Privatization in Practice: Case Studies of Contracting for TANF Case Management. Contract Types


Agencies in the study sites use four different types of contract (Table IV.2): (1) pure pay-for-performance, (2) cost-reimbursement, (3) fixed price, or (4) hybrid contracts.

Table IV.2.
Payment Structure in Contracts in Study Sites
Contract Type Payment Structure
Placement Contract  
Pure pay-for-performance Per-client payments for:
   30 and 90 days employment retention

Bonuses for:
   Exceeding 90-day retention target
   Reducing part-time employment below target

Retention Contract  
Pure pay-for-performance Per-client payments for:
30, 90, 180, 270, and 360 days employment retention

Bonuses for:
Exceeding 180-day retention target
Reducing part-time employment below target

Cost-reimbursement Reimbursement of costs up to a cap
Hybrid of cost-reimbursement and pay for performance Reimbursement of costs up to a cap
Fee paid for meeting performance targets
Bonuses of 1 and 2 percent for exceeding performance targets
Employment Services Contract  
Pure pay-for-performance Per-client payments for:
   Completion of employment plan and assessment
   Job placement
   90, 180, and 365 days employment retention
   Completion of vocational education or training
   Completion of job search curriculum
   Placement wage above $7.15 per hour
   Placements with earnings above 200 percent of poverty

Fixed payments per quarter for:
   Exceeding employer and jobseeker satisfaction targets
   Performance on state measures

TANF Eligibility Determination Contract
Fixed price Fixed payment
Hybrid of fixed price and pay-for-performance Fixed payment of 15-25 percent of contractors budget
Monthly payments based on percentage of target achieved on three performance measures:
   Employed clients
   180 days employment retention
   Exits from assistance due to employment

Bonuses based on percentage that actual performance exceeds performance targets

Hybrid of cost-reimbursement and pay-for-performance Reimbursement of costs up to a cap

Restricted bonus (must be used for community reinvestment) for meeting second-level performance targets

Unrestricted bonus for meeting third-level performance targets

Pure Pay-for-Performance Contracts. Under these contracts, contractors are compensated only as they achieve certain performance goals. Delaware and Palm Beach County use pure pay-for-performance contracts.

Payments can be based on the number of clients who achieve certain outcomes or "pay points," the percentage of clients who meet performance goals, or both. In the placement contract used in Delaware, payments are based on the number of clients who enroll as well as the number of clients who attain job retention goals. Contract payments in Palm Beach County include a broader range of pay points, some related to employment outcomes and others to clients receipt of services, such as employment plans and assessments, vocational education or training, and job search classes. In both sites, further payments are made if the contractor achieves supplemental performance goals. For example:

  • In the placement contract in Delaware, bonus payments of up to 7 percent of the contract value are available for each percentage point the proportion of enrollees with 180 days job retention exceeds the target and the proportion of employed enrollees working part-time falls below the target.
  • In Palm Beach County, the contractor receives payments based on reported satisfaction of employers and job seekers. For example, $12,000 is paid for each quarter in which the job seeker satisfactory rate is 90 percent or above, and $7,500 for each quarter in which the rate is 80 percent or above.
  • Payments also occur in Palm Beach County based on the statewide ranking of the workforce development board in meeting three performance standards: entered employment, wage rate at entered employment, and welfare recidivism. The contractor earns $7,000 per measure if the Palm Beach County Workforce Development Board is ranked as the top board in the state, $5,000 if it is ranked in the top 25 percent, and $2,500 if it is ranked in the top 50 percent.
  • The contracts may also include performance goals that do not trigger payments.

Cost-Reimbursement Contracts. Under cost-reimbursement contracts, providers receive payments for the expenses they incur. Generally, costs must fall within a budget approved during the procurement process. Some cost-reimbursement contracts specify performance goals, but compensation is not dependent on attaining them. Hennepin Countys contracts are pure cost-reimbursement  providers are allocated a specific number of client "slots" and receive payment for the expenses they incur up to a maximum per client amount.

Fixed-Price Contracts. Fixed-price agreements establish a set fee for contractors, regardless of performance or the actual cost of providing services. As with cost-reimbursement contracts, the contracts may include performance measures, but a contractors performance does not directly affect payments. Palm Beach Countys contract for TANF eligibility determination is fixed price.

Hybrid Contracts. Three study sites  Lower Rio Grande Valley, San Diego County, and Wisconsin  use hybrid contracts. These contracts combine elements of pay-for-performance contracts with either cost-reimbursement or fixed-price contracts. The three contracts differ in the share of contractor income that is based on performance:

  • San Diego County ties most of contractors income to performance. Contractors receive a fixed monthly payment of 15 to 25 percent of their budgets, irrespective of their performance. Additional monthly payments are based on contractors achievements on three performance measures. Semi-annual bonuses are also paid based on the extent to which actual performance exceeds performance targets.
  • Lower Rio Grande Valley uses a cost-reimbursement contract with performance-based profit and incentive payments. The contractor earns a 5 percent profit payment upon meeting performance standards set by the state. Bonus payments of 1 and 2 percent are available for meeting performance targets that exceed the state standards.
  • Wisconsin also uses a cost-reimbursement contract with performance-based bonuses. Contractors receive restricted bonuses, which must be reinvested in purposes consistent with TANF, for reaching intermediate performance goals, and unrestricted bonuses for the highest performance goals. The contract includes three "optional" performance standards (Table IV.1). Attainment of these optional standards only triggers bonus payments if one or more of the other standards are not met. The contractor can substitute an optional performance standard for an unmet basic standard in order to qualify for the bonus payment. The amount of the bonuses is not specified in the contract but will be determined by a subsequent Biennial Budget. For the 2000-2001 contracts, the bonuses were worth about 7 percent of the contract amount (Wisconsin Legislative Audit Bureau 2001).

The contracts in the study sites are not representative of those used nationally. Pure pay-for performance contracts are relatively rare  fewer than 20 percent of states use them  as are contracts combining performance-based payments with cost reimbursement, used in only 2 percent of states (GAO 2002). In contrast, over 60 percent of states use cost reimbursement for at least half their contracts, and most TANF contracts are fixed price in nearly a quarter of all states.

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