemic consequences and rebound effects.

Service-Dominant Logic and Performance-Based Contracting: A Systems Thinking Perspective

This paper extends recent theoretical advances by merging service-dominant logic (S-D logic) and performance-based contracting (PBC). S-D logic is a conceptual frame of reference that defines supply chain knowledge and skill as its fundamental building blocks of strategic benefit. Cocreation of value between actors and beneficiaries is central to S-D logic and is measured through performance outcomes. PBC is a transformational departure from traditional supply chain strategies that focuses on delivering performance instead of goods and services. PBC has found increasing use in large-scale complex systems where the postproduction costs exceed the production cost, such as defense, transportation, and healthcare. These systems are commonly called sustainment-dominated systems (SDSs). We use systems theory and the Boardman Soft Systems Methodology to develop a systemigram that corresponds to the 11 foundational premises of S-D logic in the context of PBC. We also verify the use of the systemigram as an instrument to instantiate systems thinking and move S-D logic from an abstract framework to a more actionable framework. This paper provides managers and researchers a systematic insight into how investment into knowledge, skills, and the cocreation of value can drive improved SDS life-cycle affordability in the context of PBC.