New Research Shows Performance-Based Contracting Lowers Costs

BigFatFinanceBlog (Kroll) - The use of performance-based contracting appears to be growing, particularly in the public sector.

As of 2006, government agencies in about 40 countries either had implemented or were exploring the use of performance-based contracting, according to a 2009 report by the Transportation Research Board of the National Academies, Performance-Based Contracting for Maintenance. Within the U.S. and Canada, performance-based contracts are in use within a number of states and provinces, the report adds.

The use of performance-based contracting appears to be less common in the private sector. (Or, if companies are using it, they’re keeping a little quieter about it. )

However, Rolls-Royce has been using performance-based contracting for several decades. The company allowed researchers Morris Cohen, Jose Guajardo, and Serguei Netessine at Wharton, along with Sang-Hyun Kim at Yale University, access to its records. The quartet studied five years of Rolls-Royce maintenance records on 700-some products used by 60 customers. The results of their research will be published in a forthcoming paper, although a summary is available here.