Performance Based Logistics (PBL) Contracting Strategies

To leverage PBL’s proven ability to deliver needed reliability and availability to DoD customers at reduced cost, the DoD has a goal of ensuring the effective use of PBL, with particular focus on business arrangements that provide financial incentives to industry.

Defining Support Outcomes – Developing support outcomes and capturing them in a PWS is a foundational effort in establishing properly structured PBL contracts, and is addressed as the first step in the Product Support Strategy Development Tool, Integrate Warfighter Requirements and Support.

This first step in this process model is tied to the Joint Capability Integration and Development System (JCIDS), which focuses on developing operational and support requirements and Key Performance Parameters (KPP). The KPPs drive the metrics that will: (a) be linked to or documented in the PBL contract; (b) serve as the primary measures of support provider performance; or (c) be decomposed to lower-level metrics appropriate to the support providers performance requirements. 

Capturing the sustainment metrics as outcomes in a PWS can be facilitated by the use of automated tools, such as the Acquisition Requirements Roadmap Tool (ARRT). The ARRT is a set of automated tools to assist the workforce in writing performance-based requirements for services contracts following the Requirements Roadmap process. ARRT is a Microsoft Office application that generates Microsoft Word documents. A planned new tool includes an integrated product support element PWS template. The ARRT is on the DAU Service Acquisition Mall (SAM) website. **NOTE: As of FY24, the ARRT is offline. Please check back for updates.**

Metrics - The life cycle sustainment outcome metrics required by the Joint Requirements Oversight Council (JROC) include:

• Sustainment KPP (Materiel Availability (Am) and Operational Availability (Ao)) 
• Reliability Key System Attribute (KSA) or Additional Performance Attribute (APA)
• Maintainability KSA or APA
• Operating & Support (O&S) Cost KSA or APA

As programs progress from acquisition and fielding to sustainment, these four metrics are used to monitor and measure performance. In addition to these mandated metrics, the PSM usually adopts a variety of lower-level metrics that are consistent with the support provider scope of responsibility and which link back to the top-level warfighter requirements. The DoD PBL Guidebook includes a section on building linkages between various levels of metrics, plus a robust appendix with a comprehensive listing of metrics.

Contract Incentives and Disincentives - Best practice PBL contracts often use some combination of “carrots and sticks” incentives and disincentives that are tightly aligned, promoting behaviors and outcomes that benefit both the customer and supplier. A PBL contract can be incentivized based on a wide variety of factors to include award fees (cash payments/bonuses) or extended contract terms whereby the contract will be extended if desired outcomes are being achieved. Cost-cutting targets are inherent if a fixed price model is used; the more the supplier cuts costs the more margin they make; contract price adjustments are made at pre-defined timeframes to review costs and re-price the work. However, not all PBL programs are fixed price and as such, any cost-plus type contract should include some form of cost savings incentive.

Disincentives are usually the “flip side” of incentives — such as reduced fees under incentive contracts, poor ratings on performance evaluations, lapsed options, un-extended contracts or contract terminations.

It is important to keep in mind that the government has wide discretion in assembling and blending contract types and incentive types, tailored to fit the circumstances of the program. There is no one-size fits-all, universally applicable PBL contract and incentive templates.

Baseline – Identifying the difference between existing status and desired performance goals is a key part of developing an effective PBL contract strategy. The life cycle stage of a program will determine the scope of a baselining effort. Technical baselines are part of this effort, but baseline data may also be derived from Failure Modes Effects & Criticality Analysis (FMECA), Failure Reporting and Corrective Action System (FRACAS), Level of Repair Analysis (LORA), Maintenance Task Analysis (MTA), Reliability Centered Maintenance (RCM) analysis, and other key maintenance planning artifacts, as well as Reliability, Availability, and Maintainability (RAM) and Life Cycle Cost (LCC) analyses.

The process of developing the system sustainment baseline is to identify all of the information known about the system to include performance, support, reliability, maintainability, and cost data. If it is early in the program life, or if adequate performance history is not available, moving to a full-fledged PBL effort may be a multi-step process.

Risk, Issue and Opportunity Management - Robust best practice PBL programs include a focus on total program risk reduction along with appropriate off-ramp exit criteria that are captured in the contract. Off-ramps need to balance the needs of the contractor, the customer, and the organic support structure. PBL contracts should include detailed criteria to assure that the program can continue sustainment efforts should the need to exit the arrangement arise. Some common off-ramp criteria are as follows:

• Acquisition, transfer, or use of necessary technical data and support/tooling equipment to allow for follow-on competition or transition to an organic activity
• Training to support transition to alternate support provider
• Transfer or disposition of assets
• Special (Section H) Contract Requirement that allows tailoring and/or exclusions as a form of off-ramps

Optimal PBL contract types - Key factors to contract type determination include but are not limited to the following:

• Program type (legacy or new start)
• Types of funds (i.e., Procurement, Operations and Maintenance (O&M), Research, Development, Test and Evaluation (RDT&E), and Working Capital Funds (WCF))
• PBL levels (system, sub-system, or component)
• Life cycle phase (acquisition through sustainment)
• Federal Acquisition Regulation (FAR) Part applicability - FAR Part 12 “Acquisition of Commercial Items” or FAR Part 15 “Contracting by Negotiation”.

Generally, the optimal contract type for a PBL effort is a fixed price vehicle. However, it is often necessary to begin with cost reimbursement-type contracts in the early phases of PBL implementation while the appropriate cost and performance baselines mature, after which time, programs can transition to a fixed price model.

Longer-term contracts encourage long-term investments to improve product or process efficiencies, but there is no one “right answer” for the appropriate length of a PBL contract. Effective PBL contracts are typically multi-year contracts (i.e., 3 to 5 years with additional option or award term years), with high confidence level for exercising options/award term years. They also typically feature provisions to recognize supplier investment and opportunities to recoup investments.

There has been much discussion regarding the use of FAR, Part 12, “Acquisition of Commercial Items” to acquire PBL. The adoption of commercial pricing practices and reporting processes is seen to be beneficial in helping the contractor, under Government oversight, to implement more efficient practices and thus yield cost savings to the DoD. It is understood that this may not be acceptable for critical or unique military applications. Determinations regarding FAR Part 12 or FAR Part 15 need to be made following FAR and Defense FAR Supplement (DFARS) guidance.

Contract Approaches - There are 2 major types of methodologies that can be potentially used to implement PBL contracts: the supply or service contracting approach.

PBL Contracts as Supply Contracts – Supplies are broadly defined by FAR Part 2 to mean all property except land or interest in land. It includes (but is not limited to) public works, buildings, and facilities; ships, floating equipment, and vessels of every character, type, and description, together with parts and accessories; aircraft and aircraft parts, accessories, and equipment; machine tools; and the alteration or installation of any of the foregoing. Supply Contracts are addressed in FAR Part 11.

The supply contracting PBL approach has been used extensively, particularly by the Navy and the Naval Supply Systems Command (NAVSUP) Weapon Support Services (WSS) organization. The PBL contract does not procure work in terms of an amount of effort, and the contractor is not paid based upon performance of any number of labor hours or labor years in the contract. The PBL contract requires delivery of end items of supply and measures the performance of the end item delivered to the Fleet.

Since the PBL contract requires delivery of an end item of supply, it is within the discretion of the contractor to deliver a new spare, overhaul the item, or remanufacture the item to provide the specified availability and reliability. The Government receives a rebuilt or new end item with a new (or nearly new) life expectancy resulting from processes similar to original manufacturing.

Under the PBL contract, end items of supplies are delivered, which are measured against availability and reliability metrics. The PBL contract does not result in the Government procuring a task, but in the delivery of an end item of supply.

PBL Contract as Service Contracts - A service contract is defined by FAR Part 37 to mean a contract that directly engages the time and effort of a contractor whose primary purpose is to perform an identifiable task rather than to furnish an end item of supply. A service contract may be either a non-personal or personal service contract. It can also cover services performed by either professional or nonprofessional personnel whether on an individual or organizational basis.

As listed on the SAM homepage, service contracts can include the following:

• Equipment-related services
• Knowledge-based services
• Facility-related services
• Electronic and Communications services
• Transportation services
• Research and development
• Logistics Management Services
• Construction Services
• Medical Services

It should be noted that the Department of Labor (DOL) Field Operations Handbook provide the basis for distinguishing between supply and service contracts based on the nature of the repair- i.e. when remanufacturing or overhaul is involved. The Walsh-Healey Public Contract Act generally applies to the remanufacturing and furnishing of supplies.

Contracting agencies are required to initially determine whether the work to be performed under a proposed contract would principally involve remanufacturing work or service work based on the above guidelines and incorporate the appropriate Walsh-Healey Public Contract Act or Service Contract Act (SCA) labor standards clauses into the contract prior to issuing a solicitation.

Funding Strategies – One of the biggest challenges to PBL is funding stability and budget instability. Contract provisions should reflect fact-of-life funding variability and provide both the customer and supplier adequate adjustment mechanisms to mitigate risk to accommodate funding variability.

While PBL programs can be optimized when funding is stable, it is important to recognize budgetary realities. In today’s fiscally austere budget environment, certainty in appropriated funds availability is not guaranteed. Therefore, all parties to a PBL agreement should work to identify and codify a “funding baseline” or “floor,” i.e., the minimum funding level that will allow the program to endure, with flexible structures above the baseline given requisite funds availability.

In determining the optimal funding strategy, it is important to understand the options available related to “colors of money.” “Colors of money” refers to different types of funds discussed above.

Current funding requirements stipulate that specific appropriation types be used at various points in the life cycle, that these appropriation types be used to address discrete types of products or support, and that these funds be used within statutory time limits. In order for PBL to be effective, many of these different colors of money may be needed to procure, support, and sustain DoD weapons systems and equipment over the life cycle.

Time and scope restrictions on various appropriations are a challenge to manage, and often result in less than optimal PBL contracting structures. Early in the Acquisition phase, PBL may be funded with procurement funding and, depending on scope of support, RDT&E funds. After fielding, O&M funds are the predominant source of funding for system sustainment, although multiple ‘lines of accounting’ may be required to address the disparate sustainment functions, e.g., depot maintenance, spares, software and personnel. The use of multiple funding types and lines of accounting restricts flexibility in PBL execution activities and complicates tracking and baselining of sustainment costs.

In order to capitalize on the flexibility inherent in WCFs, there has been an increased use of revolving funds to enable PBL strategies. It facilitates award of long-term PBL contracts. The Navy has been very successful in utilizing the Navy WCF (NWCF), via supply type contracts to implement PBL.

Roles and Responsibilities - In order to develop a successful PBL contract, it is useful to tap into the Product Support Management (PSM) Integrated Product Team (IPT), the second step in the Product Support Strategy Process Model. There is no “must-do” rule on who should be on the team once the program has determined that a PBL contract with industry is the preferred approach, but in general, the PSM IPT could include:

• Component command headquarters representatives
• Operational command representatives
• Logistics representatives (including Supply, Maintenance, and Transportation)
• Industry partners
• Organization representatives from Contracting, Engineering, Life Cycle Logistics, Business/Financial Management, Cost Estimating, Program Management, Legal and Information Technology

To be effective, the PSM IPT should contain a mix of functional area representatives who understand the operational and sustainment requirements of the system, who understand related cost and pricing issues, and who can answer complex contract questions. The IPT needs to be able to address questions that will tie to the appropriate contact type and incentive structure. They need to be able to answer, for example, when it may be more effective to invest in increased inventory levels verses re-engineering to improve reliability. They may also need to know how an investment in increased capability affects overall contract profit margins. An effective IPT will understand the primary risk factors, will understand how profit is created, and will be able to structure a contract to achieve the overall performance outcome.

Make sure each team member understands the mechanics of PBL and incentive contracting. Contract professionals will need to be trained on how to develop contracts that are different from traditional cost-plus contracts. Supply chain professionals will need to be educated in the latest approaches for handling complex supply chains and must be familiar in the current tools used to model them. Maintenance personnel need to understand the latest preventive, predictive, and corrective maintenance techniques, and need to understand the end-to-end maintenance process for the selected weapon system, sub-system, or component.

Tools and Data - The IPT needs effective tools to help them make the right decisions and manage risk. Visibility of supply, maintenance and transportation information is crucial to the up-front development of the PBL contracting strategy and is also critical in managing the effort once awarded. Additionally, using incentive modeling can be a valuable decision support technique, serving as a cost-effective way to measure the impact or probability of success for various PBL support scenarios. To find out more about product support tools, please refer to the Product Support Analytical Tools Database.

Click here to view a video on PBL Best Practices, featuring perspectives by Ms Lisa P. Smith, DASD(PS), and two Service practitioners describing successful PBL arrangements at the subsystem/component and system (platform) level.