Price and Payment
Under normal circumstances, payment to a
contractor for services rendered under a contract
is based on the price stated in the contract
(Contract Price (CP)). Unlike conventional contracts
where payments are usually made in full, a PBC
payment is subjected to an “at-risk” margin that
is modifiable. At-risk margin is a percentage
determined to be equal to the contractor’s profit
margin, the maximum amount at-risk to the
contractor that will be deducted as remedy due to
under performance. This means, in a typical PBC,
payment to the contractor is the sum of “amount
not subjected to performance” and “performance
payment for each KPI”.
Another important feature of 3 rd Generation
PBC is the use of payment curves for each KPI.
A typical performance curve, as shown in Figure
4, is the means to relate the actual “Achieved
Performance” to “Adjusted Performance Score”
(APS). In other words, an APS is an expression
of performance as a percentage of the Required
Performance Level. As shown in this curve,
if Achieved Performance is at the required
performance level or above (within Band A), the
APS value will be 100%; if within Band B, APS
is between 80 to 100; if within Band C, APS is
between 0 to 80, and so on. The design of the
performance curve and the colour coding for each
Band are interpreted as follows:
Band A (Good) - performance equals or
exceeds the Required Performance Level.
If over-performance is of value, may specify
incentive to be included in the Performance
Payment, otherwise APS is set to 100%.
Band B (Fair) - performance slightly less
than the Required Performance Level. It
allows for minor variations in APS but still
have small and tangible impact on the value
of the services. The slope discourages
performance to fall further below.
Band C (Bad) - performance may be
tolerable for short term but unsatisfactory
in medium/longer term due to diminishing
value of services. The slope will cause APS
to reduce rapidly as performance degrades.
May trigger remedies under the contract.
Band D (Poor) - value of services is
considered negligible since the buyer’s
ability to attain the required outcomes is
significantly affected. Regardless of the
Achieved Performance, APS is set at 0%.
May trigger further remedies under the
contract including LD.
Although the focus is on at-risk margin as the
method for payment deduction, PBC does not
exclude the provisions for Liquidated Damages
(LD). At-risk margin does not replace LD, in fact,
LD is considered a KPI with another name. LD
in a PBC is applied when there is no value in the
level of service provided by a contractor under
the contract. At this point where damage has
occurred, an alternative method to achieve the
Contract Outcome is required.
Putting it into perspective, LD in PBC is the
compensation to be borne by the contractor to
allow the buyer to pay another party to perform the
service and achieve the required outcome. For the
Government, the loss suffered due to significant
under performance by a contractor is sometimes
difficult to quantify accurately in financial terms
due to the non-commercial nature of some of
the services it provides (eg. defence and security
related services). Notwithstanding the same, the
value of the loss must be objectively estimated
and imposed on the contractor. In response to
the comments made by Jabatan Audit Negara
who audited and requested Jabatan Bomba dan
Penyelamat to further improve its PBCs a few
years ago, the current LD provision employed in 3 rd
Generation PBC allows the Government to deduct
beyond at-risk margin, now up to 60% of CP.
In order to summarise the price and payment
mechanism in a PBC, let us consider the following
example: A PBC at-risk margin is determined to
be 20%, it has three KPIs with assigned relative
weightings of 50%, 30% and 20% respectively
and put in force one LD under KPI-2. The payment
formula for this PBC is therefore as shown in Table
3 on the next page.
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