Performance-Based Logistics Contracts Continue To Prove Their Value

In spite of itself, sometimes the Department of Defense’s acquisition system gets it right. Sometimes it can even save the taxpayers money. The department does so when it restrains its tendency to control, regulate, audit and manage every aspect of a defense contract and instead relies on commercial best practices and incentivizing the contractor(s) hired to perform the work.

Probably the best example of government getting out of the way and letting industry do its thing is the use of Performance-Based Logistics (PBL) sustainment contracts. Unlike traditional fee for service or time and materials contracts, PBL works by specifying outcomes, not activities. The contractor commits to meeting a specified level of performance or an outcome, say the percentage of a fleet of vehicles or aircraft available for operations, for a price (usually below what the government was paying before). The contractor also has an incentive to improve its processes and, sometimes, even hardware, because it can increase its profit. PBL is a win-win because it is based on a core human value: do better in order to reap greater rewards. A 2011 study by INSEAD of commercial airline engine maintenance contracts found “a positive and significant effect on product reliability created by the incentives under PBC (performance based contracting).” Overall, product reliability was found to be 25-40 percent higher under a PBL/PBC than using a traditional time and material contract.

Defense contractors have proven this to be the case over and over. Take one example. General Dynamics Information Technology received the 2013 Secretary of Defense Performance-Based Logistics Award for its work on the U.S. Marine Corps’ Combat Operations Center program. According to DoD, by employing an innovative PBL approach, the team enhanced the effectiveness of the sustainment strategy, resulting in dramatic cost reductions while maintaining exceptional availability including: a 21 percent operations and sustainment cost reduction, resulting in a $7.1 million savings per year, a 39 percent reduction in forward-deployed support personnel, and system availability of over 90 percent. Quite an accomplishment.

But this is just one of many examples. Boeing’s C-17 Global Sustainment Partnership with the Warner Robins Air Logistics Center has demonstrated a similar track record over more than a decade. The C-17 fleet has achieved an 86 percent mission-capable rate in recent years, even as flight hour costs decreased by 29 percent. According to Lt. Col. Jeff Hayden, C-17 chief of program integration, “We measure monthly against 11 performance metrics. Boeing has exceeded every one by huge amounts.”

These outcomes should not come as a surprise to anyone in the Pentagon. Back in 2010, the principal deputy assistant secretary of defense for logistics and materiel readiness commissioned a study to perform an independent, fact-based assessment of PBL product support strategies, called Project Proof Point. A team from Deloitte Consulting, Supply Chain Visions, and Auburn University looked at 21 examples of PBL-based contracts. What they concluded was that properly structured and managed, PBL-based arrangements were able to increase value to the customer while reducing costs.

Of the 21 programs evaluated, 13 began under a non-PBL support strategy, and 12 realized improved operational readiness at a reduced cost, compared with their pre-PBL support. The remaining 8 programs were supported from inception by a PBL strategy and had no pre-PBL data to evaluate. Even so, 17 programs had improved performance and lowered cost over time.

The only question that remains to be answered is why DoD is still so reluctant to implement PBL-style contracting across its sustainment activities? Senior leaders say nice things about PBL but then don’t take appropriate action. In an era of declining defense budgets this is just plain wrong.