An experienced-based argument for the consideration of Performance Based Contracting as an option to improve outcomes. Simply put, moving from "paying contractors for goods and services", to "rewarding partners for measured outcomes".

1. Making the leap …
…from paying for goods and services …
… to rewarding for desired outcomes!
Presented by:
Jerry Dover, P.Eng.
Director Engineering
Give and Go Prepared Foods Corp.

2. Engineer and Maintainer
Project
Engineer
Maintenance
Manager
Infantry and
engineering
officer
Introduction
2
Several blows to
the head

3. Definitions*
Contract:
 a legally binding, voluntary
agreement between parties
3
*from an engineer not a lawyer
 typically defines the
provision of goods or
services

4. 4
Definitions
Defined
Outcomes
Measured
Performance
Linked
Compensation
PERFORMANCE
BASED
CONTRACT

5. 5
Learning From Experience:
A Story*
* About how I learned to use PBCs through trial and error and
mistakes and failures and blows to the head and … so forth

6. 6
Life as a Manager of Contracts
Seemed Stable and Unchanging
Don’t worry, if it doesn’t
work, we’ll take it back
Our Standard Terms are:
50% downpayment
40% due on notice to ship
10% due on delivery net 30 days
We have a great Service
Agreement for 12
Maintenance visits per
year, unplanned parts and
labour extra
This is all very normal – crazy talk!

7. 7
We Want:
• Predictability - PM contracts
• Reliability - new capital assets
• Productivity – automation
We get:
• Emergency outages
• Unexpected expenses
• Performance below expectations
My happy life as an engineer was
much like your happy life:

8. 8
I had to supply some unique, older
rebuilt equipment to a German
integrator who was building a
“showpiece production line”
One day, things
changed
They did not want our old equipment
to risk their delivery and payments,
so they asked us to sign
a “Performance Contract”

9. 9
What is the
underlying
purpose of this
type of contract?
How will it
shift the
balance of risk
and reward?
Can we use this
type of contract to
our benefit?
This Started a
Learning Quest

10. 10
So I tried it on other suppliers, and got…
ANGER
CONFUSION
DELAYS
LEGAL
REVIEWS
(GOOD)
REFUSALS
(NOT
GOOD)

11. 11
A key supplier of critical equipment
simply refused to accept it
 First contract after
20 years serving your
company!
 No customer of
ours has ever asked
for this!
 Your performance
demands are too
stringent and unfair!

12. 12
Given this resistance,
do we proceed?
Why the resistance?
(Is it worth the fighting)
What are the true risks
and benefits?
(Will it really help)
How exactly do you
implement & enforce?
(Can we make it work)

13. 13
 overcome the fear of change
 trust: it must be a mutually-beneficial
agreement
 understanding the risks and costs of
failure
 collaborate on defining the service
levels
 be VERY clear on how the outcomes
will be measured, and by whom
 agree on your dispute resolution
mechanisms
Do we go back to the status quo,
or press on with this new way?

14. 14
The PBC Framework

15. 15
The PBC Framework
Table of Contents
1. COMPONENTS OF THIS AGREEMENT ................................... 2
2. SCOPE OF SUPPLY AND PRICE ........................................... 2
3. DELIVERY DATES AND CONDITIONS ................................... 4
4. PERFORMANCE SPECIFICATIONS ........................................ 5
5. TECHNICAL SPECIFICATIONS ............................................ 5
6. INTERFACES ................................................................ 6
7. SHIPPING METHODS AND CONDITIONS ............................... 6
8. INSTALLATION AND COMMISSIONING .................................. 7
9. EQUIPMENT DOCUMENTATION .......................................... 8
11. SPARE PARTS AGREEMENTS ............................................. 10
12. COMMERCIAL AGREEMENTS ............................................. 10
13. CONFIRMATION OF THE AGREEMENT ................................. 13

16. 16
 The Supplier has a financial inventive to beat the targets
 Both parties could track progress clearly
 I could focus on other aspects of the project
The End Results
 Our management was more confident
 When a spec was not met, the vendor
fixed it without complaint
 Both parties got what they wanted!

17. 17
Our team’s attitude evolved from
What Did We Learn?
How Are Things Better?
Passive
acceptance of
goods/services
Deeper
understanding of
apportioning risk
Proactive, mature
approach to link
rewards with
outcomes

18. The Moral of the Story
18
Speak in terms of performance.
Mutually agree to acquire:
 specific capabilities
 desired ranges of availability
 defined standards of build,
finish, and maintainability

19. 19
Focus on:
 true partnering
 a mature, non-adversarial
approach to assigning
incentives and damages
 work hard to determine
capabilities and how to
measure them
The Moral of the Story

20. They make sense
They improve on the status quo
They help BOTH parties succeed
I welcome your comments and feedback!
jerry_dover@hotmail.com

21. Additional Resources
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