Performance-Based Contracting
Start Date: Dec 2003
End Date: Dec 2005
Project Status: Complete
Traditional contracts are based upon the specification of client requirements in terms of time, cost and quality, and teams of experts help clients to specify targets for each of these things. A contractor who achieves what was required in terms of time, cost and quality will have fulfilled contractual obligations and will rightly expect to be paid, regardless of whether the client is happy with the result.
In 1998, The Egan Report proposed an agenda for radical change and improvement in the way that the construction industry organizes projects. In terms of the business of contracting, the industry was told that it must replace competitive tendering with long term relationships based on clear measurement of performance and sustained improvements in quality and efficiency. Although there has been a huge amount of work implementing the changes called for by Egan, very little attention has been paid to the contractual issue that would arise as a result of moving away from competitive tendering and the traditional approach to construction contracting. A system of key performance indicators (KPIs) has been developed to monitor and demonstrate performance measurement and continuous improvement. But as long as these KPIs report traditional time, cost and quality targets, the contractual focus will remain traditional.
One radical way in which the basis of contracting could be fundamentally altered is to do away with the traditional focus on documenting requirements, against which competing contractors compete on price. There is a completely different way to procure buildings - performance-based contracting. In this system, the idea would be to specify what performance is required from a completed building and to choose a contractor to provide it based upon that contractor's past performance in achieving client performance requirements. This is analogous to performance specification applied to a whole building. It would mean that a housing scheme might be ordered on the basis that crime is reduced while families are housed, or an office development commissioned on the basis of increased productivity of the occupiers, or a hospital on the basis that health care is provided within the constraint of minimizing the risks of cross-infection. The principle is to allow the providers of construction services to decide how to achieve the ends, instead of instructing them in enormous detail about what, precisely, must be built. This requires that payment be linked to the performance achieved, rather than the amount of building work undertaken. One inevitable consequence of such an approach may be a huge reduction in the documentation and project management overhead required by clients. On the other hand, the documentation may simply be shifted to somewhere else in the supply chain. In essence, a project procured like this would be customer focused, rather than supplier-led as it is at the moment.
In order for this to work, selection of contractors might be based upon records of their past performance in achieving their clients' needs (rather than achieving time, cost and quality targets). The UK's traditional focus on lowest price bidding has helped to avoid the worst excesses of collusion and corrupt practices, and there are naturally very real fears about losing the accountability that comes from traditional practice. But if contractors' performance data is freely available in the public domain, then this problem is overcome.
These ideas raise some serious questions for research. Performance based contracting means not only identifying the performance that is required from a constructed facility, but also tying the contractor's reward to the extent to which this performance is achieved through the building project. By approaching building contractors directly to negotiate the extent to which they might be able to meet performance targets, the traditional focus of the industry would change, to design-build con