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Performance-based contracts yield more efficiencies for state government

July 09, 2011 J

A surprising editorial in The Columbian.

In Our View: Incentives, Penalties

Performance-based contracts yield more efficiencies for state government

As of Thursday, July 7, 2011
On Monday, State Auditor Brian Sonntag announced that he would not be running for governor in 2012, noting that his current job “continues to be a good fit and the place where I can best contribute and focus on my values: advocating for open and accessible government; holding government accountable to citizens; valuing public employees as a primary resource.”

Yes, we’d say so. It took the high-achieving and well-respected state auditor only one more day to proffer another example of the second of his three values: holding government accountable. On Tuesday, Sonntag’s office released a “Performance-Based Contracting Review” that should make the state’s massive contracting system much more efficient.

This might sound like geeky microscience that appeals only to the most advanced pencil-pushers, but here’s why it matters to taxpayers: The state directs more than $10 billion annually (one-third of all state spending) to contracts for goods and services. And when contracts are “performance-based,” they deliver bigger bangs for the taxpayers’ bucks.

For many years, state agencies typically used “time-and-materials” contracts, which pay vendors based on time spent and quantity of materials used. Recently, though, the emphasis has properly shifted to performance-based contracts that pay vendors based on established outcomes or results.

For example: A few years ago, state officials noticed that accidents on freeways were taking hours to clear, and motorists were entangled in long delays. A program was developed that paid tow-truck companies a bonus if they took fewer than 90 minutes to clear the freeway of hard-to-move trucks. Dramatic results were obtained quickly, as the goal was met in 90 percent of major accidents.

Sonntag’s department produced Tuesday’s report in response to an executive order last November from Gov. Chris Gregoire. The study was completed quickly and thoroughly; 34 state agencies were reviewed, and more than 450 contracts were examined. More than 100 contract and program managers were interviewed. To increase knowledge across all sectors of state contracting, two training sessions were conducted, with more than 60 managers attending each session.

What lessons were learned by the state auditor’s office? To begin with, most agencies are using basic forms of performance-based contracting, but there’s plenty of room for improvement. Only about 15 percent of reviewed contracts tied payment to performance measures or outcomes. Only about 8 percent included performance incentives, and 22 percent included penalties.

When those two elements — incentives and penalties — are applied to state contracts, the government becomes more like the private sector, and that’s a good thing. Competition increases, and that’s an even better thing. If a vendor beats deadlines, he or she makes more money and taxpayers benefit from quicker results. If a deadline is missed or quality standards are not met, the vendor is punished where it hurts most: the bottom line, where profits are gained or lost.

The report also recommended that agencies reduce staff time by using more standardized language in contract documents. Agencies should used a “risk assessment and monitoring plan” (RAMP) in processing contracts, and if one is not available, the agencies can use elements of the RAMP already in place for the Department of Social and Health Services.

In one respect, the report from Sonntag’s office is a little frustrating in that these guidelines should’ve been implemented years ago. However, it’s encouraging to see the state auditor’s office responding so powerfully to the governor’s demand to make state government more efficient.

Original article in The Columbian can be found here.

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