Performance-based Contracts Perform

My Contract Management magazine arrived recently with even more evidence that a vested, collaborative approach to managing difficult contracts – or solving difficult problems – results in success on a huge scale.

Most of us grew up hearing about the controversies surrounding the Rocky Flats Plant near Denver, a U.S. nuclear weapons production facility that operated from 1952 to 1992. The 6,200-acre facility was under the control of the Atomic Energy Commission until 1977 and after that the Department of Energy. To make a long, complicated and often amazing story short, numerous violations of federal anti-pollution laws were found there in the late 1980s, including massive water, soil  and building contamination.

That triggered an arduous process of environmental cleanup remediation and restoration, along with the decision to close the facility. It became the Rocky Flats Environmental Technology Site in 1994, and the cleanup effort was contracted to the Kaiser-Hill Company.

During this process, the Contract Management article reports that DOE wanted to “do things differently” in how they contracted for the Rocky Flats closure and cleanup project by providing incentives for the contractor to perform consistently within DOE goals. The department outlined the WHAT and turned to a supplier team of Kaiser Engineers and CH2M Hill, an engineering, consulting, construction and operations firm, to fulfill the HOW.

short paper on the Rocky Flats closure states the CH2M Hill – Kaiser team “operated under two innovative DOE contracting models” at the site. The first, awarded in 1995, “was the first performance-based contract in DOE,” paying the contractor only for “specific units of verifiable work.”

The second contracting model was the 2000 closure contract, which authorized the entire scope of work to clean and close the site by October 2005 at a target cost of $3.9 billion. DOE originally estimated in 1995 that it would take 65 years and $30 billion to clean up and close Rocky Flats.

No wonder DOE’s drive to do it differently.

Fast forward to 2007, when the cleanup was certified by the EPA as complete; in July that year DOE transferred about 4,000 acres of land on the Rocky Flats site to the U.S. Fish and Wildlife Service to establish the Rocky Flats National Wildlife Refuge. It’s an environmental triumph and a major success for innovative contracting. The Kaiser-Hill contractor team brought innovative approaches to clean up the mess, and the result was that contract incentives for schedule and cost savings resulted in the closure more than a year ahead of schedule and $530 million under the contract budget!

It was a groundbreaking example of performance-based collaboration. DOE’s 346-page Rocky Flats Closure Legacy report says: “Beyond any specific innovation, it was through unparalleled cooperation among the interested parties that a conservative and compliant cleanup and closure of Rocky Flats was enabled; ahead of schedule, under cost, and without a fatality or serious injury.”

The report outlines some major takeaways from Rocky Flats, including:

–      Contract reform works: “The first K-H ‘Integrating Management’ contract demonstrated that incentivizing clearly defined performance measures vastly improved actual results.”

–      What, Not How: Simply put, DOE said it “must manage to a contract, not manage the work for the contractor.”

–      Collaborative working relationships: The closure was a success because everyone was “engaged in the process and supportive of the ultimate goal. We communicated openly and often to seek the best solutions, and came to value the input from formerly dogmatic opponents.”

Those points encompass all of Vested Outsourcing’s Five Rules, especially Rule 2, Focus on the What, Not the How; Rule 3, Agree on Clearly Defined and Measurable Outcomes; and Rule 5, Governance Structure Should Provide Insight, not Merely Oversight.

My take? If the government can turn a political, legal and environmental disaster into something innovative and worthwhile by using collaborative, performance-based relationships, industry should pay really, really close attention.

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