State Auditor releases review of performance-based contracting

July 6, 2011

At the request of Governor Gregoire, State Auditor Brian Sonntag released a report last week detailing the state's current use of performance-based contracting and identifying opportunities for improvements. The report stems from an Executive Order issued by the Governor last November.

From the report:

What do we mean by "performance-based" contracts?  Traditionally, governments have used time-and-materials contracts that compensate vendors based on how much time they spent and the quantity of materials they used. Under performance-based contracts, businesses are paid based on providing deliverables or meeting pre-established outcomes or results. Government buys results instead of efforts.

For example, a team of educators might be contracted to help 500 job-seekers who never finished high school win general education diplomas (GEDs). A traditional contract might simply require the contractor to conduct the required classes. A performance-based contract might tie contractor pay to the number of people who actually received GEDs. A more advanced performance-based contract might tie compensation to the number who found jobs because they had GEDs.

We distinguish between two types of performance-based contracts:

  • Deliverables-based contracts that link payment to specific products or project milestones. 
  • Outcomes-based contracts that tie payment to results, connecting performance measures and/or outcomes to payment.

Performance-based contracting is not a one-size-fits-all solution. Deliverables, performance measures and outcomes must be tailored to support the purpose of the contract and the goals of the program it supports. Writing performance-based contracts offers many challenges, but some agencies are using promising techniques, such as setting due dates for deliverables, tying the distribution of funds to completion of specific deliverables, and withholding payments if grant recipients do not meet requirements.

Washington’s contracting systems are in transition, and contract oversight is divided among a number of agencies. For instance, the Office of Financial Management (OFM) provides guidance and oversees client services and personal services contracts, while the Department of General Administration oversees contracts for goods and purchased services. The Department of Enterprise Services, to be created later this year, will be structured in part to consolidate the oversight of most state contracts to ensure agencies and citizens receive maximum value. This transition period presents an ideal opportunity for agencies to expand their performance-based contracting.

Among the Auditor's recommendations:

  • Increase the use of performance or outcome measures for payment;
  • Improve contract management and contracting processes;
  • Increase staff expertise and capacity; and
  • Educate and collaborate with contractors.

One of the Auditor's long-term recommendations as the state moves forward with robust performance-based contracting is to:

Create a centralized office or staff with a high degree of expertise in performance measurement and performance-based contracting to provide technical assistance to agencies in developing and improving their use of performance measures and outcomes.

The report notes that this is a "leading practice." It also mirrors our recommendation for the state to create a competition council to help take the politics out of contracting and provide the business case and monitoring expertise necessary to ensure taxpayers are receiving contract value and results.

Though not identical to these recommendations, bills were introduced last session to create a version of this reform (HB 1873 and SB 5316) but they were not acted on by the Legislature.

Combined with the contracting reforms enacted with the adoption of SB 5931 earlier this year, the Governor's November Executive Order and the State Auditor's report help provide the framework for the state to transition more of its activities to real performance-based contracting. These are important steps to ensuring government spends more of its time buying meaningful results and not just intentions.