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Performance-based contracts

October 12, 2014

There is growing evidence that the form and design of a contract has substantial impact on the results achieved. The evidence ranges from studies on major projects, which often suffer from use of the wrong contract model, to more focused investigation of the behavioral impact of specific terms, such as the liability or indemnity provisions.

The steady move away from traditional product-based sales into a world of solutions and services is changing the emphasis of contracts. Rather than each transaction being driven by a specific delivery or input, many agreements now relate to phased activity where ‘completion’ is rather less precise and ‘success’ can be gauged only over time and linked to an extended output or outcome.

Inevitably, this leads to a growing interest in outcome and performance based contracts. Yet according to the input to a current study, their use remains limited and contract professionals generally develop them through ‘trial and error’. There are also some important differences in perspective between the customer and supplier community. For example, suppliers have recognized the extent to which extended performance periods depend on active cooperation with their customer (and potentially their numerous sub-contractors); buyers seem slower to grasp or accept this point. Both buyers and suppliers appear slow to accept the organizational and operational implications of this enormous shift in the contracting model.

These are among the early, high-level conclusions from a survey IACCM is undertaking in partnership with Newcastle University Business School (UK) and the University of Paderborn (Germany). The research includes insights to the types of outcome based agreements most commonly used, the nature of the benefits and the challenges with their implementation and management. The overall output from this study will include not only the research results, but (over time) more detailed recommendations on different models for outcome and performance based contracts.

If you complete this survey, you will of course automatically receive a copy of the results and be invited to a webinar with the academics conducing the research. Please visit http://ww3.unipark.de/uc/contractingforsolutions/ to participate.

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