dover performance contracts 2015

Making the leap …

…from paying for goods and services …

… to rewarding for desired outcomes!

Presented by:

Jerry Dover, P.Eng.

Director Engineering

Give and Go Prepared Foods Corp.

Engineer and Maintainer

Project Engineer

Maintenance Manager

Infantry and engineering

officer

Introduction

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Several blows to the head

Definitions*Contract:

a legally binding, voluntary agreement between parties

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*from an engineer not a lawyer

typically defines the provision of goods or services

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Definitions

Defined Outcomes

Measured Performance

Linked Compensation

PERFORMANCE BASED

CONTRACT

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Learning From Experience:A Story*

* About how I learned to use PBCs through trial and error and mistakes and failures and blows to the head and … so forth

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Life as a Manager of Contracts Seemed Stable and Unchanging

Don’t worry, if it doesn’t work, we’ll take it back

Our Standard Terms are:50% downpayment

40% due on notice to ship10% due on delivery net 30 days

We have a great Service Agreement for 12

Maintenance visits per year, unplanned parts and

labour extra

This is all very normal – crazy talk!

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We Want:

• Predictability - PM contracts

• Reliability - new capital assets

• Productivity – automation

We get:

• Emergency outages

• Unexpected expenses

• Performance below expectations

My happy life as an engineer was much like your happy life:

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I had to supply some unique, older rebuilt equipment to a German integrator who was building a “showpiece production line”

One day, things changed

They did not want our old equipmentto risk their delivery and payments,so they asked us to signa “Performance Contract”

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What is the underlying purpose of this type of contract?

How will it shift the balance of risk and reward?

Can we use this type of contract to our benefit?

This Started a Learning Quest

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So I tried it on other suppliers, and got…

ANGER

CONFUSION

DELAYS

LEGAL REVIEWS (GOOD)

REFUSALS (NOT

GOOD)

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A key supplier of critical equipment simply refused to accept it

First contract after 20 years serving your

company! No customer of

ours has ever asked for this!

Your performance demands are too

stringent and unfair!

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Given this resistance,do we proceed?

Why the resistance?(Is it worth the fighting)

What are the true risks and benefits?(Will it really help)

How exactly do you implement & enforce?(Can we make it work)

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overcome the fear of change

trust: it must be a mutually-beneficial agreement

understanding the risks and costs of failure

collaborate on defining the service levels

be VERY clear on how the outcomes will be measured, and by whom

agree on your dispute resolution mechanisms

Do we go back to the status quo,or press on with this new way?

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The PBC Framework

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The PBC FrameworkTable of Contents1. COMPONENTS OF THIS AGREEMENT ................................... 22. SCOPE OF SUPPLY AND PRICE ........................................... 23. DELIVERY DATES AND CONDITIONS ................................... 44. PERFORMANCE SPECIFICATIONS ........................................ 55. TECHNICAL SPECIFICATIONS ............................................ 56. INTERFACES ................................................................ 67. SHIPPING METHODS AND CONDITIONS ............................... 68. INSTALLATION AND COMMISSIONING .................................. 79. EQUIPMENT DOCUMENTATION .......................................... 811. SPARE PARTS AGREEMENTS ............................................. 1012. COMMERCIAL AGREEMENTS ............................................. 1013. CONFIRMATION OF THE AGREEMENT ................................. 13

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The Supplier has a financial inventive to beat the targets Both parties could track progress clearly I could focus on other aspects of the project

The End Results

Our management was more confident When a spec was not met, the vendor fixed it without complaint Both parties got what they wanted!

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Our team’s attitude evolved from

What Did We Learn?How Are Things Better?

Passive acceptance of

goods/services

Deeper understanding of apportioning risk

Proactive, mature approach to link

rewards with outcomes

The Moral of the Story

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Speak in terms of performance.

Mutually agree to acquire:

specific capabilities

desired ranges of availability

defined standards of build, finish, and maintainability

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Focus on:

true partnering

a mature, non-adversarial approach to assigning incentives and damages

work hard to determine capabilities and how to measure them

The Moral of the Story

They make sense

They improve on the status quo

They help BOTH parties succeed

I welcome your comments and feedback!jerry_dover@hotmail.com

Additional Resources

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