More and more states and municipalities are wising up when it comes to disaster recovery contractors. More often, governments are in search of safeguards to protect themselves from contractors making big promises and delivering very little follow through. They’re finding these contractors offer low rates but no commitment to the deliverables that matter. This problem has helped the world of disaster recovery procurement evolve from time and materials (T&M) contracts to value-based contracts, where we have to put our money where our mouth is. Production and efficiency have become the much-needed focus.
Many entities procure T&M contracts because they’re easier to scope, and they generate significant interest from contractors. The contractor will roughly estimate the time required to perform the activity and produce an hourly rate for their efforts. Since this produces minimal risk to the contractor, they are usually willing to work as many hours as the client requests. This often proves to be a double-edged sword because the client looks up to find themselves out a lot of money that has been spent paying for effort but not results.
HUD recognizes these risks and warns governments that, “in accordance with 24 CFR 85.36(b)(10), a time-and-materials contract may be used only when the Contracting Officer has determined that no other type of contract is suitable…” – HUD PHA Handbook, Chapter 10, page 8.
The handbook goes on to state that, “a time-and-materials contract provides no positive profit incentive to the contractor to control cost or labor use. The more the contractor’s labor force works, the more profit the contractor realizes.” - HUD PHA Handbook, Chapter 10, page 9
Value-based contracts are highly effective because they align the client’s and the contractor’s interests. When both parties agree on what completion looks like, the contractor has to price with certainty. This allows the procuring entity to appropriately compare a vendor’s true costs, rather than a misleading hourly rate schedule. Plus, the contractor isn’t paid for “effort,” but only for achieving the client’s goals. This structure motivates disaster recovery contractors to reengineer processes and employ cutting edge technology, in turn accelerating recovery.In New York, the NYC Comptroller City Agency Audit Reports in 2015, identified this very issue. The chart below illustrates the payments made to Sandy vendors while applicants still waited for assistance.
HORNE recently won a procurement to provide disaster recovery implementation services for the devastating flood and storm event in October 2015. The government wisely insisted on a turnkey procurement model that only pays when homes are repaired and reconstructed. Since HORNE’s team controls all phases of the recovery process, including construction, we felt confident that our innovative technology and proven processes would mitigate the risks of a complex process often bid on a T&M basis. The procurement also included performance penalties for not meeting production milestones in accordance with the proposed recovery timeline. These mechanisms work together to ensure that the government only pays for the recovery of its citizens, not our learning curve or our mistakes. They are holding us accountable to our promises, and in the process, protecting taxpayer dollars.
The evolution of disaster recovery procurement should continue to transfer risk from cash-strapped governments to contractors with the experience and integrity to make good on their proposal commitments. Governments should focus on outcomes that matter and structure contracts and payment terms to reflect those values.
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