The Golden Rules of Pay for Success Procurement

By Grace Edinger, Procurement Strategy Lead, and Harry Huntley, Senior Agriculture Policy Analyst

As momentum has built across state governments for Pay for Success (PFS), we’ve been looking at real world examples of projects – and especially of RFPs and contracts for those projects - to draw some important conclusions about what works. At this inflection point in how environmental outcomes are paid for, we thought it would be useful to identify concrete requirements that set Pay for Success programs up for…well…success.

This post is the introduction to a series of deep dives on how Pay for Success procurements can meet government agencies’ goals. Briefly, these are some of the key enabling conditions that EPIC thinks are vital to environmental Pay for Success contracts:

1. Time it right:
   Effective Pay for Success models require contract durations that are normal for the private sector but unusual for governments. Paying only once outcomes are achieved means that agencies and treasurers need a place where they can hold money for 5-10 years. While it is possible for PFS contracts to work over the 3-5 year period that agencies are easily able to contract, many outcomes take 5-10 years and this creates complicated accounting issues in many states. A dedicated trust fund with a predictable source of income is one type of account that can make it easier to sign long term contracts. Legislatures and agencies need to know how long their contracts can last; if its not very many years, specific statutory authorizations are needed to adjust that limit to one that is relevant to outcomes. Not only is length important, but timing of payments is also key. There is a lot of nuance to payment schemes and contract length that we’ll dive into more in a future blog.

2. Don’t sweat the small stuff:
   In exchange for bidders taking the risk that they will fail to achieve results–and therefore not get paid–agencies are giving up day-to-day micromanagement of project design, engineering, and similar project-level choices. Pay for success doesn’t work if an agency both requires bidders to take a lot more risk and the agency wants to hold on to all project level decision-making. Pay for Success involved fixed price contracts.  Contractors can’t be required to provide timesheets, receipts for materials or cost documentation – that is the point of a fixed price contract. Agencies also generally shouldn’t dictate specific private land parcels on which projects must occur or predetermine the ways applicants are allowed to create outcomes. Reduced paperwork, better targeting, and delivery innovations are all sources of cost savings.

3. Define success:
   A contract needs very clear expectations of exactly what will trigger payment, which believe it or not, is not always clear in traditionally procured contracts. The outcomes have to be things that are reasonably within the power of the contractor to provide. Site visits or drone imagery reviewed by the purchasing agency are two ways to determine whether the expectations have been met. Third parties can also play a role if needed. If the outcomes will be directly measured, what science-based processes will be used? If outcomes are based on models, both the procedure to verify the practice has been implemented to model specifications and the models that are acceptable to quantify the outcome need to be clearly defined.

4. Pay for what you get:
   Using a per unit pricing model, Pay for Success allows governments to pay for exactly what is produced. Co-benefits can be an explicit part of outcome requirements, but governments need to recognize that it typically will cost more to deliver more benefits. It goes without saying that if contractors produce less, they only get paid for the units of outcome they deliver. But if the contractors generate more than originally agreed upon, contracts should allow up to ~10% more to be purchased at the same per-unit price without negotiations, and potentially more beyond that subject to negotiation. This incentivizes higher performance and facilitates agencies meeting their goals faster.

5. Scale to win:
   By nature of their structure, Pay for Success contracts have economies of scale. If programs are authorized to fund bigger projects, there are likely to be greater cost savings and accelerated project timelines. Generally, the bidder with the cheapest per unit cost should win out, but in situations where agencies want to prioritize scale, it’s better to put a minimum size in RFP eligibility than to dilute the emphasis on cost by giving priority points for size in application ranking.

Traditional procurement RFPs can be hundreds of pages long. Pay for Success contracts can be DRAMATICALLY simpler than that. But they are still complex government transactions, and all the tips and tricks EPIC staff have accumulated can’t be covered in full in one blog post, so be on the lookout for us to dig deeper on each of these principles in future blogs.