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Payment by results

April 28, 2015

IACCM recently hosted a roundtable discussion to explore industry attitudes towards contracts based on ‘payment by results’.

As buyers shift from seeking low price to value for money, it is inevitable that suppliers will be expected to commit more firmly to performance. This typically extends the period of engagement for the supplier and leads to the question “When should I be paid?” Many buyers – business and consumer – will increasingly expect that value is visible prior to payment, in whole or in part.

For Governments, ideas like payment by results have particular attraction. They see it not only as a way of encouraging supplier honesty and performance, but also of demonstrating responsible handling of public funds. Therefore the results of this roundtable discussion are being shared with the UK’s National Audit Office as it explores developing guidance on ‘payment by result’ contracts.

There are problems with this approach – some practical, others reflecting attitudes. For example, will such an approach simply lead to higher prices because of the perceived additional risks? Will it result in major suppliers deciding not to bid? Is payment by results compatible with other Government policies, such as expanding business awarded to small and medium enterprises? With regard to attitudes, there was a degree of cynicism at the table that this was just another way for the public sector to avoid its responsibilities in driving good performance. The point was made that many contracts are risky because the customer doesn’t really know what they want, or there is political interference, or the client lacks skills at performance management. In these circumstances, payment by results will not fix the problems.

One participant made the observation that buyers must understand the overall supply chain before moving in this direction. It is not only a question of whether the contracted supplier is willing to work on this basis, but also whether they can impose similar terms onto their suppliers. In many industries, the market lacks real competitiveness and tier one suppliers may simply refuse to do business in this way.

A wide-ranging discussion resulted in many ideas and insights, which are being turned into a summary paper. Please add your comments or experiences. This is a subject that shows every sign of growing in importance.

One Comment
  1. This is a great theory, harder to implement in practice. For example, if you have a project aimed at generating $100M in value, and that value is realized, the buyer may say that the value would have been realized independently (there will be other stakeholders who want to get credit), or even in spite of the supplier’s efforts. And if the value is not realized, the supplier may point to issues with control or unfulfilled responsibilities of the buyer. In other words, it’s easy for things to get messy.

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