Compressed Air Performance-Based Contracting and When It Makes Sense

Compressed Air Performance-Based Contracting and When It Makes Sense BayControls Banner Image

So, let’s say you have a compressed air project in mind.

Maybe you know that you need to reduce your compressed air system pressure.

Or perhaps your facility is being pushed to cut energy expenses as part of a corporate mandate.

Now, let’s suppose that it’s a complicated project involving several potential steps, analyses, and updates or upgrades.

One you can’t do in-house. One that involves an outside vendor.

As with any project involving partnering with a vendor, funding the project can be a major hang-up.

The same goes for choosing the method in which to work with another company.

Sometimes, the solution to this problem comes down to using a compressed air performance contract – also known as the performance-based contracting (PBC) method.

But what does this mean, exactly?

And when would it make sense for you to use a performance-based contract for your compressed air project?

Let’s explore this more.


What is Performance-Based Contracting?

Performance-based contracting, which is also called performance-based service contracting (PBCSC) or performance-based service acquisition (PBSA), is defined as:

“a results-oriented contracting method that focuses on the outputs, quality, or outcomes that may tie at least a portion of a contractor’s payment, contract extensions, or contract renewals to the achievement of specific, measurable performance standards and requirements.”

In general, performance-based contracting includes a few specific measures. Per the U.S. Federal Acquisition Regulation (FAR), performance-based contracts must:

  • Describe the requirements in terms of results required rather than the methods of performance of the work
  • Use measurable performance standards (i.e. terms of quality, timeliness, quantity, etc.) and quality assurance surveillance plans
  • Specify procedures for reductions of fee or for reductions to the price of a fixed-price contract when services are not performed or do not meet contract requirements
  • Include performance incentives where appropriate

FAR also explains that work in a performance-based contract should be described by what – that is, the end goal or objective – instead of how to do something.


When Does Compressed Air Performance-Based Contracting Make Sense?

There are several scenarios where using a performance-based contract for your compressed air project may make sense:

1) When you want to keep your upfront costs to a minimum

If your project is going to be particularly expensive – or if you want (or need) to avoid an intense capital investment in the beginning of your project – using a performance-based contract will help you minimize your upfront costs for it.

For instance, when Bay Controls worked with Ford Motor Company on a compressed air project for 12 of their plants, Ford requested that we deliver the intended project as a performance contract for this very reason.

2) When there is the possibility of having a long-term project (i.e., 1-5 years)

If you are open to or have the buy-in for a longer-term contract, using a performance-based contract with the outside firm you hire makes sense – especially if the project itself will last several years in duration.

This is especially helpful if you are exploring ways to pay for compressed air upgrades with little or no out-of-pocket costs.

As we mentioned in our blog post about this topic, if you can align your project financing with the anticipated energy savings via a performance contract spanning several years, you can potentially pay for compressed air upgrades entirely with the energy savings they generate (via the performance contract).

3) When you can involve an integrated, cross-functional internal team   

Per Ronald L. Straight from Howard University at the 91st International Supply Management Conference:

“Integrated teaming, not an ad hoc work group, is critical to a successful [performance-based contract]. Cross-functional teams are especially needed to establish the requirements, the measures, and evaluation methods for PBC. It is important that such teams work together to solve the issues related to the contract rather than defending their traditional silo organizations.”

For performance-based contracting to truly be successful, it’s important to have different members and departments from your company involved in the compressed air project. This could include, for instance, people from IT, engineering, procurement, energy management, maintenance, and/or operations.

However, it is not always possible to have an integrated, cross-functional team involved in a project involving compressed air. If this is the case, this may not be the best method or manner to enact your project.

4) When you know what results, or objectives, you want from the beginning of the project

For a performance-based contract project to be successful, you need to know what results or objectives are desired from the very beginning.

For example, do you want to lower your energy spend by a certain percentage or dollar amount? Or meet a corporate mandate? Or perhaps prevent system-wide compressed air pressure fluctuations?

As Straight states: “The most important part of a PBC and what distinguishes it from other contracting methods is in describing the results that are desired.”

Therefore, if you don’t know what results or objectives you want the project to bring about, performance-based contracting may not be the wisest choice for you.

If you do, though, using a project-based contract can ensure the project success!

5) When you can avoid being too prescriptive in how you want a project to be executed and can allow the outside company to be flexible

For a performance-based contract to be successful, the outside company who executes the project needs to be given flexibility in how they implement the project.

Remember: the focus is on the results they achieve, not the nitty-gritty methods of how they achieve these results.

FAR gives this explanation of what this looks like:

“For example, instead of telling the contractor how to perform aircraft maintenance or stating how many mechanics should be assigned to a crew, the contract should state that the contractor is accountable for ensuring that 100 percent of flight schedules are met or that 75 percent of all aircraft will be ready for flight.”

This quote comes directly from their 2002 report about performance-based contracting in which they analyzed 25 contracts to see how they used (or tried to use) the performance-based contracting method.

During their research, FAR discovered that when contracts were heavily prescriptive – or too detailed in how they wanted things to be accomplished – the agencies in question weren’t nearly as fruitful.

Here’s how this ties to your compressed air project: if you aren’t willing (or are unable) to allow the outside company you’re partnering with for your compressed air project to be flexible (within reason, of course) in the way they set out to achieve your desired objectives, using a performance-based contract may not be the best method for you.

And that’s okay. Everything depends on the nature of the project. In some circumstances, you may not be able to be flexible. You may have to be prescriptive. And if that’s the case, then a performance-based contract might not be the right fit.

6) When you can measure the outside company’s performance against performance standards/indicators  

The main part of performance-based contracting is measuring the performance of the contracted company throughout the project.

If you can set performance indicators or standards before the project begins and measure them throughout the project, you can successfully utilize a performance-based contract for this compressed air project.

And what should these indicators or standards look like?

Straight explains: “Performance standards describe a definite level or degree of quality for measuring performance.” He adds that “Performance standards must be measurable, achievable, relevant, and controllable.”


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