The life-cycle of implementing a pay for performance contract involves six key steps that can be grouped into two distinct phases – Contracting and Implementation & Payment.
For detailed information on each of these steps, download our Life Cycle of Pay for Performance Contracts white paper.
Phase I: Contracting
During the contracting phase, the buyer lays the groundwork necessary to focus the producer on the delivery of measurable environmental outcomes, and works to gain buy-in within its own organization for pay for performance contracting.
Step 1: Define Need for Pay for Performance and Secure Funding
Buyers should consider the benefits that pay for performance offers in achieving the program’s goals, particularly through cost-effective, outcomes-based contracting, which will in turn support efforts to secure funding.
Step 2: Select Strategy and Define Payment Terms
Defining the basics of the environmental need, such as the geographic scope of the environmental issue, stakeholder capabilities, and project risk will assist in selecting the appropriate pay for performance strategy. After selecting the strategy, the buyer works with its procurement department to define payment terms that work within the organization’s finance and legal bounds and most effectively contribute to achievement of the program’s goals.
Step 3: Solicit and Select projects
Once payment terms are agreed upon within the buyer’s organization, the buyer solicits applications using a request for proposal. The buyer selects a short list of project applications based on the projected cost-effectiveness of environmental outcomes to be generated, site characteristics, co-benefits, the applicant’s experience, and other criteria defined in the solicitation. After the buyer has selected projects for funding, contracts are executed between the buyer and producer.
Ready to get started developing a contract? Check out our guidance and templates for contracting.
Phase II: Implementation and Payment
During the Implementation and Payment Phase, the producer designs and constructs the project and the buyer makes payments based on the payment terms agreed upon in the Contracting Phase.
Steps 4 & 5: Design and Construct Projects
Depending on the pay for performance strategy and the payment terms defined in Step 2, the buyer either makes partial payments or no payments at all during Steps 4 and 5. Payments made during this period are not typically contingent upon measurable environmental outcomes, but rather achievement of specific design and construction milestones.
Full delivery contracts hold all payment until Step 6 when the environmental outcomes generated initially and maintained over time are verified. Alternatively, partial pay for performance contracts define payment milestones throughout project design and construction, and reserve only a portion of payment for Step 6.
Step 6: Verify Outcomes and Make Secondary Performance-Based Payment
Environmental outcomes are verified, typically by a third party, using a defined methodology that assesses quality. Payments are made to the producer initially upon completion of the final construction milestone and throughout the stewardship term, based on ongoing verification of environmental outcomes.