12 June 2019
A performance-based specification allows you to delineate the specific performance requirements you wish to achieve. It also provides contractual requirements to ensure that performance targets are met over a period of time after the asset is placed into operation. A prescriptive-based specification is typically a compliance to set criteria and standards and/or detailed engineering design that may be well-developed and proven and therefore does not necessitate the need for strict performance evaluations.
Many organisations do not understand the difference between the two, with most projects typically delivered using a prescriptive-based specification either through an EPCM, FEED, or EPC contract method. But this means that they take all the risk in what they are asking for over the extended life of the asset. As we discussed in Golden Rule #2, the benefit of accuracy in this method of evaluation can also be eroded in the overall performance.
The Bathtub Effect
So, we come back to the “Bathtub effect” of assets again. We all know it well, right? Simply put, there is a greater chance of issues and failure in the early stages of the life of an asset. The asset then gets bedded in with problems, is fixed, and then (hopefully) settles down to normal running expectations for the given design life. Then, the failure rate increases again near the asset’s end of life, where the cost of maintenance and availability eventually outweighs the benefit of the asset’s use, and the asset is retired.
So why not include the early “bedding in” stage of the bathtub in the contract framework? This is warranty, I hear you say. Well, not always, as warranty can sometimes only apply to the provision of defective component replacement and not the cost of maintenance labour. Furthermore, it will never include consequential damage costs, such as the asset non-availability and its impact on the business, which can be so significant that it dwarfs the cost of the maintenance replacement.
And what if the reoccurring defects through this period do not get rectified in the 12 or so months of warranty? The asset owner then has to live with these for the life of the asset or pay for rectifications that were never expected in the WLCA, or live with lower than expected performance.
The advantages of Performance-based Contracting
An alternative to this is to consider Performance Based Contracting (PBC). This is a results-oriented contracting method that focuses on the output, quality, or outcomes that may tie at least a portion of a contractor's payment, contract extensions, or contract renewals to the achievement of specific, measurable performance standards and requirements.
Interestingly enough, many governments and funding organisations have taken efforts to introduce PBC’s over the last decade. They use them specifically in the ongoing maintenance of assets, not always as a combination of the initial asset delivery and a link to payments of the asset. In the ongoing maintenance world, PBC’s offer several advantages over more traditional approaches. These are :
- Cost savings in management and maintenance of assets
- Greater certainty in expenditure forecasting
- Ability to manage assets with fewer staff
- Improved asset performance and availability
- Stable multi-year financing of maintenance
Prescriptive Based Specifications
Prescriptive Based Specifications is a more common approach used, and its poor execution in approach is the reason why Performance Based Contracting is considered in the first place. If the execution of a Prescriptive Based Specification is achieved correctly, a reduced risk is very possible, and this allows for easier integration of assets into the expected normal operating criteria that will follow the asset for its life. The key is therefore in perfecting the execution and in doing so, consideration needs to be given to the following:
- Establishment of a well-structured Basis of Design;
- Using highly experienced professional engineers in the development of the specifications that includes strong emphasis to proven standards, quality requirements, and rigid testing requirements undertaken though-out manufacture and at acceptance testing stages;
- Extensive independent and preferably full time quality inspection (based on company and country profile risk assessment) and testing regime for all critical sub-components and manufacture/on-site process undertaken by independent engineers;
- Robust acceptance program that is implicitly tied into the contract payments.
It is therefore critical that the contracting approach be determined early in the project definition stages (ideally when the URS and BoD is being created).
 ©ASHRAE www.ashrae.org. Used with permission from ASHRAE Journal, October 2013