Is it enough for a KPI to be SMART?

The consequences of not achieving contractual requirements can be severe for both the contract owner and contractor. Delays, cost overruns, and breakdowns in relationships are just a few examples. KPIs are often used to highlight the importance of the contractual requirements critical to the contract owner (CO).

Often, KPIs are often developed before the commencement of operations to deliver the contractual requirements and are developed using the SMART framework. While developing KPIs that are Specific, Measurable, Attainable, Realistic and Timely (SMART) usually results in reasonable KPIs that appear to achieve the contract owners requirements, there are additional considerations that should be taken into account to ensure that they truly drive the desired contract outcomes.

Below are five key areas that KPIs often do not consider:

  1. Contractor Systems, Processes and Controls: Often, KPIs are developed without understanding the contractor's systems, processes, and controls. This can lead to KPIs being developed which require a level of service significantly below the contractor’s business as usual delivery standards. This may result in the contractor receiving additional payment for no additional effort.
  2. Reporting: KPIs may be developed which rely on reporting from the contractor to determine if the KPI has been achieved. This may result in:
    1. The CO placing reliance on the contractor for reporting, but the CO has no oversight or knowledge of the contractors reporting systems, processes and controls. The contractors reporting may not be reporting accurately.
    2. The contractor not being able to report on the KPI requirements. An example of this is the KPI requirement to report an average of their daily results for a month but the contractor can only report weekly results. The report to the CO shows the monthly average, but is not calculated from the correct information.
  3. KPI Description and Measurement: The description of a KPI must be aligned with the measurement and calculation. An example is a KPI description of delivering non-defective products on time, but the KPI measurement is calculated on the number of products delivered on time only. When the measurement aligns differently from the KPI description, the KPI will no longer achieve its objective and may still reward the contractor while they are not providing the desired service.
  4. Weighting of KPIs: KPIs developed where some KPIs provide a greater reward may incentivise the contractor to focus only on those KPIs. In this instance the contractor may not actively work to achieve some KPIs knowing that any penalties they receive from failing the other KPIs will be compensated by the few they do achieve.  
  5. Driving Behaviours: The behaviours that KPIs drive must be aligned with the objectives of both the CO and the contractor. For example, if a KPI rewards on-time delivery but does not incentivise low levels of defective products, it can incentivise the contractor to reduce internal product checks to achieve on-time delivery. By identifying all the contract objectives at the time of developing the KPIs, both on-time delivery and low numbers of defective products can be incentivised.

To avoid these common pitfalls, consider arranging for an independent review of proposed KPIs and a review of the contractor's reporting systems, processes, and controls before agreeing the KPIs.

In conclusion, relying solely on SMART KPIs is not enough to achieve contract objectives. Additional considerations such as driving behaviours, KPI requirements and measurement, contractor systems, processes and controls must be considered.

Don't let poor KPI development be the downfall of your project. For more information please contact a member of our Risk Advisory Services team.