Is the GCC ready for performance-based contracts?

Wayne Furlong, project manager for KEO International Consultants, considers the pros and cons of performance-related contracts.

With the high projected growth of facilities and network management in the UAE, a serious consideration for asset owners is the type of contract they will enter into with their maintenance contractor.

A relatively recent development is the ‘performance-based' contract. These stipulate the required Level of Service (LOS) of an asset to be achieved, or maintained, by a contractor. Quantity, timing and location of the maintenance regime is then determined by the contractor themselves.

Performance-based contracts differ from traditional contracts in that a large proportion of the risk is transferred from the client to the contractor. Consider the main differences in the contract types:

Traditional:

• Measurement of performance is based on timeliness of delivery and work quality

• Asset owner representative allocates quantity, timing, treatment type and location

• Payment is made on a cost per work item basis

Performance:

• Network or facility specifications in the contract are written in the form of performance measures. These are broadly categorised by Management Performance Measures, Operational Performance Measures and Key Performance Measures (KPMs).

• Performance is measured on resultant LOS of asset

• Contractor determines quantity, timing, treatment type and location to meet performance requirements

•Payment is primarily lump- sum

• Penalties determined on failure to meet KPIs.

Probably the biggest cost saving to the asset owner results from their participation being generally limited to auditing to ensure compliance, while utilising the contractor's operations knowledge. The contractor can have maintenance planning staff and systems that function on several contracts, as opposed to each asset owner requiring a management and operations supervision team.

The KPMs refer to the measurable asset conditions that are specified in the contract. These are designed to ensure that the maintenance work will achieve the required standard.

Specification of KPMs represent the greatest risk at the outset of the contract because they directly relate to asset condition, and will determine the operating state, and the condition in which the asset is returned to its owner at the end of the contract period.

It is important that the KPMs are robustly specified, particularly with long-term contracts. They represent the basis of the viability of the contractual arrangement.

Development of the KPMs often highlights competing objectives i.e. cost, operational effectiveness, practicality, data collection and sub-networking requirements.

It takes well-rounded knowledge and foresight to result in the successful development of a set of KPMs that will function well.

An appreciation of the complexities that underpin asset management optimisation - the condition and performance relationship, variable and unforeseen usage, operational issues and legislative requirements is essential. An integrated approach is required to allow the contract to function as intended.

The asset owners should satisfy themselves that the requirements have been understood by the tendering parties. Excessively low bids can indicate a misunderstanding or a perceived specification loophole.

A reasonable way to manage the risk associated with the tender process is to monitor the contractor's methodology during the tender period, and confirm that they have properly considered all the facets of the project.

Consider also Hybrid contracts, which while shifting the risk toward the contractor, maintain certain elements of a traditional contract. For instance, a contractor may be responsible for the timing of a maintenance treatment but will be obliged to carry out a minimum amount of treatments per year, while still being required to meet the KPMs.

Finally, data used for specification purposes must be grounded with a strong statistical basis and we must acknowledge that engineering judgement and experience cannot be wholly substituted with measurable parameters and computerised analysis.

Optimising expenditure is, as always, the best economic solution. In all circumstances an asset owner will not get more than they pay for, but they might get less.

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