Performance-based Contracts Research Articles

Proposition of a Model for Selection of the Hybrid Contract Implementation Strategy for a Pilot Project of Regular Road Maintenance in Montenegro

Performance‐based maintenance contracts (PBMCs) are modern contracts that should allow road maintenance entities to contract maintenance activities more successfully and generate money value. In the case of Montenegro, a gradual approach of PBMC introduction is recommended through a hybrid contract for routine road maintenance. Hybrid contract implementation will enable a lower level of client risk in the early stages of PBM contract. Game theory is used for selection of an adequate model for hybrid contract structure in terms of size and nature of the BoQ elements. In addition to the estimated or charged quantities of works from previous contracts, the model also includes parameters that to some extent take into account the experience and expertise of contractors and clients, but also the availability of road data. In order for model to be applied, historical data from traditional road maintenance contracts, which were implemented in the previous period in Montenegro, are used.

A Review of Tools for Project Financial Assessments

Governments not always have the funds to build transport and other infrastructure projects that are economically justified and environmentally and socially sound. Under certain circumstances, projects meeting such conditions can be implemented by involving private financing, through public-private partnerships (PPP), which is a means to get projects completed by leveraging scarce public resources. In a PPP project, the sources of revenue to the private partner (or concessionaire) may include (i) the users of the facility (e.g., road tolling), (ii) the government (e.g. through availability payments, capital grants and shadow tolls), and (iii) both users and government, which is usually called a hybrid concession. As a key step in considering attracting private investors for such projects, decision makers and practitioners need to assess their financial viability, an endeavor that can be greatly facilitated by relatively simple tools now available. This paper reviews and provides case studies of two existing tools for assessing the financial viability of: (i) hybrid road PPP projects, which involve both tolls and availability payments; and (ii) output- and performance-based road contracts (OPBRC), which involves payments by the government. The main output generated by both models include the project’s internal rate of return, equity internal rate of return, annual debt service coverage ratio and the present value of the government’s cash flow.

Contract design for equipment after-sales service with business interruption insurance

After-sales service is strategically important for mission-critical equipment due to the high operational risks involved (e.g., machine breakdowns). To address this challenge, the operators of such equipment often purchase business interruption (BI) insurance to mitigate operational risks. In this paper, we develop a principal-agent model to study an after-sales service contracting problem with an insurance option. Two prevailing contract forms are considered: a resource-based contract (RBC) and a performance-based contract (PBC). We first show that, in the presence of insurance, a PBC outperforms an RBC in terms of system performance due to the skewed incentives inherent in an RBC. More important, our results show that insurance plays contrasting roles in incentivizing a service supplier under the two contracting mechanisms. Under an RBC, insurance improves the service supplier’s effort provision and hence benefits the operator because insurance provides a risk-sharing mechanism that better aligns the incentives of the service supplier and the operator. Under a PBC, although the supplier’s equilibrium effort remains at the first-best level regardless of the insurance coverage level, the use of insurance changes the operator’s optimal contract and the risk allocation between the operator and the supplier. Our findings provide important insights into the interplay of insurance and contract incentives in an after-sales service context.

Understanding the Impacts of Length of the Contract and Fleet Size on Spare Parts Level and Reliability Investments in Performance-based Contracting

Understanding the Impacts of Length of the Contract and Fleet Size on Spare Parts Level and Reliability Investments in Performance-based Contracting

LIFE CYCLE COST ANALYSIS OF A PBC PILOT PROJECT FOR ROAD IN INDONESIA

Implementation of Performance-based Contracts (PBC) for road maintenance in Indonesia still requires various studies, especially related to potential long-term cost efficiencies that can be achieved by the road agencies by shifting the application of traditional contracts to PBC. This study assesses the effectiveness of PBC compared to traditional contract implementation based on a case study on one of the PBC pilot projects in Indonesia. The effectiveness of the PBC reviews in terms of project life cycle cost efficiency was calculated. LCC calculations were conducted by considering the influence of the length of contracted road, the initial conditions of contracted road, and the duration of PBC project. The LCC calculation shows that the implementation of PBC generally has the potential to generate LCC efficiency compared to the traditional contract. This study also proved that the implementation of PBC can guarantee the performance of road services during multi-year contracts and also provide other benefits for the road agency and road users.
 ABSTRAK: Pelaksanaan Kontrak Berasaskan Prestasi (PBC) bagi penyelenggaraan jalan di Indonesia masih memerlukan pelbagai kajian, terutama berkaitan potensi keberkesanan perbelanjaan jangka panjang yang dapat dicapai oleh pihak agensi jalan dengan mengalihkan penerapan kontrak tradisional ke PBC. Kajian ini menilai keberkesanan PBC berbanding dengan pelaksanaan kontrak tradisional berdasarkan kajian kes pada salah satu projek perintis PBC di Indonesia. Keberkesanan ulasan PBC ini adalah dari segi kecekapan kos kitaran hayat projek. Pengiraan LCC dilakukan dengan mempertimbangkan pengaruh panjang jalan yang dikontrak, keadaan awal jalan terkontrak, dan jangka waktu projek PBC. Pengiraan LCC menunjukkan bahawa pelaksanaan PBC secara amnya berpotensi untuk menghasilkan kecekapan LCC berbanding dengan kontrak tradisional. Kajian ini juga membuktikan bahawa pelaksanaan PBC dapat menjamin prestasi perkhidmatan jalan selama kontrak multi-tahun dan juga memberi manfaat lain untuk agensi jalan dan pengguna jalan raya.

Performance Management Goldilocks Style: A Transaction Cost Analysis of Incentive Intensity in Performance Regimes

This article advances a framework for identifying the likely implications of incentive intensity and associated transaction costs when employing performance management systems in the public sector. Performance management encompasses a broad range of systems including Managing for Results, PerformanceStat systems, performance-based contracting, and performance-based budgeting that seek to increase the capacity of government to achieve desired outcomes. These regimes share some common features, but, in practice, involve differing levels of incentive intensity, meaning the potency and certainty of the rewards and/or penalties attached to goal attainment. The article argues that increased intensity of incentives may improve organizational performance but very likely at the expense of higher governance costs. The framework is employed in a critical literature review of empirical research on performance management in the public sector. The review highlights the importance of considering the balance between weak incentives, which render few benefits, as opposed to very high-intensity incentives, which increase administrative costs while reducing benefits by encouraging gaming and other perverse responses.

Looking at the bigger picture: effect of performance-based contracting of district health services on equity of access to maternal health services in Zambia.

Zambia has been using output-based approaches for over two decades to finance whole or part of the public health system. Between 1996 and 2006, performance-based contracting (PBC) was implemented countrywide with the Central Board of Health (CBoH) as the provider of health services. This study reviews the association between PBC and equity of access to maternal health services in Zambia between 1996 and 2006. A comprehensive document review was undertaken to evaluate the implementation process, followed by a trend analysis of health expenditure at district level, and a segmented regression analysis of data on antenatal care (ANC) and deliveries at health facilities that was obtained from five demographic and health survey datasets (1992, 1996, 2002, 2007 and 2014). The results show that PBC was anchored by high-level political support, an overarching policy and legal framework, and collective planning and implementation with all key stakeholders. Decentralization of health service provision was also an enabling factor. ANC coverage increased in both the lower and upper wealth quintiles during the PBC era, followed by a declining trend after the PBC era in both quintiles. Further, the percentage of women delivering at health facilities increased during the PBC era, particularly in rural areas and among the poor. The positive trend continued after the PBC era with similar patterns in both lower and upper wealth quintiles. Despite these gains, per capita health expenditure at district level declined during the PBC era, with the situation worsening after the PBC era. The study concludes that a nationwide PBC approach can contribute to improved equity of access to maternal health services and that PBC is a cost-efficient and sustainable policy reform. The study calls for policymakers to comprehensively evaluate the impact of health system reforms before terminating them.

The Dynamics of Teacher Turnover in Low and High-Poverty Schools

This paper studies the implications for teacher turnover in low and high-poverty public schools of alternative teacher compensation contracts. Using existing data, I show that high-poverty school teachers exit and transfer at higher rates than low-poverty school teachers across years of teaching experience. I construct a quantitative search model with learning to explain the dynamics of teacher turnover and the distribution of teachers by years of experience in low and high-poverty schools. I use the model to simulate the impacts of alternative compensation contracts on teacher turnover and the distribution of teachers by experience in low and high-poverty schools. I find that an unconditional compensation contract and performance-based contract have favorable impact on teacher turnover. The impact of performance-based contract is lower than the impact of unconditional compensation contract, but the performance-based contract retains a higher share of effective teachers.

Study of Performance-Based Contract Application in Building Maintenance

Some buildings have no clear and structured maintenance. Currently building maintenance is mostly done when there has been damage or system instability attached to the building. Besides that, there are still not many buildings that have data about the age of use of each particular facility, for example plumbing, lights, faucets, telephones, and past data related to the changes that have been made. In one hand, a good maintenance system has been implemented in road projects because it uses Performance Based Contracts (PBCs). Therefore, the purpose of this study is to examine the application of Performance Based Contracts in buildings. The research method is in quantitative and qualitative ways to analyze the opportunities for the implementation of Performance Based Contracts in building maintenance by way of case studies. The object of research is government and private building. The results of this study are the compilation of the initial concept of building maintenance based on the Performance Based Contract (PBC). The implication of this research is the potential for making performance-based contract standard documents for more structured buildings so that they can effectively manage building maintenance.

Determining duration of performance-based contracts based on fair payoff for the government and contractors

Conventional contracts are one of the road maintenance contracts based on the number of jobs measured and paid at an agreed level for different work items or referred to as unit price contracts. Meanwhile, performance-based road maintenance determines the minimum conditions of roads, bridges, and traffic assets that must be fulfilled by contractors. National road maintenance in several developed countries has successfully used integrated contracts, performance-based contracts. This is followed by the developing countries that previously had problems with the quality of national roads in which they were unable to provide the desired level of service. This performance contract prioritizes products and it is up to the contractor how to achieve this. Therefore, the choice of design, application of technology, innovation, process, and management are all determined by the contractors. This allocates higher risks to contractors compared to traditional contracts. But at the same time, it opens opportunities to increase margins where increasing the efficiency and effectiveness of design, process, technology, and management can reduce costs to achieve established standard performance. This study uses simulations to obtain the duration of fair and optimal contracts for the government and contractor. Duration 5-7 years is determined a duration that can provide benefits for both parties.

Contracting for Road Maintenance in the Netherlands—The Downside of Performance-Based Contracting

A trend towards performance-based contracting (PBC) can be observed in public infrastructure maintenance. PBC is an approach of tying the contractor’s payment to specified performance. We investigated PBC for the maintenance of highways and roads in the Netherlands, identifying issues ultimately resulting in poor contractor performance. The PBC-induced risks for clients relate to the problematic translation and measurement of specifications, the ineffectiveness of incentives, the avoidance of contractors taking full responsibility, and contract management issues. Clients should recognize the actual balance of power in the relationship with their (main) contractors, and take appropriate measures.

Performance-Based Road Contracts in Zambia

Public infrastructure procurement involves significant incentive problems because contracts are often incomplete. Output- and performance-based road contract (OPRC) is an innovative contractual scheme that has been developed in the road sector. Unlike traditional input-based procurement methods, contractors can freely design, invest in, and maintain roads to deliver an agreed level of road functionality, which helps to ensure the sustainability of road maintenance. Using data from Zambia, this paper shows that major reconstruction works under OPRC arrangements are effective at increasing agricultural production. In particular, small-scale farmers who currently use only a few advanced inputs, can benefit from improved connectivity from improved roads. The results also indicate the possibility of improved accessibility, which allows new economic opportunities for farmers who currently do not participate in market transactions.

Optimal Design of Uptime-Guarantee Maintenance Contracts

This paper analyzes the contracting of maintenance services provided by an original equipment manufacturer (OEM) to an operator for a device. The service provider can exert different levels of maintenance effort during the course of the contract and the device's reliability (uptime) is influenced by these levels. However, the service provider's effort level is non-contractible. We obtain the optimal design of performance-based maintenance contracts in this context by singling out a unique uptime-guarantee contract structure that contains profit-maximizing contracts in all situations. With the optimal contract structure, the service provider guarantees 100% uptime and compensates the operator's downtime at a higher unit rate than it charges him/her for maintenance services (with the factor of inverse expected downtime under no contract). This finding shows that some of the well-known performance-based contract structures used in practice (e.g., pay-for-performance contracts) can be sub-optimal for the OEMs. When the operator's revenue rate from the device is known to the service provider, the optimal contract compensates for any lost revenue due to downtime yet leaves the operator with zero expected profit from the contract. Under asymmetric information, we provide a closed-form formula for calculating the optimal compensation rate. We also demonstrate the advantages and limitations of offering menus of contracts to increase the service provider's expected profits.

Portfolio pumping and fund performance ranking: A performance-based compensation contract perspective

Abstract We collect compensation policy data from 60 Chinese mutual fund companies, which cover 88% of the assets managed by all active stock and stock-oriented hybrid mutual funds in China. Using the collected data, we investigate portfolio pumping from a performance-based perspective. We find that portfolio pumping is stronger for funds ranking around critical points of performance distribution (i.e., the top one-tenth, one-fourth, one third, and half cutoffs). This finding is mainly driven by funds from companies that set these critical points to grade fund managers’ bonus levels. Our findings provide evidence of portfolio pumping motivated by performance ranking instead of the flow-performance relationship documented in prior studies.

Fuzzy Logic Analysis of the Build, Capacity Build and Transfer (B-CB-T) Modality for Urban Water Supply Service Delivery in Ethiopia

Rapid urbanization in Ethiopia is resulting in the need for alternative sustainable service models for urban water supply. Contractual arrangements to improve the functionality of urban water services in Ethiopia have included build, operate and transfer (BOT), design, build and operate (DBO), performance-based contracts (PBC) and utility development. UNICEF undertook a review of these modalities and concluded that a modified version of the BOT modality was required to both incentivize private sector engagement in urban water supply and to enhance public sector utilities. This paper describes the contractual modality developed to achieve this aim, namely an Ethiopian build, capacity build and transfer (B-CB-T) modality. This paper tests the applicability of the B-CB-T model using fuzzy logic statistical analysis and concludes that of the four tested variables (internal accountability, external accountability, operation and maintenance and financial management), the most statistically significant was the clear mandate to address complaints and maintain a positive relationship with the clients (users). This paper concludes that the B-CB-T is an effective contracting modality that should be accompanied by appropriate behavior change and social mobilization outreach to maximize tariff, billing, extension and performance of the infrastructure that is administered within the B-CB-T arrangement.

Study of Performance-based Contract Application in Building Maintenance

Study of Performance-based Contract Application in Building Maintenance

Risk perception in performance based contracts and the influence of experience

PurposeIn performance-based contracting (PBC), the provider is paid according to outcomes for its customer, and therefore assumes responsibility for customer risks. Previous studies have revealed that risk exposure is a fundamental influencing factor. Thus, the purpose of this paper is to analyze how previous experience with PBC influences the perception of risks.Design/methodology/approachThis research is based on a cross-industry study. Factor analysis and discriminant analysis are used to reveal to what extent experience influences PBC risk factors.FindingsIt is confirmed that risk perception differs significantly according to previous PBC experience. Thus, significant learning effects are identified in the PBC context.Research limitations/implicationsExperiential learning in PBC can explain entry barriers to PBC faced by new buyers with low levels of experience. Although the internal validity of the sample is high, as all analyzed cases represent PBC buying companies, there are limitations related to external validity.Practical implicationsTo manage risks this study provides a structure (12 risks, 3 aggregated factors), which could be used for risk evaluation and strategic and operative risk management. Other implications recommend, e.g., to collaborate with a PBC “veteran” when entering into PBC, as this boosts the level of PBC-related experience.Originality/valueThe findings of this study contribute to identifying PBC risks through the explorative statistical assessment of these PBC risk factors.

Envisioning, Evaluating and Co-Enacting Performance in Global Health Interventions

The notion of performance has become dominant in health programming, whether being embodied through pay-for-performance schemes or through other incentive-based interventions. In this article, we seek to unpack the idea of performance and performing in a dialogical fashion between field-based evaluation findings and methodological considerations. We draw on episodes where methodological reflections on performing ethnography in the field of global health intersect with findings from the everyday practices of working under performance-based contracts in the Senegalese supply chain for family planning. While process evaluations can be used to understand contextual factors influencing the implementation of an intervention, we as anthropologists in and of contemporary global health have an imperative to explore and challenge categories of knowledge and practice. Making room for new spaces of possibilities to emerge means locating anthropology within qualitative global health research.

Enabling Collaborative Response to IT Service Disruptions Under Risk Aversion

Responding to an information technology (IT) system failure often requires a collaborative approach in which both the client and the vendor need to invest in response capacity. By investing more in response capacity, the client might make the vendor's response capacity more effective in the system restoration stage. Yet, in doing so, the client also encourages free-riding by the vendor. To understand how a client should balance the need to support the vendor while setting the right incentives for the vendor to invest, we develop a model that combines the key characteristics of value co-creation (i.e., complementarity between the firms' investments in response capacity) with standard maintenance contract practices (i.e., penalty-based contracts that penalize the vendor for system downtime). We study the value of observability by characterizing the difference in the client's expected utility between when her investment is observable and non-observable by the vendor in collaborative environments. Since exposure to increased financial risks is a critical issue for the vendors with performance-based contracts, we consider the impact of risk attitudes of the firms (i.e., vendor risk aversion (VRA) and client risk aversion (CRA)) on the investments in the collaborative response process. We show that the value of observability is decreasing in VRA but increasing in CRA. Secondly, we find that the effect of risk aversion on the average system downtime is diametrically opposite depending on whether or not the client's investment is observable. Finally, the effectiveness of the performance-based contracts decreases with VRA but is more robust to CRA.

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.