What is a performance-based contract?
A performance-based contract is an agreement that specifies the result to be achieved rather than the activities to be carried out. The client sets the performance — an internal temperature, a failure rate, a technical condition — and the contractor decides what effort is needed to deliver it.
The opposite is the classic input or activity contract, which states how often each activity is performed (“service the boiler twice a year”). There the client pays for activities, regardless of the effect.
Examples of performance requirements
| Domain | Performance requirement (example) |
|---|---|
| HVAC | Internal temperature stays within an agreed band during occupied hours |
| Lifts | Availability above an agreed percentage; downtime below a maximum |
| Building maintenance | Building elements stay at an agreed condition level |
| Roads and grounds | Visual quality stays at a defined standard |
| Energy | Guaranteed consumption or guaranteed savings (energy performance contracting) |
What has to be in place
- Measurability. A performance you cannot measure objectively is not a performance but a wish. Record what is measured, how, where and how often.
- Baseline survey. Without a recorded starting condition, you cannot later establish whether a maintenance backlog predates the contract.
- Controllability. Hold the contractor to account only for what they can influence. An internal temperature is unachievable if occupants open the windows.
- Penalty and reward. Penalties alone produce defensive behaviour; a bonus for above-target performance works better.
- Term. Performance contracts only pay off over multi-year terms (often five to ten years or longer), because only then does the contractor benefit from durable solutions rather than stopgaps.
Advantages and drawbacks
Advantages: less supervision, an incentive to innovate at the delivery end, predictable costs and a single point of responsibility.
Drawbacks: drafting takes considerable preparation and expertise, changing course mid-term is harder, and a poorly measurable requirement will almost certainly end in dispute.
Related terms
- Best Value Procurement
- Tendering
- Specification
- Building costs
- Design brief
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