
Pay-for-Success: Financing Sustainability Through Results-Based Contracts
LiS Leadership Project by Chien Li, 2023
1. EXECUTIVE SUMMARY:
Pay-for-Success (PFS) is a government contracting model whereby the commissioning agency offers payment to a contracted firm only upon successful completion of a project. Ongoing data from these projects shows the potential for a 63% cost reduction in environmental outcomes for a project over a 5-year period, and ultimately creating a cleaner and better-managed environment.
The project is partnered with the Environmental Policy Innovation Center (EPIC) to conduct an analysis on PFS. Project aimed to address the policy question of: How do PFS contracts benefit states or municipalities that utilize them, and how do they generate more benefits, whether it be in cost savings or environmental outcomes, compared to than the traditional design-bid-build method?
The project interviewed 17 organizations and 20 interviewees with expertise in PFS and other alternative contracting models and examined 13 contracts and Requests for Proposals covering a diverse range of projects.
By comparing PFS with the traditional design-bid-build method for government contracting, along with two hybrid versions of PFS involving third-party investors and stepwise payments, the overall conclusion was that PFS is the most effective contracting method for environmental projects.
2. IMPORTANCE:
PFS-based contracts for environmental outcomes are being implemented in various parts of the U.S ranging from the East Coast in Anne Arundel County, Maryland, to the West Coast in Sacramento County, California, for projects such as land restoration, mitigation banks, and stormwater management. Today, governments and organizations have seen PFS as a means of generating the most cost-effective environmental benefit. However, not much study has been done for PFS, as a team we’re trying to answer the below questions through our research: How do PFS contracts benefit states or municipalities that utilize them, and how do they generate more benefits, whether it be in cost savings or environmental outcomes, compared to than the traditional design-bid-build method?
3. IMPACT AND REACH:
The team spoke with 17 organizations and 20 interviewees with expertise in PFS and other alternative contracting models on and examined 13 contracts and Requests for Proposals covering a diverse range of projects. Through this approach, the team was able to develop an understanding of the benefits and drawbacks of PFS, and how it compares to other contracting methods. The overall data and information collected and analyzed form the basis of our evaluation on the comparison of PFS and other potential contracting methods.
Given the unorthodox nature of PFS, the analysis conducted in this report focuses on categorizing and evaluating the risks that agencies and firms must deal with when it comes to government contracting. From the interviews conducted and contracts reviewed, a major emphasis was placed in these main criteria:
• Financial: Overall costs and cost-savings of the project;
• Time: Involving time spent on the project and if it was completed under the set deadline;
• Outcome: What goals were achieved and did the firm complete what it set out to do;
• Reputation: How did the agency and firm look coming out of this project;
• Management: Did oversight and implementation of the contract satisfy everyone and lead to a successful performance result.
Quota Sampling, CAM matrix are used for analyzing risks, scoring policy options and ranking policy options. By comparing PFS with the traditional design-bid-build method for government contracting, along with two hybrid versions of PFS involving third-party investors and stepwise payments, the overall conclusion was that PFS is the most effective contracting method for environmental projects.
For a government agency, the cost savings generated from PFS means that an agency could potentially pay 63% less than what was paid under the original contracting method over a 5-year time frame. PFS further enables the agency to withhold payment to the contracted firm until a satisfactory job is completed, while ensuring efficient project completion, optimal outcomes, and minimal administrative burden on the agency.
4. COLLABORATIONS:
To assess and showcase the overall results of PFS, our team (from UCLA Luskin School of Public Affairs) has partnered with Environmental Policy Innovation Center (EPIC) to conduct an analysis on PFS. EPIC is a non-profit organization based in Washington D.C with the mission to build policies to speed up environmental progress.
5. YOUR ROLE WELL DEFINED:
The project team is made up of 5 people from the Master of Public Policy program, we each contributed to the project based on our skills and background knowledge. I took the lead on organizing meetings and note taking. As a team we also interviewed the field experts and created connections. The project is a required capstone project for Luskin Master of Public Policy program. We’ve reached out to many interviewees outside of our client to create a more reliable database for our analysis. We also provided our client with additional writeups for their public use which is not required by our department. Our team would like to take part in the advocacy of Pay-For-Success, which would help transform agency’s traditional way of environmental project payment model to something more efficient and sustainable.
6. OPTIONAL NEXT STEPS:
Environmental Policy Innovation Center (EPIC) is a great client and they research on many different environmental policy topics. If any students are interested in conducting research projects with them would love to help connect.