Setting up for success: best practices in contracting for results-based financing

Results-based financing (RBF) instruments, which tie at least a portion of program funding to the achievement of pre-determined outcomes, are attracting growing interest. The argument for using RBF as a financing mechanism is compelling for governments and donors. The approach can improve the effectiveness of spending, enable innovation in service delivery and promote partnerships between the public sector and other stakeholders.

High transaction costs and lengthy design processes are regularly mentioned among the most common criticisms of RBF. However, discussions about these challenges often focus on the technical aspects of the design process and the multiplicity of actors involved. Much less attention has been paid to procurement and contracting challenges. Stakeholders engaging with RBF for the first time too often neglect these considerations until the technical design has been finalised, assuming that they will be able to rely on established processes and templates. This commonly leads to significant delays in program launch as months of work are then required to on-board and align the procurement and legal teams and iterate the draft documents (in the case of a Social Impact bond in Massachusetts the contracting process required 27 drafts and more than 1,100 of billed legal hours).  In addition, inadequate procurement and contracting processes and templates can discourage the participation of implementers and investors, lead to suboptimal decisions in the selection of such partner organisations, and limit the flexibility to adjust to changing circumstances, ultimately affecting the results achieved by the program.

In the paper we recently published, Setting Up For Success: Best Practices for the Procurement and Contracting of Results-Based Financing Programs, we review in turns typical challenges and best practices for the procurement and contracting processes. First, procurement for RBF programs should follow a different logic than for traditional grants or service contracts. Procurement teams will be faced with many strategic decisions, including whether a grant or contract is more appropriate for a specific RBF program, and whether to use a competitive process to select implementers or not. If they do elect to use a competitive process, we’ve identified a number of best practices for evaluating proposals. In an RBF program, assessing the technical and organizational capacity of implementers takes a different meaning and more emphasis should be placed on their capacity to achieve results (and adjust their interventions when needed) than on conformance criteria with a detailed list of activities. Similarly, cost-effectiveness should be assessed on a ‘price per outcome’ basis and attention should be paid to limiting the risks of “winner’s curse” as implementers may overestimate their ability to achieve the outcomes.   

Similarly, existing grant or service contract templates are not well-suited for RBF programs and require significant redesign.  As RBF programs require a strong focus on outcomes, flexibility on inputs and implementation delivery is a key condition of their success and needs to be recognised in the contract. RBF programs also establish a transfer of risk as implementers or investors pre-finance at least a portion of the delivery costs, whilst some or all of the payments will only be disbursed by the outcome funders when results have been achieved. This risk transfer has implications for the obligations assumed by each party and the contract termination clauses. Lawyers should also consider RBF programs as a new form of partnership, which calls for strong governance and processes which allow all parties to seek mutually agreeable solutions to unforeseen circumstances that may arise during the implementation period. Our conclusions reflect the excellent guidance produced by the GO Lab on Awarding Outcomes Based Contracts.

Finally, we argue that the risks of high transaction costs and delays mentioned above are due to the lack of familiarity of procurement and legal teams with RBF and the absence of well-suited templates. However, these challenges are not intrinsic to the financing mechanism. Our paper offers practical guidance and recommendations for practitioners engaging in RBF programs for the first time, emphasizing that it should be approached as a change management process. As teams gain experience with the mechanism and specific templates are created, there is no reason why contracting implementers for RBF programs should take longer than for any other contract or grant.