The Challenges of Service Contracting Vernon J. Edwards Presented to the Cape Canaveral Chapter of...

The Challenges of Service Contracting

Vernon J. EdwardsPresented to the

Cape Canaveral Chapter of the NCMADecember 13, 2006

December 13, 2006 Copyright 2006 by Vernon J. Edwards 2

Table of Contents

Topic Chart Nos.

What is a service? 3 - 7

The challenges of service contracting 8

Specification 9 - 11

Source Selection 12 - 13

Pricing 14 - 16

Quality Assurance 17

The Inadequacies of Current Policy 18

The Professional Challenge 19


What is a service?

A service is work done by one party for another in order to change some object in a specified way: some person or set of persons, property, or some set of circumstances.

My definition is based on the work of T. P. Hill. See: “On Goods and Services,” 23 Rev. Income & Wealth 315. http://www.roiw.org/1977/315.pdf


The Components of a ServiceObject, Process, Result

Service ObjectInitial State

Service ObjectResult State

Service Process(Functions, Tasks)

The service object as initially encountered by

the provider

The service object after the

provider has done its work

The ordered application of labor and capital to

produce change

(The source of costs)

A buyer can specify a service by process or result. The service is the result, not the process. People who buy services have some result in mind, even if they have only a vague idea of the result that they want, and even if they specify process.


Service Quality• This is one of the most complex issues in service

contracting.• Quality may be based on process, result, or both.• When a service entails a high level of human

interaction, process is often as important as result. Moreover, a recipient’s subjective perceptions may be more important than objective reality.

• Quality often is not validly measurable in a quantitative sense.

• Attempts to quantify might result in emphasis on relatively trivial matters (e.g., the timeliness of reports instead of their accuracy or completeness).


Categories of Services

• There are two basic categories:– Projects: one-time performance in which a specified result

must be achieved within a specified time and budget– Operations: performance of repetitive or continuous

processes throughout some period of time


Variations in Services• By tangibility of result• By durability of result• By complexity (number of objects, functions, or tasks)• By degree of customization• By process duration • By place of performance• By extent of interaction between provider and recipient• By nature of interaction between provider and recipientEach variation and each combination of variables gives rise to unique

challenges.


The Challenges

Specification

Source Selection

Pricing

Quality Assurance


Specification in General

• Specification is description.• In order to specify something you must describe it,

using words, numbers, and/or pictures.• In order to describe it you must visualize it in some

form.• In order to visualize it you must either observe it or

imagine it.


Specification of Services• In general terms, there are two ways to

specify services:– by process, or– by result.

• Contractually, it is usually considered unwise to specify in both ways.


Specifying Results

• When services are complex, the results desired might be manifold and unpredictable or unforeseeable under all conditions and circumstances of performance.

• In some cases — research and development, testing, services, and specialized operations —the result will not be acceptable unless the process is carried out in a specified way.


Source Selection• When selecting a contractor or subcontractor we

usually consider (a) the qualifications of the competing firms, (b) their proposed products or services, and (c) their proposed prices.

• Products are tangible objects that either do exist or have existed, or are imaginable in tangible form and describable in more or less objective terms.

• Services are only imaginable. They do not exist until they are being or have been rendered. They are always custom to some degree. And even tangible results often cannot be preserved for examination by evaluators.


Bases for Source SelectionEvaluating the “Proposed Approach”

• Selections based on descriptions of the “proposed approach” to providing a service may not be reliable, since the description may be nothing more than the product of the marketing imagination. There is no way to prove that the approach will succeed, and the Government may not have the know-how to predict the likelihood of succeeding.

• Binding a contractor to use its proposed approach may turn out to be a costly mistake.


Pricing Services

• There are two general approaches:– Market pricing: used for standard commercial services such

as plumbing, automobile repair, and most professional services

– Cost-based pricing: used for noncommercial services

• Pricing may be output-based or input-based.• A fixed-price lump-sum construction contract is a

classic example of output-based pricing.• Time-and-materials and labor-hour contracts are

classic examples of input-based pricing.


Input vs. Output Pricing

• The expenditure of labor and material is not, in and of itself, the service. Labor and materials are inputs to the service.

• The service is the output of the labor — some change.

• Input-based pricing uses costs incurred or labor rates and incurred hours as the basis for payment.

• Output-based pricing uses the negotiated price of the achieved service result as the basis for payment.


Output and Input Contracts

• Contracts that pay a pre-established amount upon achievement of the specified result are output contracts.

• Cost-reimbursement, time-and-materials, labor-hour, and fixed-price level-of-effort contracts are input contracts.


Quality Assurance• A number of attributes of services make them difficult to inspect:

– Intangibility of result– Short-lived or ephemeral nature of result– Dispersed performance– Subjectivity of quality– Lack of true units or lots of results

• For these reasons, statistical quality assurance using random samples and acceptable quality levels (AQLs) may not be applicable.

• The buyer might be forced to choose between 100 percent inspection or nonstatistical sampling.

• It may be difficult for the buyer to establish effective remedies for nonperformance.


The Inadequacies of the FAR

• The FAR was written for purchases of supplies (goods).

• Policies for the purchase of services are largely an after-thought. (Service contracting is considered a “special” category of contracting, even though the Government annually obligates more money for services than for goods.)

• Clauses for services often appear to be cut-and-pasted from clauses for supplies. (Compare the inspection clauses.)


The Professional Challenge

• To think things through• To develop a shared and comprehensive conceptual

framework• To challenge unrealistic or unworkable policies and

mandated procedures• To reject program “success stories” (such as

Deepwater) that are unsupported by verifiable and relevant evidence

• To experiment and develop realistic and appropriate policies and methods

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