Inherent Jeopardy of Performance Based Contracting Metrics: A Simulation Experiment

There is a growing trend across the world to adopt Performance Based Contracting strategies to support logistics systems. Using these policies, contract payments are strongly related to the performance achieved compared to prespecified metrics. However, managers are not always confident on what are the most suitable performance goals to use in these agreements. As a consequence, contractors struggle to deliver the desired performance results, while aircraft fleets experience an increase in support costs. And when the results are inadequate, leaders are tempted to impose even more performance targets to contractors, willing to exercise more control over the support organization. In this research, simulation is used to provide quantitative evidence of how sensitive life support costs are to adding metrics to a performance-based contract, with a focus on changes in turnaround times and repair costs, for different logistical configurations. The study acknowledges the potential risk of adding intermediate metrics to these contracts, which possibly will only raise life support costs without a positive effect on the main objectives of a fleet: mission readiness or simply availability. Ultimate negative effects on contractors are also discussed and recommendations are provided to managers on how they could design more successful performance-based contracts