Outcome-based contracting is about to reach a whole new level. Here’s why.

Shannon Cunniff

Even though it’s set to receive billions in settlement dollars after the 2010 Gulf oil spill, Louisiana will fall short of what’s needed to fully implement critical wetland restoration projects to better protect its fragile coast.

Rather than scaling back ambition, however, the state is trying a new and emerging procurement approach – pay-for-performance contracting – to stretch the dollars.

The state’s Coastal Master Plan has budgeted $50 billion over the next half century, to which the oil spill settlements will contribute about $15 billion. Here’s the trick: By tying compensation to contractors to specific, stated outcomes – rather than to just job completion – Louisiana should be able to save money and thus restore more of the coast sooner and more effectively.

Such tangible benefits help explain why outcome-based contracting is catching on in communities and states nationwide, all of whom struggle with budget challenges. And why it’s becoming a buzzword in procurement and sustainable investment circles.

From energy services, to healthcare to…

The idea that contractors and suppliers are rewarded based on outcomes and results has been around for some time in the healthcare industry – for example between insurers and medical suppliers who follow patient outcomes.

It’s also gained traction in the education sector where schools are contracting with energy services companies that promise savings on power bills. This will, in turn, pay for construction costs or services over time without burdening local taxpayers.

Even the federal government has used outcome-based contracting to reduce energy and water costs.

The fact that Louisiana is eyeing this contracting model for its massive coastal restoration project now takes pay-for-performance to a whole new level.

How performance contracting delivers

Natural infrastructure solutions, such as wetland restoration, are among more than 100 projects included in Louisiana’s master plan.

Traditional contracts may, for example, stipulate the placement of clean sediment in open water areas to a certain elevation and planting native wetland grasses a certain distance apart. Under such arrangements, contractors get paid for material and labor, but not necessarily for how well the product – in this case, the restored wetland – performs.

Outcome-based contracting, on the other hand, might instead consider whether the wetland has the desired biodiversity, for example, or whether it attracts nesting of endangered species. A clear set of objectives, and means for collecting data on the progress of selected indicators, help determine such outcomes.

Other outcomes under consideration may be whether the wetland is self-sustaining or slowing coastal erosion. Or whether it reduces flooding of nearby properties and slows storm surge, averting expensive damage.

Louisiana could save billions

Under some pay-for-performance models, the service provider may bring their own financing and insurance. This means the buyer doesn’t pay a dime until the project is completed and the outcome satisfactory.

Whether these contracts realize better outcomes at less public cost will depend on how the terms of contracts are defined, and how the service providers respond. It may take a few tries to find the optimal terms.

But pay-for-performance contracting could ultimately save a state such as Louisiana millions, if not billions, and bring out the best the private sector has to offer: expertise, speed and risk sharing.

Together with other innovative financing tools such as environmental impact bonds, these new approaches can help unlock private capital for much-needed infrastructure projects nationwide, at the right time.

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