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19 Issues in Providing Incentives and Disincentives to The contractor is responsible for performance and is free Contractors to choose the methods it wishes to apply to achieve perfor- mance, although in practice states and other jurisdictions PBMC involves many considerations in deciding how to frequently require the contractor to fully comply with its encourage a contractor to achieve the desired results. Some traditional maintenance specifications. A true performance- agencies use only disincentives; for example, a lump-sum based contract promotes innovation and efficiency, which payment with deductions for failing to meet performance are major benefits of this approach. A number of other fac- targets. Others use a combination of incentives and disin- tors also affect project risk, including weather, environmen- centives. Another possibility is A+B+C contracting for a tal issues, traffic mix and growth, duration of the contract, multiphase project such as DBOM. A is the total price for the availability of resources to the contractor to carry out bid items; B is the amount of time to complete the work, the work, the nature of penalties, and whether the contractor which is multiplied by the road user cost; and C might be the must warranty its work. warranty cost for performance-based maintenance (Ander- son and Russell 2001). Because of the partnering feature of Contractors have different views regarding the desir- PBMC, a contractor is often able to provide feedback on the ability and acceptability of forcing most or all of the risk incentive structure during the acquisition process and before on them. At least one contractor sees the ability to accept a an RFP is issued. large portion of the risk as a market opportunity. Another contractor appears unwilling to accept so much risk. This Alternative Approaches contractor suggested that, in the absence of adequate risk- sharing, it would prefer not to bid. Most experts recommend In practice, incentives and disincentives are usually tied to some degree of risk-sharing (Pakkala 2002) if not sharing achievement of targets for outcomes and timeliness of perfor- both risks and rewards (Science Applications International mance (e.g., see Transit New Zealand 1998). Sometimes the Corporation 2007). contractor is provided with financial motivation to achieve certain output levels. Other possibilities, as mentioned ear- lier, include contract renewal as an incentive (option years), CONTRACTOR SELECTION CRITERIA award fees for more subjective aspects of performance, and incentives for completing certain work early. Disincentives The criteria agencies have used to select contractors vary frequently include deductions for failing to meet perfor- from organization to organization. Selection criteria may be mance targets and liquidated damages for failing to comply required by law. To apply a selection process not authorized with specific contract terms. by law would require legislative change. Prequalification and postqualification (i.e., before or after receiving bids) occur in Types of performance-based contracts, often used in federal different agencies around the world. performance-based service contracts include the following: Selection Criteria Fixed-price (lump-sum) plus disincentives (deduc- tions/liquidated damages) and possibly incentives Contractor selection criteria include low bid, modified low Cost plus with incentive fees or disincentives/liqui- bid, best value, Qualifications-Based Selection (QBS), and dated damages technical submittal and negotiation. Low bid may be elective Fixed-price or cost plus with an award fee or a legal requirement. Fixed-price or cost plus with an award term (Air Force Guide ... 2003; Federal Acquisition Regulation Modified low bid introduces nonprice considerations by 2005). weeding out potential bidders that cannot satisfy minimum qualifications. Modified low bid can be accomplished by Based on the literature review, the most common per- using a pre- or postbid qualification process. The contract- formance-based contracts in the highway sector involve ing agency picks the contractor offering the lowest bid from lump-sum payments and deductions for failing to meet per- the set of pre- or postqualified bidders (Science Applications formance standards, with at least one option to extend the International Corporation 2007). contract term. Selecting a contractor based on best value involves giving a certain percentage weight to technical considerations and ROLES AND RISKS OF KEY PLAYERS the remainder to costs. Table 6 shows representative weights used in different countries from around the world. Many dif- PBMC typically shifts a large portion of the risk of a main- ferent criteria may be used to determine the technical score, tenance contract from the owneragency to the contractor. such as the following: