State and local governments are tackling homelessness with an innovative financing model that can guarantee a definite return on their investment. With this approach, the government will pay a contracted service provider only when it meets specific, pre-determined social outcomes and is appropriately called the “pay for success (PFS)” model.

PFS contracts include rigorous evaluations of objective metrics that prove the service provider’s efforts are worthy of the money. The approach—also referred to as performance-based contracting—is very different from the government’s traditional fee-for-service or cost-reimbursement models.

More interestingly, prior to getting tax money, PFS projects are generally funded by “social innovative financing.” Third-party funders, such as philanthropic entities, independent social investors or commercial banks, support the service delivery with money until an independent evaluator determines whether or not the service provider met the intended goals. With this type of financing, the government takes on less risk.

Key Ingredients for ‘Pay for Success’ Contracting - Onvia

‘Pay for Success’ Model Intrigues Government Officials Looking to Address Complex Social Challenges

In California’s first attempt, Santa Clara County used the PFS model for its Project Welcome Home. The project aims to reduce chronic homelessness in the county through more housing and an array of supportive services. The service provider, Abode Services, began in 2015 providing housing and more ongoing physical and behavioral health services to participants. The University of California at San Francisco will evaluate the services for success.

Since then, Project Welcome Home has received $6.9 million in upfront funding from private and philanthropic funders.

The ‘pay for success’ model offers promise for governments seeking to address complex challenges while connecting payments for services to results.

Dave Cortese, Santa Clara County Board of Supervisors.

The model has intrigued state and local government officials across the country. According to the National Conference of State Legislatures, Massachusetts and New York launched pilot programs as early as 2013. Those two states, along with Cuyahoga County in Ohio and the State of Minnesota, have awarded PFS-based contracts. At least eight other states and counties have been researching the approach.

To Win ‘Pay for Success’ Contracts, Tracking Early Planning is Key

Onvia’s latest report, 10 Hotspots for Government Contracting in 2016, shows that bid & RFP volumes for contracts related to social services (up 14%) and mental health (up 30%) grew significantly over the last two years. As government officials seek to address societal issues, PFS is an option that is not only alluring, but also requires additional planning. For contractors interested in this sort of business, tracking PFS planning before the bid or RFP is published is critical.

Onvia’s Spending Forecast Center reveals one example of early planning for PFS initiatives. Pennsylvania Governor Tom Wolf’s Fiscal Year 2015-2016 Executive Budget proposes legislation to allow for PFS contracts. As a result, the Commonwealth issued an RFI last year, asking for feedback on past experiences and lessons learned related to PFS. Officials asked what outcomes to prioritize, what to consider when structuring a PFS contract, and which partnerships with local governments that can produce more savings.

'Pay for Success' Models: An Opportunity for Contractors to Help Solve Social Issues and Stretch Taxpayer Dollars

‘Pay for Success’ and social innovative financing is an appealing approach to dealing with social issues and getting the best results for each tax dollar. State and local governments have a lot of questions and are looking for companies and organizations with experience to answer them.

Businesses in healthcare services can play initial advisory roles in helping state and local governments understand PFS and how to find the best path forward. In addition, business strategy and financial services companies have opportunities to help the public sector understand how to proceed and where best to find funding.