Total Ownership Costs for Base Operations Support Contracts: Lowering Costs and Improving Performance

July 13, 2015

PAE VP of Infrastructure and Base Operations Jim Sands was a primary author of this paper, provided by PSC to the U.S. Navy Facilities Command at their request.

Reducing the total ownership costs (TOC) of facilities is a challenging but necessary objective for the Department of Defense (DoD), particularly in light of the budget pressures it currently faces.  Improvements in technology and processes have resulted in immense gains in the efficiency and effectiveness of facilities support capabilities, but DoD has not yet been able to fully capitalize on these advances. The Professional Services Council (PSC), at the request of Naval Facilities Engineering Command (NAVFAC), solicited industry input on how future procurements for operations, maintenance, sustainment and disposal (typically acquired by Facility Support Contracts (FSC) or Base Operations Support (BOS) contracts) could be structured in order to reduce TOC for facilities while improving performance.

Our research yielded three different contractual language options for driving down TOC: 1) Shared Savings/Overruns; 2) Fee Based; and 3) TOC Clause Based

While these three options approach cost savings in different ways, they all share some common element

1. Contracts should focus on the “what is to be accomplished” rather than the “how it is to be accomplished.”  By giving companies leeway in their approach (i.e. the “how”) to addressing the “what” the government wants done, companies are able to leverage innovation to enable cost savings and improved results.

  • Careful use of performance metrics is necessary to ensure industry understands, and can quantify, the “what” the government desires.  

Figure 1.

  • A company’s approach will include its own mix of preventive, predictive, and corrective maintenance programs, the use of technology and analytical techniques, work management processes, and more, which allow the company to distinguish itself from its competitors by offering better results and/or reduced costs.  When the government narrowly dictates the “how”, companies have less options available to distinguish themselves from the competition, and awards tend to go to the lowest priced offeror who can provide a minimal acceptable level of performance.

2. Solicitations should include a sample task order for companies to propose solutions to.  Sample task orders allow the government to compare differing approaches to determine which company has the requisite management approach and provides the best value.  While companies should have the leeway to propose differing approaches, it is ultimately the government’s responsibility to evaluate the varying approaches and select the offer that provides the levels of performance, risk, and price the government desires.

3. Contract should have a period of performance of sufficient length to allow initial investments and initiatives to come to fruition.

4. A detailed inventory of initial conditions and/or performance of the facilities and equipment at the time of initial solicitation is necessary if improvements in conditions and/or performance during the period of performance is to be rewarded.  Improvements can only be quantified if the government and contractor start with a shared understanding of the baseline conditions of the facilities and equipment. 

Starting with this common framework, the following options could be used to incentive superior performance and lower TOC:

Option 1: Shared Savings/Overruns 

This approach shares savings achieved or cost overruns between the government and the contractor on the instant contract. This could be a formulaic (cost-based) incentive type contract (FPIF or CPIF) with either a fixed (i.e. 50/50) share line (see figure 2) or a split share-line with varying percentages (see figure 3) of savings/overruns.  With a variable share line, the government could get most of early savings and industry savings come later; such an approach makes industry work harder to ensure the effectiveness of their programs/processes/practices but also increases the risk/exposure of firms to significant cost overruns.  Under a CPIF arrangement there is usually a minimum and a maximum fee.  Under a FPI arrangement, the government’s liability is capped at the ceiling price but the savings are always shared.

Figure 2.  In this figure, the target cost is $100.  The difference between the target cost and the final cost is divided between the contractor and the government at a constant rate, in the form of increased or decreased fee. This figure uses a 50/50 split, but other ratios could be stipulated in a contract.

Figure 3.  In this figure, the target cost is again $100.  The difference between the target cost and the final cost is divided between the contractor and the government at a varying rate.  Minor savings or overruns fall on the government, but the ratio shifts towards the contractor as the actual costs move further from the target costs.  In this example, if the actual costs came in $2 below the $100 target, the government would receive 90% of the savings while the contractor would only receive 10%.  If the actual costs came in at $10 under the $100 target, the government would receive 50% of the savings and the contractor would receive 50% of the savings.  The same holds true for overruns, with large overruns falling heavily on the contractor.

Option 2: Fee Based

This approach would use fees to incentivize performance towards key performance indicators and targets.  Fee scenarios can come in a variety of forms, and multiple forms are often included in a single contract:

Base Fee – A set percentage of contract estimated cost (usually in the 1% to 3% range)

Incentive Fee – Key performance indicators and targets are established for only a limited number of key metrics around the maintenance program (such as the metrics listed in figure 1 on the first page.)  Targeted performance improvement is expected over time.  A fee pool (expressed as a percentage of estimated cost or price) is established and the actual fee earned is based on a table relating performance to the total pool. (E.g. 90% performance = $x, 100% = $y, 110% = $z)

Award Fee – Key performance indicators and targets are established for only a limited number of metrics around the specific assets or production processes (machine specific).  Targeted performance improvement is expected over time.  A fee pool is established and the actual fee earned is based on a table relating performance to the total pool.  This pool could also be used to incentivize future (post-contract) saving for the government.

Option 3: TOC Clause Based

This approach is similar to Value Engineering Change Proposals (VECPs), but where the savings are derived against the contract costs and therefore represent very little risk to the government. In addition, this third option would not require savings measurement/verification by the government, which is a significant reduction in the burden often associated with VECPs.  The savings would be guaranteed by a reduction in the out-year prices. 

This option would specifically balance project-like investments with BOS contract out-year savings, with an overall focus on incentivizing TOC reductions in operations, maintenance, and sustainment of facilities. Specific metrics and a year-by-year system for maximizing impact from the program were discussed.

The source selection methodology for this approach should include some specific projects up-front and the commensurate out-year price saving associated with them. This option would require specific Section H special clause language to be most effective.  It would make sense to also include a mechanism for the government to invest in some projects where there is not a sufficient return on investment for the contractor on the instant contract but would have significant future saving to the government.

Conclusion

The above options broadly outline strategies the government could take to reduce TOC.  PSC would welcome participation in further discussions to create draft contractual language against a nominal requirement set.  In addition, several of the industry representatives we engaged would like to respond to a NAVFAC RFI, where specific responses to that RFI would be handled as proprietary.  If amenable, the Navy could issue an RFI either to the base operations industry in general, or to a specific BOS job. Industry partners we worked with indicated that they would respond to such an RFI even if they were not specifically interested in the BOS opportunity that the RFI was associated with. The Navy is encouraged to consider allowing presentation-style attachments to the RFI, which industry believes would facilitate understanding. 

Please contact Matthew Taylor on the PSC staff at taylor@pscouncil.org if you have any questions or if we can be of any additional assistance.