Performance-Based Contracts in the Aviation Industry

Introduction

The companies that operate in the industry of airlines should always be sure that the customers are provided with the top-quality services. Furthermore, the clients of the airline companies come into contact with products provided by the suppliers of the companies. Thus, the companies employ performance-based contracts with contractors in order to be able to operate economically as well as reduce the costs. The person that is responsible for negotiations connected with products and services for the airline company is the buyer. A buyer should select the seller of a product or a source of supply in order to achieve the best value for the company. Apart from being able to analyze the performance of the market, a negotiator should also possess critical skills of planning, persuasion, and critical thinking.

Attributes of Performance-Based Contracts

Performance-based contracts are instrumental in improving performance and lowering the cost in procurement organizations. A performance-based contract usually includes the following components: a description of the requirements instead of specifications on how the work should be done; a list of performance standards that can be measured; a description of the manner in which the performance of the contractor will be evaluated; an identification of clear incentives or indefinite incentives.

According to CIPS (2012, p. 1), performance-based contracting is ‘a result-oriented contracting method that focuses on the outputs, 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.’

Advantages of the performance-based contracting revolve around improving the levels of services the company offers, inducing innovation and reducing costs, enhancing the asset management within the company as well as building new connections. The disadvantages, on the other hand, are associated with the mobilizing challenges, a longer and more costly process of procurement, as well as the inability to control the process of funds relocation (Hyman 2009, p. 10).

The primary purpose of selecting a performance-based contracting in a procurement company is to achieve lower costs, increase in the performance or the value. It is important that the company chooses a competent contractor because performance based contracting involves strict specifications based on the output or outcome as well as actions targeted at coming up with the most efficient and innovative way of performance. In this case, a company should pay attention to the partnerships as well as past performance evaluations when choosing an appropriate contractor (CIPS 2012, p. 3).

Competencies of a Successful Negotiator

A successful negotiator is an individual that has gone through extensive training on practice. However, the practice of negotiating a sale is often frustrating, so a negotiator should possess the following skills:

  • Practical skills and intelligence;
  • Skills in planning;
  • Ability to verbally express the company’s requirements and needs;
  • Knowledge about the product in question;
  • The skill of critical thinking in a stressful situation (Kaleikini 2010, para. 4).

During the process of negotiation, a negotiator may select from the three styles of communication: assertive, passive, and aggressive. For instance, the assertive style of communication is a skill connected with increasing the negotiator’s chances of achieving success in the process of negotiation. Assertive negotiators are individuals that are considerate and confident in their negotiating skills. Furthermore, assertive communication in the course of negotiation helps to facilitate positive outcomes that will be beneficial for both sides of the negotiation. The main skill of assertive negotiation is connected with being factual rather than critical (Queensland Government 2014, para. 6).

Passive negotiators, on the other hand, are individuals whose negotiation practice is rarely successful. They often use unclear language when negotiating as well as they are unable to withstand their company’s demands and give in too quickly. Aggressive negotiators are opposite in the behavior to the passive negotiators; however, the similarity between the two types is that they rarely achieve success. They often employ an approach of confrontation that usually alienates other parties of the negotiating process as well as destroys the process completely.

Steps in Fuel Purchase Negotiations

The process of negotiation connected with buying fuel for a company is connected with the establishment of an agreement with the fuel supplier. Such an agreement will be instrumental in covering all issues connected with the supplier. The content of an agreement will depend on the way the supplier does business as well as on the needs of the jet company and the desired outcome of the negotiation (International Air Transport Association 2013, p. 1).

The pre-award phase of the performance-based contract takes place before the contract’s signing. The main priority of the aviation company on this stage id to have the service completed on the desired time at the same time with no increases on the part of the contractor that offers fuel for the company.

Secondly, the award phase of the performance-based contract is linked to designing a model of the total cost of ownership, preparations for further negotiations, creating a list of the contract’s terms and conditions. Furthermore, when the contract revolves around buying jet fuel for an airline, the payment considerations should take place in the award phase. These considerations should include the method of payment, advance and progress payment, as well as the types of guarantees the contractor offers.

Lastly, the post-award phase of the performance-based contract is linked to collecting information, monitoring the performance of the contractor, as well as measuring the outcomes of the contract. These actions are closely linked to effective control over the contractor. Furthermore, the resources and techniques used in the post-award phase will depend on the nature of the contract itself, its complexity and size.

The Buyer’s Source Selection Process

The process of source selection is connected with a buyer selecting a ‘seller or a source of supply for products and services’ (Garrett & Kipke 2003, p. 136). As a rule, a buyer applies the criteria of evaluation in order to choose the most appropriate supplier for meeting the needs of the buyer’s company. However, the process of selecting a seller is rarely simple because of the following factors:

  • Despite the fact that the price of a product is the most important for an item, the lowest price proposed by the seller can sometimes be not the lowest cost for the product. This can happen if the supplier is not competent enough for delivering the ordered product in time.
  • The proposals of sellers are frequently divided into contractual sections of technical questions, the issues in delivery and the pricing conditions. Each section should be evaluated separately, which makes the process of selecting a seller quite complex (Garrett & Kipke 2003, p. 137).
  • Critical products may often require a number of different sources.

The source selection evaluation criteria involve three preconditions. The first precondition lies in the buyer’s understanding what services or products should be bought. The second precondition is connected with the buyer’s complete understanding of how the industry in which the product exists operates. The last precondition is in getting knowledge about the market practices of the industry.

During the process of development and analysis of the source selection, the buyer is able to acquire knowledge about the necessary product. Gaining an understanding of the industry means asking questions about the qualities of services or products. The questions are the following: How is the product or service created? What kind of workforce is required for their production? What are the costs? What are the qualities of the product or service? Furthermore, getting to understand the market is about analyzing the behavior of sellers and buyers. The questions for market understanding are the following: What are the sales terms and conditions? What is the range of the prices? What are the practices of pricing? (Garrett & Kipke 2003, p. 137)

After answering the above questions, a buyer will be able to create the criteria of seller evaluation by means of selecting its attributes.

Conclusion

To sum up, in order for airline companies to procure goods and services, the process of negotiation should be taken seriously. Performance-based contracts between a company and a contractor are essential for reducing the costs and improving the quality of products and services despite the fact that the company can face challenges connected with mobilizing or a longer and more costly process of procurement.

Reference List

CIPS 2012, Public procurement practice: performance based contracting, Web.

Garrett, G & Kipke, R 2003, The capture management life-cycle, CCH, Chicago.

Hyman, W 2009, Performance-based contracting for maintenance, Web.

International Air Transport Association 2013, Aviation fuel supply model agreement, Web.

Kaleikini, M 2010, What skills make for a good negotiator? Web.

Queensland Government 2014, Negotiation skills, Web.