PERFORMANCE STANDARDS: A GUIDE TO DECISIONS AND EVALUATION

The FAR also includes four performance standards that provide a framework for decision making (see Figure 1-4). These standards—customer satisfaction, minimizing operating cost, maintaining the public trust, and fulfilling public policy objectives—provide criteria upon which participants in the process can measure how well they performed. All acquisition officials and members of the integrated acquisition team are advised to keep these standards in mind when performing their duties, remembering that they come before policies, practices, and goals.

Figure 1-4 Standards of Performance for the Federal Acquisition System

Customer Satisfaction

The first standard, customer satisfaction, is a restatement of the implementing vision that the primary objective is to satisfy “the customer in terms of cost, quality, and timeliness of the delivered product or service.” It means that the product is more important than the process. This key performance standard has seven elements (Figure 1-5, Key Elements of Customer Satisfaction):

1. It is a recognition that the ultimate user’s needs are paramount.

2. Continuous communication with the customer is key to define, and often refine, the performance characteristics of the product or service.

3. The potential offeror’s track record is to be taken into account when selecting contractors to provide the product or perform the service.

Figure 1-5 Key Elements of Customer Satisfaction

4. The early use of market research is vital to identifying sources within industry that have the capability to furnish the designated goods or services.

5. Effective competition must be promoted.

6. To be successful, the acquisition system must deliver a high-quality product when it is needed, where it is needed, and in a cost-effective manner.

7. Advanced planning is an integral part of the overall process, but the system must retain the capability to be flexible.

Satisfy the customer in terms of quality and timeliness of the delivered products or service: The purpose of this principle is to remind all participants in the acquisition process that all actions should be directed to supporting the needs of the customer, who is the ultimate user. It is also important to point out that the contemporary meaning of the term quality includes the ultimate user’s performance, reliability, and maintainability needs, which are defined during the requirements determination and refined product design phases of the acquisition through a series of tradeoffs.

Principal customers are identified as the users and line managers acting on behalf of the American taxpayer. How responsive the integrated acquisition team is to the needs and concerns of the customer is a critical factor upon which the team is evaluated. Customers usually view their needs primarily in terms of performance and schedule. They want to receive exactly what they ordered—no more, no less, no substitutes, no defects, and at the agreed-upon delivery date. However, fiscal constraints are a reality that all who participate in the acquisition process must recognize, and everyone must be willing to make tradeoff decisions. Therefore, the integrated acquisition team must know how much it will cost to provide the customer the desired level of quality and service early in the life cycle of the product. For example, in the DoD the PM, supported by the Cost/Performance IPT (CPIPT), is tasked to conduct all program cost and performance tradeoff analysis. The CPIPT’s analysis may result in performance or engineering and design changes, provided they do not violate threshold values in the Operational Requirements Document (ORD) and Acquisition Program Baseline (APB).

Continuous communications: This is about the management of information—converting ideas into concepts and then into products or services that meet the needs of the customer. Meeting this standard requires establishing a communication protocol and maintaining an effective feedback process within the entire integrated acquisition team. Including the customer as a member of the integrated acquisition team facilitates meeting the customer’s goals. The open communication process includes using the intranet, extranet, video conferencing, and traditional written and verbal means. After contract award the common language for communicating within the team must be the contract document. This document represents the contract performance baseline that was the product of the negotiated agreement and encompasses the characteristics of the product or services to be delivered as well as the how, where, and when. Which documents should be designated for use as the performance baseline depends on the complexity of the acquisition. Examples of appropriate documents are: specifications, requirements-traceability matrices, statements of work, work breakdown structures, integrated master plans, integrated master schedules, earned value systems, system maturity matrices, and technical performance indicators.

Select contractors with proven track records: Acquisition policy now makes it mandatory that the past performance record of all offerors be evaluated for all source selections for negotiated competitive acquisitions expected to exceed $100,000, unless the contracting officer determines competition is not an appropriate factor for the acquisition.

This standard strongly endorses the use of a contractor’s demonstrated past performance record, or demonstrated current superior ability to perform, to establish the contractor as a primary candidate for a government contract. The value of this practice to the government is that there is supposedly less risk in selecting a contractor with a proven track record than one that is relatively unknown. This belief is based on practices being adopted by industry and Deming’s philosophy, i.e., the value of developing long-term relationships that lead to reduced cost and improved quality by working together. Implementing this standard will not be easy. It requires the buying office to address questions such as: (1) What in a contractors’ past performance history is considered relevant? (2) Does a contractor’s past performance experience have a shelf-life? (3) How will corporation mergers and downsizing be considered? and (4) How will firms without a history of past performance on a government contract be evaluated and compared to one with a history?

Maximize the use of commercial sources: Acquisition policy emphasizes maximum use of commercial and commercial non-developmental items. This policy was implemented because of the technology explosion, especially in electronic data interchange, and the realization that commercial items can satisfy a large majority of government requirements. Also, by using commercial or non-developmental sources, cost will be reduced, lead times shortened, and the industrial base enhanced. Commercial contractors must be considered not only as prime contractors but subcontractors as well. Whenever practical to maximize competition, innovation, and interoperability, the DoD charges its acquisition managers to capitalize on commercial technologies for the acquisition of products and services.

This performance standard also charges the integrated acquisition team to communicate with the commercial sector during the requirements determination phase to identify available capabilities that will satisfy the user’s needs. This recognizes the vital role market research plays in determining requirements. Market research is defined as “the process that is used to collect, organize, maintain, analyze, and present data for the purpose of fully understanding the technology, competitive forces, and capabilities of the marketplace to meet an organization’s needs for supplies and services.” The goal of market research is to find the most suitable supplier, product, or service available to satisfy the customer’s needs. To be successful, early participation in the market research process is required by all members of the integrated acquisition team.

Selection of a commercial product or service can also be viewed as a way to accelerate the acquisition process because it identifies goods or services already available. This strategy bypasses the design and product development phases of the acquisition process. It mitigates the cost, schedule, and performance risk inherent in the development of items unique to the government.

For systems, the CO should now focus on developing strategic partnerships because the private sector is depending more and more on strategic sourcing as part of supply chain management. Selecting the right partner who will participate in joint planning early in the process is critical. As suppliers build their businesses around their specialized knowledge and core competencies, strategic alliances with these suppliers become increasingly important to the design and development of a system and ensure long-term support. Consequently, supplier assessments of the potential supply base must be more detailed and precise.

At this point it is appropriate to point out that the laws, rules, regulations, policies, and procedures used by the federal government can easily discourage a commercial contractor from doing business in the public sector. One of the most significant laws is TINA, which requires designated categories of contracts and contractors to furnish the government cost or pricing data upon which the product or services cost was based. TINA also requires some contractors to disclose their accounting practices to the government.

Promote competition: Acquisition policy has traditionally emphasized “full and open competition” as the way to ensure that quality goods and services are obtained at a fair and reasonable price. This means that all responsible sources are permitted to compete.

In a competitive situation, both the seller and buyer will attempt to exploit the situation for their own advantage. The seller will ask as high a price as it feels it reasonably can. The buyer will not pay more than necessary to obtain the needed item. “Which prevails will depend on relative bargaining strength, and this will depend on the interaction of such factors as the number of buyers and sellers of the product, the costs, the amounts of profit, the intensity of demand, and the alternatives available to both buyers and sellers.”

As discussed earlier, studies by the RAND Corporation, the Battelle Memorial Institute, and the Office of the Secretary of Defense concluded that contract price reductions from 25 to 30 percent can be realized in an atmosphere of genuine price competition. Price reductions on government contracts through competition are prevalent. Congress has made clear that competitive procurements are mandatory, and sealed bids and negotiated procurements fit the competitive award criteria that “full and open competition” exists. Inclusion of negotiated procurements, which permit award without discussion, and the implementation of the best value and past performance standards, means the award will no longer be left only to the low bidder. Low price is not a fair way to measure competition because, as Deming points out, “price has no meaning without a measure of the quality being purchased.”

Early in our history, contracts were awarded primarily on price because it was believed that lowest price represented the “best value” to the government. This policy created “the strict conformance standard”—a process in which lowest price begets the lowest possible interpretation of requirements, i.e., no more, no less. Today, as part of acquisition streamlining, government policy encourages greater use of performance specifications. This, coupled with continued advances in technology, means that requirements have become more complex and that the number of variables to consider when evaluating proposals has increased. Consequently, the 1991 DoD appropriations bill changed the law to enable the use of “best value” criteria. Best value is consistent with Deming’s fourth point, i.e., “to end the practice of awarding business on price tag alone.” The contractor’s approach to meeting the requirement, delivery schedule, contractor’s past performance, and life cycle (support) cost are also major factors to be considered when selecting the supplier.

The system must perform in a cost-effective manner: This standard relates to reducing policy and procedural constraints on the acquisition system that cause it to be characterized as non-responsive and inefficient. The requirement for the system to perform in a timely, high-quality, and cost-effective manner embraces one of the major initiatives of the vision, i.e., acquisition employees must be empowered to exercise their individual initiative and judgment. James Wilson points out that we want government to be both fair and responsive; but the more rules we impose to ensure fairness, the harder we make it for government to be responsive. Herbert Kaufman is quoted as saying that red tape is of our own making: “Every restraint and requirement originates in somebody’s demand for it.”

The DoD inspector general reported that in the case of procurements under $500,000, cost and pricing data were still requested 75 percent of the time, even though they were not required by the regulations. Empowering employees to make decisions in their areas of responsibility is a message that a significant cultural change is required. FAR paragraph 1.102, Statement of guiding principles for the Federal Acquisition System, states that members of the integrated acquisition team must be empowered to make decisions in their area of responsibility for the system to become more responsive. The FAR vision further encourages members of the team to exercise initiative when it is in the best interest of the government to do so. If it is not prohibited by law or regulation, and it makes good business sense to initiate an action, then do it. Members of the team can address tasks in their areas of responsibility from the perspective that if it does not add value, and the regulations or policies are silent on the subject, then why do it?

Emphasis is also being placed on the government adopting best commercial practices when and where it makes good business sense to do so. In the 1980s commercial industry began to focus on the total system cost. This change in perspective occurred when the private sector realized that almost 60% of the cost of goods sold went to purchase supplies and services from subcontractors and vendors. Top management realized that they needed to change their perspective to be more competitive. The primary measures of success no longer were price, keeping the production line moving, and the cost of operating their departments. Effective management of outside suppliers was recognized in the private sector as a competitive weapon. Purchasing and supply managers began to focus on: (1) value-added benefits, such as the quality of purchased material and services, and (2) cutting the total cost of acquiring, converting materials to finished goods, moving, and holding inventories. At the same time, supply strategies were developed and integrated into marketing, production, and financial strategies. This has led to three major developments in industry:

1. Using cross-functional commodity teams to identify sources or develop new products

2. Developing and managing the organization’s supply chain

3. Developing collaborative supplier partnerships and strategic alliances.

An efficient acquisition system is also the outgrowth of the skills and training of its personnel. As the government downsizes, contracting professionals are assuming an increased workload and becoming generalists specializing in business management–type duties. Therefore, job training and qualification requirements must be revised to meet the government employee’s future needs.

Planning is an integral part of the acquisition system: The acquisition team must participate in the planning and budgeting process. All members are also charged to participate in the requirements determination and acquisition planning steps of this process. The integrated acquisition team must be formed early so that each appropriate discipline can translate operational and support needs into program requirements. Participation in program definition, market research, and the subsequent preparation of the documentation describing the requirement ensures that all factors are considered. Depending on the size of the acquisition, these documents can be multidimensional; it is therefore vital that all appropriate members of the integrated acquisition team participate in initial planning. This performance standard also cautions members of the team to be flexible so they can adjust to unforeseen changes to requirements as conditions dictate.

Minimizing Administrative Cost

The next performance standard is minimizing administrative operating cost. This has always been important, but the scale of importance increases exponentially in periods of declining funds. Some examples of ways to minimize administrative cost are: (1) shortening procurement cycle time through the use of electronic communications; (2) eliminating the use of paper through the use of electronic commerce; (3) using purchase cards for small dollar purchases; (4) taking advantage of the bulk purchasing power of the government; (5) using blanket purchase agreements, multiple-award indefinite quantity contracts, and single agency procurements; (6) integrating product and process; and (7) relying increasingly on commercial products.

Avoiding excessive checking is another way to reduce administrative cost. “There is an optimal level of ‘waste’ in any organization, public or private. It is at that level below which further savings are worth less than the cost producing them.” The benefits derived from added product testing and inspection fit the same law of diminishing returns. Acquisition managers must determine by cost-benefit analysis if the cost of avoiding risk entirely is worth the expenditure. Other prime candidates for cost-benefit evaluations are performance requirements, process standards, product modification, product and reliability testing, data items, and size and structure of the integrated acquisition team itself.

Dr. Paul Kaminski, former Under Secretary of Defense for Acquisition and Technology and one of the architects of acquisition reform, recalled how as a program manager in the Air Force he had evaluated recommendations from the engineering support organization on required specifications and data items. He determined their merit by using the risk-reward (cost-benefit) technique. Following Dr. Kaminski’s lead, questions to ask when determining the requirements to be incorporated into the specifications, processes, and data to be delivered to the government include:

1. Is it vital to product performance and the customer’s mission?

2. Does it enhance management of the program, or is it a “just in case” requirement?

3. What is the impact on the purchasing cycle time and the personnel cost of the integrated acquisition team?

4. Can it be accomplished in a less costly way?

Maintaining the Public Trust and Managing Risk

Maintaining the public trust: When framing the Constitution, our founding fathers recognized the crucial role public opinion plays in influencing what laws would be written, what their content would be, what funds would be requested, and how those funds would be allocated. Alexander Hamilton recognized in The Federalist Papers that “legislative discretion is regulated by public opinion.” This performance standard highlights the importance of maintaining the public trust, calling on each member of the integrated acquisition team—government as well as contractor—to ensure the integrity of the acquisition system by handling public resources wisely, fairly, and openly. The standard states that each member of the team is “responsible and accountable for the wise use of public resources as well as acting in a manner which maintains the public’s trust. Fairness and openness require open communication among team members, internal and external customers, and the public.”

As part of the government’s fiduciary responsibility to the taxpayer, government personnel have traditionally performed oversight of contractor performance. This often includes full-time personnel assigned to review the contractor’s performance on site or performing periodic visits to the contractor’s plant to inspect and accept the deliverable product. Contractor progress is also monitored by reports, often covering numerous details, submitted by the contractor via contract data requirements lists (CDRL). This practice has sometimes led to the government approving performance plans after contract award and creating decision points where government permission is required prior to the contractor advancing to the next step.

Acquisition doctrine has moved government surveillance to a higher level without sacrificing the public’s interests. Emphasis is now being placed on increased use of performance-based contracting, which is designed to increase the contractor’s accountability for achieving the designated performance factors. In exchange for accepting this increased risk, the contractor is given a much greater amount of flexibility in the way it performs under the contract.

Draft solicitations now can be sent to prospective offerors prior to issuing the solicitation. This means that a performance requirement document fully describing tasks and performance requirements can be developed in conjunction with the contractor prior to issuing the formal request for proposal. The integrated acquisition team can then monitor contractor performance through the use of performance indicators, e.g., metrics. Under this concept the contractor also is able to incorporate its current processes into the requirements document rather than create a hybrid process, as has been the case in the past.

Managing risk: Another way to earn the public trust is to empower officials to exercise initiative and apply sound business judgment to the management of the risks associated with each acquisition. The goal is to be proactive by shifting the objective of decisions from “risk avoidance” to “risk management.” This is opposed to “eliminating risk” through the adoption of all-inclusive processes and extensive test programs.

Managing risk increases the acquisition team’s readiness to address possible problems. Risk is defined as “the probability of unwanted consequences of an event or decision.” Every risk has a probability of occurrence, an impact, and choices that will affect outcome. Risk can also be described as a potential problem dealing with the possibility of failing to achieve a designated objective. It is not limited to any one source and can be categorized by type, e.g., cost, schedule, technical performance, supportability, and programmatic risk. The contractor is also subject to business risk, such as a subcontractor going out of business, failure of a subcontractor to deliver on time, or a component part becoming obsolete.

A historic obstacle in managing risk is the real-life situation in which managers are more often busier correcting today’s problems than preventing or mitigating tomorrow’s. A large part of the reason for this condition is that the reward system recognizes those who solve current problems and rarely recognizes those with the foresight to prevent problems from occurring.

DoD Directive 5000.2 defines risk management as “an organized method of identifying and measuring risk and developing, selecting, and managing options for handling these risks. The types of risk include, but are not limited to, schedule, cost, technical feasibility, threat, risk of technical obsolescence, security, software management, dependencies between a new program and other prgrams, and risk of creating a monopoly for future procurements.” Risk management is a systematic approach rather than an “art or science.” Identifying and managing risk is an important part of each integrated acquisition team’s responsibilities. Policy has shifted the team’s focus from total risk avoidance to risk management.

Members of the integrated acquisition team can manage risk by: (1) reducing the probability of the problem occurring; (2) developing a contingency plan to work around the problem, should it occur; (3) transferring the risk to another party; and (4) eliminating the risk completely. In most cases the cost of completely eliminating a risk is prohibitive.

Policy initiatives are also addressing risk from the top down. One leading example in which risk management has been implemented through policy is the performance standard that maximizes the use of commercial products or services in the FAR.

An additional example of risk management is the emphasis placed on the contractor’s recent past performance in making the source selection. Theoretically, there is less risk when a proven performer is awarded a contract. The FAR performance standard is: “When selecting contractors to provide products or perform services, the Government will use contractors who have a track record of successful past performance or who demonstrate a current superior ability to perform.”

From the contractor’s point of view, almost every acquisition also represents a potential window of opportunity. For example, it provides the contractor the opportunity to improve its sales position and return on invested assets. It also means that the contractor can maintain a positive record of performance that will enhance its ability to obtain subsequent business. It could represent an opportunity to launch a new product line or enhance the contractor’s competitive position within the industry. In addition to receiving the needed product at a fair and reasonable price, the government also benefits from mission success, improving organizational efficiency and effectiveness, and enhancing the industrial base.

The key point regarding these windows of opportunity is that they are often of short duration. Therefore, management must be alert to the opportunity potential present and develop contingency plans before the window slams shut.

Fulfillment of Public Policy Objectives

Congress is the primary authority for turning public policies into law. Not only does it establish the foundation for rules that govern the acquisition process, but it also initiates social and economic policies through legislation. However, interpreting the legislation is the function of the executive branch of government, with help from the judiciary and case law. The magnitude of social and economic policies addressed in the FAR is immense and complex. Table 1-2 below lists the categories of social and economic programs.

This performance standard also requires the acquisition system to attain goals adopted by Congress and the president while ensuring efficient use of public resources. The social economic programs that have the greatest affect on the acquisition process are small business, small and disadvantaged business, equal opportunity, affirmative action programs, and wage protection given to construction and service contract labor.

Table 1-2 Categories of Social Economic Programs