A Renewed Promise for Performance-Based Contracting: What DOL’s New Pay-for-Performance Guidance Means for State and Local Workforce Boards

The Time for Performance-Based Contracting is Now!

With a misdemeanor on her record, Michelle was struggling to maintain stable housing and a job while also raising her two children. She had previously worked in retail but had always had an interest in healthcare. With coaching, tuition assistance,  transportation stipends and milestone-based gift card incentives enabled by the Northern Virginia Team independence (NVTI) program, Michelle was able to complete her GED, train for and pass the Nurse Aide exam and secure a position as a Nurse Assistant immediately after completing the program. She is currently working nearly 40 hours a week and is living with her children in an apartment.

- The NVTI Program is funded by the Skillsource Group,
Operator of the Northern Virginia Workforce Development Board

NVTI was  the country’s first program to leverage the pay for for performance (PFP) provision in the 2014 Workforce Innovation and Opportunity Act (WIOA). The provision  enables workforce boards to hold up to 10% of their WIOA Title 1 funds for extended disbursement beyond the 2-year fiscal limit by tying these funds to to the achievement of WIOA performance indicators two and four quarters past program completion. While local workforce boards have always been able to use performance-based contracting strategies to drive resources towards results for the people facing the highest barriers to employment, the recent release of a PFP Training and Employment Guidance Letter (TEGL) from the U.S. Department of Labor has shined a new light on the potential of PFP to drive improved and equitable outcomes for people like Michelle who face the highest barriers to employment. The TEGL provides guidance on implementing PFP contract strategies for state and local WIOA title I, subtitle B programs. The publication of the PFP TEGL and corresponding webinar and resource library reflects DOL’s commitment to performance-based contracting strategies (also called outcomes-based or results-driven strategies).

For the past four years, many state and local workforce boards have perceived uncertainty about the overlap and interplay of performance-based contracting and WIOA PFP and have been hesitant to pursue any form of performance-based approach that ties funding to future achieved outcomes.  Now, with the release of the TEGL, there is a renewed opportunity to pursue all types of performance-based contracting approaches to advance improved and equitable outcomes. It’s especially timely as state and local workforce boards seek to drive resources towards those impacted most by the COVID-19 pandemic and those experiencing the greatest barriers to employment.

This brief  is intended to be actionable for state and local workforce boards hoping to capitalize on this renewed opportunity. It covers three areas:

      • The benefits of pursuing performance-based approaches with a focus on equity 
      • The differences between a standard performance-based contract and a PFP contracting strategy 
      • The steps involved in a PFP contracting strategy 

Is a Performance-Based Contracting Strategy Right for You?

As states and local workforce boards consider performance-based contracting strategies and the potential they offer to reorient funding, services, and data towards improved and more equitable outcomes, we recommend board leaders consider the following questions to gauge whether performance-based strategies are suitable for your programs: 

      • Are you interested in more deeply understanding disparate outcomes among program participants?
      • Are you excited about exploring and addressing equity gaps in enrollment, completion, and outcomes? 
      • Is there a particular population or community in your jurisdiction experiencing barriers to employment who are currently being underserved by the workforce system? 
      • Do you currently contract with providers who might be interested in working with you to achieve better outcomes for particular populations/communities?
      • Are you committed to strengthening partnership and collaboration with other agencies, providers, and employers in support of improved and more equitable outcomes for workforce customers in the long run? 
      • Are you excited about the prospect of building out your data capabilities to better collect, disaggregate, analyze and use data to drive continuous program improvement?
      • Are you already using or are interested in exploring a contract strategy that ties a certain amount of funding to the achievement of agreed-upon outcomes?

If your answer is yes to one or more of these questions, a performance-based contracting strategy can be a great option! 

As workforce practitioners our hope is that the lives of the individuals we serve are transformed, that each and every person has the opportunity to achieve economic mobility for themselves and their families.  But transformation takes time and two year funding often lacks the flexibility to measure improvements in financial stability.  The Pay for Performance clause allows us to look at a portion of our funding in a different way, to consider longer term outcomes, like education, growth in wages, and for the justice-involved population, recidivism. It also allows us to take a portion of that funding and spend it beyond the two-year cycle so that we can incentivize longitudinal analysis. It allows us to think differently about how we evaluate effectiveness.” 

-- Brooke Valle, Chief Strategy & Innovation Officer,
San Diego Workforce Partnership, during a 2018 webinar

Pay for Performance Contracting Explained

While performance-based contracting has long been allowed and encouraged under DOL funding, the PFP provision in WIOA sought to drive a focus on the WIOA performance indicators, specifically job retention two and four quarters after program completion for individuals experiencing barriers to employment who may need more comprehensive and complex support for longer periods of time  in order to successfully gain measurable skills, gain employment and retain employment after program completion. The extended disbursement offered by a PFP contracting strategy allows bonus and/or contingency payments to be made to providers when these, and other performance measures are achieved.  The PFP provision also allows for other non-WIOA performance indicators to be tied to outcomes payments to encourage greater focus on serving populations with the highest barriers such as youth who have experienced the justice or foster care systems. It also enables coalition-building with other referrer and human service agencies since it often requires a collaborative approach to  successfully enroll, serve and achieve outcomes for population groups with the highest employment barriers.  

The chart below describes the three different contracting strategies available to workforce boards. Whichever contracting strategy a workforce board opts for, each contract must be kept separate. Mixing a cost reimbursable contract with a performance contract is not allowed.

Types of WIOA contracting strategies

In the past year, several local workforce boards have pursued performance-based contracts with their WIOA providers, and several state boards implemented performance-based contracts leveraging other funding sources. Third Sector is hopeful that DOL’s renewed endorsement of performance-based contracting, more broadly defined, will encourage state and local workforce boards to take an intentional, outcomes-based, and equity-focused approach to allocating scarce resources. Additionally, implementing performance-based contracting now will prepare local workforce boards to leverage PFP in the future, especially if additional WIOA funding is allocated as part of the economic recovery efforts and/or DOL provides additional clarity and flexibility in the implementation of PFP.

Through our experiences supporting PFP and other performance-based contracting strategies, Third Sector has seen firsthand the potential of performance-based contracting strategies to steer resources towards underserved populations while advancing improved and more equitable outcomes. We have consistently seen how the process of setting up a performance-based or PFP contract delivers major benefits in and of itself for state and local workforce partners. The conversations, analysis, and negotiation that go into structuring these contracts build capacity among state and local workforce partners to share and examine disaggregated data more regularly, collaborate more effectively, and develop new ways of working with community partners and providers in pursuit of life-changing outcomes. The issuance of the TEGL by the DOL offers the promise of launching a whole new round of discussions in 2021 and beyond among state and local workforce partners offering positive benefits and more equitable outcomes for workforce boards and the people whose lives and career opportunities they seek to improve.

Components of the PFP TEGL

Below is a summary of the PFP TEGL and related insights from Third Sector’s experience with local workforce boards. As you review the guidance and resources, keep in mind that the PFP TEGL only applies to how local workforce boards manage funds set aside for PFP contracting strategies. It does not apply to other types of contracts including performance based contracts that expend funds within the two-year funding cycle.

Definition of “PFP Contract Strategies” A contracting strategy where up to 10% of WIOA funds are designated for extended disbursement beyond the 2-year funding cycle and are explicitly tied to the achievement of WIOA’s performance indicators. This includes independent validation of the outcomes. 

Definition of “PFP Related Activities” Necessary activities to execute the PFP contracting strategy such as the feasibility study, technical assistance, reporting,  and PFP evaluation. PFP-related activities cannot be paid for using the extended disbursement set-aside funds but they can be paid for using regular WIOA Title I funds,  WIOA Governor’s Reserve, or other local funds.  

Funding Sources:
The table below summarize which types of funding can be used to cover PFP contract strategies and related activities.

Auditing and  Monitoring: Similar to other WIOA contracts, DOL may opt to review PFP contracts. If this happens, DOL monitors will NOT review underlying expense receipts called for in cost-reimbursable contracts but instead review supporting documentation around participant performance and related outcome/bonus payments.

PFP Contract Implementation Steps:

In addition to the TEGL itself, DOL has provided a 16 minute webcast on the six steps involved for any workforce board considering a PFP contracting strategy.  The steps are further explained below:

STEP 1. PFP Feasibility Study

Once you’ve decided to explore a PFP contract, a feasibility study must be completed. If the feasibility study is completed by a third party, (it doesn’t have to be), it can be paid for with regular WIOA Funds. Extended disbursement PFP funds can NOT be used to procure TA support for a feasibility study. 

The process of completing the feasibility study is usually a 6-12 month exercise where workforce boards identify a workforce development problem that a PFP contracting strategy can help address, complete an assessment to uncover the roots of this problem, and work with others to identify possible solutions. The feasibility study should therefore include an assessment and a design component.

Assessment Component: During the assessment component of the feasibility component, the following dimensions and questions should be considered:

Design Component: During the design component, local areas work with other agencies, provider representatives, workforce customers and others to agree on the parameters of the contracting, service,  referral and data agreements for the contracting strategy. In particular, the design component must include the following required elements of a PFP contracting strategy:

  • Identify the workforce development problem that the project will address. We especially recommend using PFP contracting strategies to address inequities in enrollment, service completion or outcomes between population groups.  
  • Identify the target population and the project number of participants. 
  • Specify the projected performance outcomes for the WIOA-required performance indicators
  • Estimate the cost associated with achieving the projected performance outcomes
  • Describe the prospective services for participants
  • Describe how the local will reallocate funds to other PFP contract strategies if the project does not achieve the projected performance outcomes

STEP 2. Funding Determination

Up to 10% of the local allocation for WIOA title I Adult, Dislocated Worker, and Youth formula funds can be reserved for PFP contract strategies.

It is up to local areas to determine how much of their allotted funding they wish to hold for extended disbursement PFP contracting strategies. They then report this amount to the state. Local areas may allocate extended disbursement funds  for PFP contracts in advance of feasibility study completion.

The state then requests a grant modification to it’s WIOA grant specifying the aggregate amount that local areas wish to hold for extended disbursement. DOL issues a grant amendment and sets up a separate tracking system to monitor the use of these extended disbursement funds. 

Local areas are then responsible for holding extended disbursement funds in a separate account and for tracking and reporting on these funds using the same procedures as their standard reporting procedures but clearly keeping the PFP funds separate from regular WIOA funds. 

If PFP funds for a particular project are not spent because the performance outcomes were not achieved, they will be reallocated in accordance with the plan laid out in the feasibility study. 

The chart below illustrates the flow of WIOA financial disbursement and financial reporting. 

STEP 3. Contract Development

Once the feasibility study is complete, a local area will determine how to implement the PFP contracting strategy. This can be done by issuing an RFP to select a new service provider or by issuing a new PFP contract to an existing provider to expand services and reach to the target population group.  

Eligible PFP Service Provider
Per WIOA §122 and 123, service providers participating in a PFP contract must be a “WIOA-eligible provider”, meaning that for the Adult and Dislocated Worker contract strategies,  the provider must be on the Eligible Training Provider List (ETPL) and be delivering job training services. WIOA youth providers eligible for PFP do not need to be on the ETPL and may be a local or national community-based organization or intermediary, community college, or other provider. WIOA Youth PFP providers must still be able to complete an objective initial assessment of the youth and to offer the full suite of youth services either directly themselves or in partnership with others. 

Once a provider is selected, the relevant parties will negotiate and further define the PFP contract which includes elaborating on the four variables first explored in the feasibility study. These include target population and number of participants, target performance  outcomes, payments associated with achieving selected performance outcomes, and the prospective services for participants. Descriptions of these variables are included below. 

Target Population and Number of Participants:
WIOA encourages PFP contracting strategies to be used for population groups that experience barriers to employment. We have seen performance-based and PFP contracting strategies work exceptionally well when the goal is to increase enrollment, enhance services, and achieve improved and more equitable outcomes for historically underserved youth and adults. These may include opportunity youth disconnected from work or education, justice or foster involved youth, adults who have experienced systemic racism or individuals enrolled in social benefit programs such as the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF).  The number of participants targeted in a PFP contracting strategy can vary greatly depending on the number of eligible individuals in the local area. Past PFP contracting strategies have sought to serve between 100-1,000 youth. 

Target Performance Outcomes
Extended disbursement funds should first and foremost be tied to WIOA’s primary performance indicators in WIOA. These include: 

  • Education and Employment Rate - 2nd & 4th Quarter after Exit 
  • Credential Attainment 
  • Measurable Skill Gains 
  • Median Earnings - 2nd Quarter after Exit 
  • Effectiveness at Serving Employers

While additional performance outcomes may be contracted under PFP, they can only trigger payment after primary performance indicators are achieved. 

The PFP contract should also specify how the performance indicators are defined and how they will be measured. Contracts must be written precisely enough to be clear to the local board, provider, validator, and any oversight body on specific outcomes to be used for performance payment.

Eligible Services
The PFP contract design should include an overview of the variety of services that will be offered to achieve the PFP performance outcomes which may still be tailored to individuals needs. 

Other Contract Parameters
In addition to the four variables described above, the final contract must also include the following elements:

  • A stipulation that payments cannot be made for reasons other than meeting or exceeding performance outcomes
  • Circumstances that would necessitate outcomes being adjusted
  • The period of performance (contract start and end date) and timetable for when performance outcomes will be achieved
  • Standard terms and conditions that are required by the state, local area and federal government
  • Signatures and dates of persons authorized to enter into PFP contract agreements

STEP 4. Contract Delivery

For adult and dislocated worker PFP contracting strategies, eligible services include occupational skills training, on-the-job training, skill upgrading and retraining, entrepreneurial training, transitional jobs, job readiness training, adult education and literacy activities, and customized training. 

For youth PFP contracting strategies, the local area must ensure that target youth are able to obtain the required components of the WIOA youth design framework specified in 20 CFR § 681.420. These include an objective assessment upon enrollment, an individual service plan encompassing any number of the 14 WIOA program elements, and case management including follow-up services. 

The individual costs associated with delivering these services can NOT be included in the PFP contract. The extended disbursement funds connected to the PFP contract can ONLY be released once agreed upon outcomes have been achieved and validated. If a local area wishes to support the costs of delivering services, this must be done using a SEPERATE cost-reimbursable or performance contract tied to regular WIOA or other available funds.

STEP 5. Outcome Validation, Evaluation and Reporting

Independent Performance Validation
Each local area adopting a PFP contracting strategy must facilitate an independent validation of the performance outcomes selected for payment. Any costs associated with the Independent validation are allowable expenses under the extended disbursement 10% set-aside funds. 

PFP Evaluation
If a PFP contract exists in a state, the state must facilitate an evaluation of the design of the PFP contracting strategies as well as the performance of the PFP projects. Other important aspects of the evaluation include:

  • States may conduct its own evaluation or hire an independent evaluator, and it may select from a wide range of types and methods.  
  • Where possible, the evaluation should include information about employers’ and participants’ satisfaction with the PFP contracting strategy
  • The state evaluation must be developed in collaboration with state and local workforce boards and other agencies and is as rigorous as possible. 
  • The 10% extended disbursement funds may not be used for the evaluation, but other WIOA title I, subtitle B formula funds, Governor’s Reserve funds, or other funding sources may be used. 
  • Evaluation reports must be made electronically available to the state board and the public during the program year that the reports are completed.
  • In their annual PFP performance report to DOL (form ETA-9174), states need to include information about two PFP evaluation topics: 1) the research questions addressed by the evaluation(s); and 2) the challenges to evaluating PFP contract strategies, either at the project level or across projects.

PFP Reporting
States that include PFP contract strategies must annually submit a separate PFP Report (form ETA-9174).  This is a narrative report that requests information on: 

  • PFP target population and the populations or baselines used for comparison purposes to determine performance standards; 
  • performance indicators used; 
  • actual performance outcomes. 
  • research questions addressed in the evaluation, and
  • evaluation challenges encountered; 
  • design of PFP contracts and contract strategies; 
  • methodology used to measure outcomes of the intervention; 
  • methodology used to determine the success of the PFP contract; 
  • technical assistance provided by the state.

STEP 6. Payment

Performance payments can be made to providers once they have met or exceeded all contractually-specified performance indicators. If the contract includes bonus payments, those can be made once the provider meets the levels set forth in the contract. If the provider does not meet the specified performance outcomes, no outcome or bonus payments are made.

About Third Sector

Third Sector’s experience in interpreting and implementing the PFP provision and the TEGL comes from our work supporting a cohort of five local workforce boards to complete feasibility studies and design potential contracts. Two of those boards, San Diego Workforce Partnership and the SkillSource Group in Northern Virginia executed the country’s first two PFP performance contracts in early 2018. Unfortunately, those contracts were suspended shortly after launch, pending the operational clarity now provided by the TEGL. Since then, Third Sector has supported other state and local workforce boards, including a cohort of five workforce boards  in Massachusetts and the Texas Workforce Commission, in exploring performance-based contracts more broadly.  

To take advantage of this exciting opportunity and to get started with performance-based contracts and/or PFP, reach out to info@thirdsectorcap.org