Five things to avoid when drawing up an outcome based or SIB contract

Outcome based contracts and SIB contracts have some key differences from more conventional fee-for-service contracts. We asked six people with extensive experience in negotiating these types of contracts what can cause a deal to break down prior to signing. Here we summarise the main lessons learnt.  You can read more about overcoming the challenges in our Short Guide to Contract Formation.

1.    Don’t just use standard payment terms

Many standard terms for traditional fee-for-service contracts are based on a pre-agreed fixed amount – the ‘contract price’. This doesn’t work in an outcome based contract, chiefly because the amount to be paid will vary depending on how well the contractor does in achieving outcomes. Instead, there should be a mechanism for reporting and validating the evidence that outcomes have been achieved, and an indication of how much will be paid when this happens.

2.    Don’t leave the number of people you expect the contractor to work with completely open-ended 

In many outcome contracts, the amount paid is directly linked to the number of service users worked with by the Contractor. If too many people use the service, the total cost of outcomes generated may be too high for the authority to bear. Including a maximum total number of service users in the contract, or a contract cap, will help protect the Authority from this. At the other end of the scale, if too few people use the service then the contractor may not be able to cover their mobilisation or set-up costs. It may be right for the Contractor to carry this risk, but if they are reliant on the Authority making referrals, the authority could consider guaranteeing a minimum number.

3.    Don’t deny the contractor the right to compensation if you end the contract before they’ve had a chance to achieve the outcomes

In order to develop their financial model, the contractor needs to understand what will be paid if the authority makes a voluntary termination, or defaults on their obligations. If authority termination happens before the contractor has had the chance to achieve enough outcomes to cover their up-front costs, they will make a heavy loss which was not their fault. This risk can be mitigated by including a mechanism to estimate what outcome payments would have been achieved if the contract had been continued.

4.    Don’t include standard monitoring terms that do not align with the outcomes desired 

In an outcome contract, there will automatically be a heightened focus on management information and data sharing since this will be needed to determine outcome achievement and outcome payments. Adding additional monitoring requirements on top of these may increase contractor costs or constrain the contractor’s flexibility during delivery – potentially undoing one of the key benefits offered by an outcome based contract. 

5.    Don’t forget to include a mechanism to change terms after launch

Whilst it can feel counter-intuitive, you should not expect to have nailed down everything at point of contract signing. If this is a new type of contract for the authority, or a new relationship, it may be reasonable to expect some changes to the contract during performance.

Thinking about these five things should help give you the best chance of a successful conclusion of the negotiations. But all the people we spoke to also emphasised how important it is to ensure that your legal team is engaged early in the process of contract negotiation. There will always be things that need to be worked through, and all stakeholders on both sides need to be comfortable with the final terms. 

You can read more about these issues, and see an example contract, in the GO Lab’s Short Guide to Contract Formation. This was developed by J. Ruairi MacDonald, a visiting PhD researcher at the GO Lab. He is a legally trained public policy specialist, via consultation with six experts who have experience of formulating these types of contracts.