The Poor Performance of Performance Contracts

There are about 200,000 trees on the streets of San Diego, according to recent data. That’s a lot of trees, and the city proudly signed a contract with a private sector firm to trim 44,000 trees per year in order to keep them healthy and the public safe from hazards like falling branches.

That’s a sensible goal, but an auditor’s report in March 2019 found that the city had no way of knowing whether its contractor was actually meeting that objective.

This is the dark side of performance contracting. To be sure it’s a good thing to see that the deliverables in a contract—particularly ones involving services—are clear.  But whatever the contract says, it doesn’t matter much if an agency doesn’t provide sufficient oversight and monitoring, “I love the idea of performance-based contracting,” says Kip Memmott, audit director for Oregon. “And in theory they’re wonderful. But [many] haven’t been effective at meeting their promise.”

Sometimes this is because the contracts themselves don’t do a good job at spelling out, with clarity, what levels of performance are required in order to deserve full payment for the service or avoid penalties. Moreover, even clarity and specificity of performance goals are nearly worthless if there is no pre-ordained schedule for check-ins to make sure that the measures are being met.

In San Diego, for example, the tree contract called for specifications for the level of services to be provided. But there was no contract compliance process in place to actually monitor performance.

The management team in charge of tree trimming agreed with the auditor’s complaints and promised to remediate them.

Similarly, when The Texas Conference of Urban Counties signed a contract with the state’s Juvenile Justice Department in July 2019, it required that the group meet milestones for service availability and response times when there were problems or outages in its web-based juvenile case management system. But “the Department did not have a process to ensure that the contractor met those service requirements,” said an audit about a year ago. As the Texas Juvenile Justice Department wrote in response to the audit, “The TJJD acknowledges errors made and has taken steps to prevent such errors in the future.” Some of the steps it is taking include “enhancing and standardizing” the way it goes about planning its contracts, reviewing them, and “more clearly defining staff roles and requirements in those processes and procedures.”

The lack of adequate monitoring in Texas goes far beyond juvenile justice. In a summary report conducted by the Texas Auditor’s office, performance monitoring was the most cited weakness in contracting.

North Carolina is another state that is failing to provide sufficient performance oversight of its contracts. As in many other cities and states, the primary reason is lack of resources. “The agencies tell us ‘We don’t have the staff, we don’t have the staff,” according to North Carolina State Auditor Beth Wood.

In fact, Wood says, all the managed care organizations hired by the state to provide health care through Medicaid were evaluated. But only two had documentation to support the evaluation. What’s more, says Wood, “in the few instances where documentation supported deficiencies or bad performance, the Health and Human Services Department did not require corrective action plans or assess penalties.”

One of the underlying reasons why performance contracts don’t necessarily lead to better performance is that the men and women who are often most responsible for writing the contracts have never been trained in this particular skill. They are lawyers, who typically are taught transactional contracting techniques. They are skilled in drawing up a contract with timelines, milestones, payment schedules and so on. “But many of today’s law schools don’t teach more advanced performance-based contracting skills,” says Kate Vitasek, a faculty member at the University of Tennessee and co-author of Strategic Sourcing in the New Economy.

This phenomenon can go beyond performance contracts with vendors and extend to agreements between cities, states and their citizens. When Portland, Oregon passed new tax measures in 2016, the ballot contained language that guaranteed monitoring of the results of the changes. But there was no specification of who would do the monitoring and how, says Performance Auditor Alexandra Fercak, referring to a December 2019 audit.

In fairness, using performance measures to hold contractors or government entities fully accountable isn’t always feasible. When a hurricane hits, for example, it can be impossible to hold ambulance corps or firefighters to contracts’ current response time requirements. A flooded road can extend the time it takes to get to a heart attack victim through no fault of the contractor.

It’s our strong suspicion that a great many performance goals in health care-related contracts aren’t going to be met for many months as a result of the coronavirus outbreak.

Still, even though there may be instances in which the performance accomplishments in contracts aren’t achieved, ensuring that they’re carefully and regularly monitored is crucial.