Incentive Plans: Design & Application Considerations

Contract incentive plans are considered by many owners and contractors to be valuable mechanisms for enhancing project success. Their application is recommended by The Business Roundtable’s Construction Industry Cost Effectiveness (CICE) Project and the Construction Industry Institute (CII). Nonetheless, use of incentive plans by the construction industry is mixed. Increased knowledge of successful incentive plan designs and applications could foster broader acceptance and use with substantial resulting benefits.

This publication presents the results of a CII Contracts Task Force study designed to assess the incentive plan experience of CII member companies. Objectives of the study were to: (1) provide a better understanding of the values and limitations of various plans, (2) identify a broadened array of options for specific plan designs, and (3) offer guidelines for plan application and administration. The study focuses principally on cost reimbursable contracts because they represent the preponderance of data available. Also, reimbursable cost contracts are amenable to a broader variety of incentive plan approaches than fixed-price contracts. A small number of fixed-price contract plans were reviewed, however, and comments are included in the report when appropriate.

The research methodology used for this study involved collection and examination of specific plans and follow-up discussions with key owner and contractor participants. In all, the study team reviewed 19 applications and received input from 26 member companies (representing 15 owners and 11 contractors). Analysis concentrated on individual features of the various plans, as opposed to total designs, to provide the broadest basis for “building” or “tailoring” future designs.

This publication presents and compares the following considerations or characterizations:

Primary Features

• Unilateral vs. negotiated plans
• Positive vs. negative incentives
• End-of-project vs. milestone determination

• Quantitative vs. qualitative yardsticks
• Parameters
• Offsite vs. onsite determination
• Win/loss vs. conditional awards
• Bonus flowdown

An expected range of potential benefits of incentive plans, as experienced by owners and contractors who have used such plans, is also presented. A report prepared by the University of California, Berkeley, contains further details about this study.