Use of Incentives in Performance-Based Logistics Contracting

Abstract

Performance-based logistics (PBL) contracts, in which vendors are given responsibility for management of complex fleets, have been relatively common in certain commercial sectors, particularly the airline industry, but their use within DoD only dates back to the late 1990s. PBL contracts depend on the ability of the customer to properly structure and implement contract incentives to promote vendor behavior that reduces costs and improves performance. Recent DoD policy efforts have encouraged the use of PBLs, relying on research that indicates that PBLs can be successful in lowering costs and improving performance. The objective of this proposed research effort is to move beyond the question of whether PBL contracts work to examine how best to structure the incentives built into PBL contracts to promote reduced costs and improved performance. The technical approach for this proposed research project would be to examine the literature on performance-based contracting practices and the literature on the use of contract incentives and examine the usage of these practices in case studies of DoD PBL contracts. The expected results of this research effort are the identification of best practices for PBL contracting that would benefit not just the Department of Defense, but also the commercial sector, academics, and others interested in complex fleet management and the classic principal/agent problem.