Idea to retire: Inflated performance ratings for contractors

Central to the ability of a market economy to promote consumer welfare is the ability of consumers through their buying decisions to reward suppliers who have treated them well in the past (by buying a product or service again) and punishing those who haven’t (by not buying it again the next time).

Imagine a counterfactual where current purchasing decisions were not influenced by suppliers’ past performance: poor performers would not lose market share, and good performers would not gain. Incentives for a supplier to perform well would drastically decrease. In our everyday lives as consumers, we apply this principle constantly: if a barber or hairdresser has cut and styled our hair well the last time, we are notably more likely to return to the same place the next time.

Yet until the 1990s, federal contracting did not take contractor past performance into account when making new decisions . The strange idea was that it was “unfair” to reward or punish a contractor for its past performance; ignoring past performance was seen to help assure a “level playing field.” In my 1990 book, “Procurement and Public Management,” which criticized the failure to use past performance in government in making decisions about contract awards, I quoted a very conscientious civil servant who discussed how he fought off his instinct to reward a contractor who had done an outstanding job on a previous contract by giving them a leg up for new work. He was very proud of his resistance to temptation.

In the 1990s this changed. At the end of the George H.W. Bush administration, the Office of Federal Procurement Policy (OFPP) announced an effort to change the Federal Acquisition Regulation to allow for past performance to be used as a “source selection” factor. The new Clinton administration, which had appointed me as OFPP Administrator in 1993, pursued this new direction aggressively. The result was a provision added to the Federal Acquisition Regulation (FAR 15.304) in 1995, stating that “past performance shall be evaluated in all source selections for negotiated competitive acquisitions” other than small purchases. The provision also gave the government wide latitude in deciding how to evaluate past performance: 

“The solicitation shall describe the approach for evaluating past performance, including evaluating offerors with no relevant performance history, and shall provide offerors an opportunity to identify past or current contracts (including Federal, State, and local government and private) for efforts similar to the Government requirement. The solicitation shall also authorize offerors to provide information on problems encountered on the identified contracts and the offeror’s corrective actions. The Government shall consider this information, as well as information obtained from any other sources, when evaluating the offeror’s past performance. The source selection authority shall determine the relevance of similar past performance information.” (FAR15.304(a)(2))

I was hopeful at the time that the new emphasis on past performance might produce a revolution in government procurement, by dramatically increasing incentives for contractors to perform well. Twenty years later, it is fair to say that inclusion of past performance in the system has had at least some effect on encouraging contractors to perform better, but that no revolution has occurred. As one of the authors of the new policy, I would say I have been disappointed with the amount of impact it has had. One of the most-common observations one hears from government contracting officials involved in selecting contractors for new business is that the past performance of those bidding on a contract seldom varies enough to serve as a differentiator when making awards.

I believe that a key mistake made in designing the new past performance system in 1995 was to allow a contractor disappointed with their past performance rating to receive a “review at a level above the contracting officer to consider disagreements between the parties regarding the evaluation.” If a mea culpa is permitted, I will note that, as OFPP Administrator, I signed onto this staff-recommended provision. (My staff was concerned the new past performance policy would be controversial and wanted to increase political support by adding a “due process” protection.)

In my view, this provision set in motion a vicious cycle of cascading failure in the government’s use of past performance information.  Government officials are very concerned that if they give a contractor a bad rating, they are nominating themselves for spending tens of hours defending, orally and/or in writing, their decision to a higher-level official. The easy way out is to give a high rating, which won’t trigger a review. But of course this reduces rating candor: in one discussion of past performance a few years ago at a government-organized event, a number of contracting officials expressed the view that the ability to review a rating the contractor didn’t like hurt the level of candor in ratings. With inflated grades and too little variance, past performance seldom serves as a discriminator in evaluating bidders. The vicious cycle occurs because, as government officials see that past performance is not serving as a discriminator, they lose interest in seriously contributing to the system. So the quality of contributions goes down over time. (I started hearing the observation that past performance was not acting as a discriminator around the time I left the government in 1997, and those discussing this problem generally noted that this was leading them not to take the ratings process seriously.)

In my view, this is a practice that deserves to go.  We should eliminate the contactor’s right to a higher-level review. At the time the past performance system was initially developed, there was no capacity to put contractor rebuttals online in conjunction with the government’s own report card.  That capability now exists, which makes it easy for the contractor to have their version of events available to third parties.

Of course I do not believe that eliminating the higher-level review is a magic bullet for what ails evaluation of past performance in government.  It is often psychologically painful to give bad news. Some government officials may believe saying a contractor performed poorly may reflect badly on themselves. Understaffing, along with the government’s chronic under-emphasis on contract management (a problem that needs attention more broadly) reduces resources and attention to the contract management task of preparing past performance report cards. But if the government solved these problems without dealing with the incentives against candor the current review process creates, it is unlikely the system would improve much. But if ending the higher-level review breaks the past performance vicious cycle, that could improve the use of past performance even without other changes, and would be an achievement that can be built on through other improvements in how we train people for using past performance and how the process is managed.

This problem has been festering for twenty years. Interestingly, past performance continues to be a topic that engages government contracting officials:  over the past few years, it has been on the agenda of the Front Line Forum which is a sounding board for working-level government contracting officials more than any other single topic. Reflecting this continued interest, over the past few years, OFPP has paid periodic attention to improving the system, but a lot of their effort has been concentrated on trying to improve “compliance” with the requirement to get the reports submitted.  This is a sort of “eat your broccoli” approach that hardly engenders enthusiasm about the importance of using past performance in government contracting.  Instead, in my view a change in this regulation should be positioned in a positive, upbeat way as a key part of an effort to reset past performance policy and hence open the way for a real improvement in vendor performance. Use the regulatory change to inspire those in the workforce who are eager to do a good job and to signal to them that something new is on the way.