8. Develop Contractor Key Performance Indicators
Strategic performance contracts require a different contracting strategy. Strategic scopes of work should be directly tied to business results with KPIs. To impact business results, scopes of work typically fall into three categories for a process or manufacturing facility: increasing revenue, lowering operating cost, and maximizing assets.
Increasing revenue:
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Plant availability
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Quality throughput
Lowering operating cost:
Maximizing assets:
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Improve production plan adherence
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Increase return on production assets
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Improve efficiency per labor hour
The key to successful performance contracting is to understand the net effect, impact, or benefit that a contracted scope of work will have on long-term business results. Many times, assets are mined, maintenance is deferred, and key people with essential knowledge and skills are let go or forced to leave in order to deliver short-term benefits. The cost to restore the asset, repair collateral damage because of deferred maintenance, and/or replace knowledge and skills can result in adding back exponential cost to stabilize production, quality, and safety in an operating facility.
The owner must be able to balance the long-term effect of any benefits received from a performance-based contract. Performance contracts should play a part in a company’s long-term strategy and should be structured for a minimum of three to five years to ensure that the contractor delivers sustainable business results that do not undermine the company’s future profits.
9. Implement the Performance Contract
Once the contractor has been selected and the KPIs and performance metrics have been mutually agreed upon, the execution of a performance contract is typically implemented in phases. The three most common phases are:
Mobilization is the process of getting the contractor’s and owner’s team into place and is critical to project success. The team should plan and allow for the proper mobilization of the right resources. The owner needs to thoroughly interview the contractor’s essential on-site management team. Although they are not part of the owner’s organization, the owner will ultimately rely on them to deliver the expected results of the agreement. The owner needs to be reasonably sure that the contractor’s team will work well with the company’s. On the flip side, the owner needs to be responsive if the contractor questions the fit of someone on the company’s team. One bad apple can spoil the whole bunch, regardless of who owns the apple.
Implementation is the process of setting up best practices that germinate the improvement process. Almost all owners underestimate the effort and resources that are required to change the way a company does business — and may have done business for more than 50 years. People, culture, methodologies, processes, procedures, and protocol are all affected by change. On a major project, expect the implementation process to take six months to a year or more. Even then, change will not stop; people will become accustomed to the idea that continuous improvement depends on constant change.
Steady-state continuous improvement is the mature phase of a project, when the dividends of performance contracting start to pay off. In the early stages of implementation, low-hanging fruit savings and improvements are realized. However, it is during the steady-state continuous improvement phase that sustainable step changes will occur.
Many top-performing companies have implemented strategic performance contracting as a long-term competitive strategy. In addition, many of these owners are leveraging the contractor’s resources and expertise to deliver additional benefits through such programs as Systematic Failure Elimination and Profit-Centered Maintenance while lowering their cost of human capital.
—Bradley K. Cunic (brad.cunic@fluor.com) is an executive director of Fluor Corp.
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