Performance-based contracts specify deliverables in terms of the outputs (e.g., lane availability, availability of operating rooms) desired by end users rather than prescribing specific inputs or materials to be used in delivering the outputs. These types of contracts can encourage innovation where the tasks involved are sufficiently complex that contractors have discretion over how they deliver the outcomes. Performance-based contracts are feasible where the outputs are easily measurable using accepted metrics. In such cases, P3 contracts specify inspection requirements, and the service providers can be subject to penalties (i.e., deductions from their monthly service payments) or bonuses depending on the outcomes.
In practice, some participants in P3 markets believe that greater emphasis should be placed on moving away from prescriptive contracts toward those that specify deliverables in terms of desired outputs-a comment that applies to P3s and conventional contract settings. However, there are also projects where it is not possible to define performance requirements in ways that are easily verifiable (e.g., renovations or extensions to existing facilities, where it is not possible to distinguish the new work from any pre-existing or latent defects). In such cases, these projects are not appropriate for delivery as a P3.
Performance-based contract provisions are not unique to P3s and are already used in some conventional infrastructure procurement contracts. However, because these provisions can be more time-consuming to develop and calibrate for specific purposes, they may not be as common for certain types of conventional contracts (e.g., those for operation and maintenance services). More importantly, performance provisions tend to be more stringent in P3 contracts with a maintenance or service phase compared with those in conventional contracts, because they provide the equivalent of a long-term warranty on the infrastructure. Conventional infrastructure construction contracts usually provide a warranty of one year only.
Performance provisions tend to be more stringent in P3 contracts with a maintenance or service phase compared with those in conventional contracts, as they provide a "long term warranty" on the infrastructure. |