Performance-Based Contracting Approaches

Kishor Shrestha

Chapter 11 in Building a Body of Knowledge in Construction Project Delivery, Procurement and Contracting, 2023, pp 199-231 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Today, agencies use several contracting approaches to outsource their work. When they contract out to private contractors, they must consider a few issues, including how the contractors perform their work, what the contractors’ responsibilities are, what risks will be transferred to the contractors, and how the contractors will be paid. In other words, the agencies must determine what specifications they want to use for the contractors to perform their work. Based on specifications used in typical contracting approaches, two outsourcing methods are common in the construction industry: method-based contracting (MBC) and performance-based contracting (PBC).Since the PBC method is comparatively a newer contracting approach, it warrants a more in-depth look. PBC use does not have a very long history, being first used in British Columbia, Canada, in 1988 to maintain roadway and bridge assets. The PBC method uses performance specification, which allows contractors freedom related to performing a given scope of work. More specifically, the performance specification does not bind the contractor, as does the traditional method-based specification, as far as ‘how to do’, ‘when to do’, and ‘what to do’ are concerned. The PBC approach also provides incentives and disincentives to the contractor based on the work quality produced.Today, the PBC approach is being used globally. Agencies who have used this approach have benefited in various ways through saved cost, increased level of service (LOS), etc. Globally, transportation agencies have used the PBC approach for several types of work, such as roadway and bridge construction and maintenance, rest stop area operations, and mowing activities, to name a few. There is also a history of agencies implementing the PBC approach in building projects, including the service providing works of buildings in the operational phase, by reducing utility costs for example. Studies have shown that the main benefits of using the PBC approach are economic and managerial.This chapter explains the reasons for using the PBC approach, types of PBC approaches, and PBC approach implementation in various project types, as well as case studies, their findings, and the challenges and lessons learned from past PBC contracts.

Keywords: Construction; Engineering; Project Delivery; Procurement; Contracting (search for similar items in EconPapers)
JEL-codes: L74 O2 (search for similar items in EconPapers)
Date: 2023
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