Incorporating Incentives Into Performance-Based Contracting Case Study

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Incorporating Incentives into Performance-Based Contracting Contracting in the US Over the last fifty years, there has been a growing trend in the US public sector to outsource government services at the federal, state, and local levels. This stands in stark contrast to the traditional model of previous generations. In the traditional model, public services were administered by large bureaucracies consisting of government employees working for the public good. Over the last several decades this trend has increased. Today, nearly every government agency and private sector organization adopts contracting to some extent. From acquiring weapon systems, as with the DoD, or providing government services, as with HUD, contracting has become…show more content…
If a city desires to contract out maintenance operations for their fleet of government-owned school buses they have two alternative methods of constructing their contract. The first approach focuses on paying the contractor by the service. Therefore, when a bus breaks down or requires scheduled maintenance (such as oil changes), the contract company would repair the bus until it is safe to drive again. In this approach, the contractor is only paid when a service is completed. Conversely, the contract company isn’t paid when buses don’t break down. As a result – the fewer buses break down – the fewer profits the contract company collects. As seen in this model, the contract company profits the most when buses break down frequently. This results in incentives to perform routine maintenance, but potentially ignore future problems before they become worse. Meanwhile, the city’s objective is just to maintain the largest number of buses operational during the school year. In this example, the incentives of the contract company aren’t fully aligned with that of their contract partner – the city. From a performance-based approach, the city would require the contract company to maintain the fleet of a thousand buses to an operational readiness rate of 97%. This means the contractor would be required to keep at least 970 school buses operational during the contract period. Again, this method focuses on the outcome. It uses a numerical metric (97%) as a standard
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