Incentive Clauses: Do they Work?

Jan 10, 2017 | Home, News, Opinion, SJCC

Executive Summary: Engineers have wondered if incentive clauses are a benefit to Owners in producing a timely, or accelerated, contract completion. My experience has been that it is of great benefit to the Owner because of the aggressive nature of project completion by the Contractor.

What is an incentive clause? There are disincentive clauses and incentive clauses in the contracting world. Disincentive clauses also carry the nice name of liquidated damages; these clauses penalize the contractor for finishing a project after the contract completion date. This penalty is usually assessed in dollars per day: $500/calendar day, $2,000/working day, or $10,000/minute, for example. Incentive clauses do the opposite – they award a contractor financially for finishing ahead of schedule: $1,400/working day, $25,000/calendar day, et cetera.

Contractors see dollar signs. Yes, it’s about money. It’s also about ego. If you’ve known a construction company owner they’ve likely had a healthy ego and done whatever it took to make as much money as possible (part greed and part survival). The incentive clause plays into the high-risk stakes that construction company owners are used to chasing. Every day as a contractor is like being at the craps table in Vegas and this contracting mechanism results in a feeding frenzy at bid time accompanied by uncontrollable salivation.

The upside. Contractors will do whatever is needed to finish as early as possible to pick up the extra cash. This results in more-than-adequate manpower and equipment along with long hours.

The downside. It’s the same as the upside: contractors will do whatever is needed to finish as early as possible to pick up the extra cash. This can come at the expense of quality and/or safety. Quality can be sacrificed in activities such as concrete cure or soil compaction. Safety can suffer due to overcrowding of work areas and long hours leading to exhaustion.

My story. I was the project manager on a wastewater project in which we had a 30-day daily incentive bonus. With twenty days until that maximum bonus could be achieved (so 50 days before project completion), I had a wad of cash in my pocket from corporate to “make it happen” 30 days before contract completion. And we made it. And we got the bonus. Immense pressure and, fortunately, no one hurt.

Conclusion. Yeah. They work.

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