I’m studying for my Management class and don’t understand how to answer this. Can you help me study?
PJM400 MOD7 Discussion post peer responses
Please respond to both POST1: and POST2: in at least 250 words. i have included the original post as reference.
From among the required or recommended readings and at least one credible, peer-reviewed outside source, answer the following.
Why do contracts include incentives?
When is it best to
use an incentive (identify a minimum of two specific circumstances
under which the use of incentive elements in the contracts are
beneficial or necessary)?
How are contracts used to transfer risk (identify two specific circumstances and provide an example for each)
Contracts may include incentives. These incentives are intended to
reward or punish sellers depending on how they perform (Baily, Farmer,
Crocker, Jessop, & Jones, 2015). Sellers are rewarded with an
incentive if their costs are reduced and/or performance is improved. In
contrast, sellers would be punished is their costs were increased
and/or their performance worsened. These incentives encourage sellers
to manage their performance and complete the contracts.
It can be beneficial to use incentives in contracts under certain
circumstances. These circumstances include the following situations:
- Amazon, Walmart, and CVS are including bonuses and temporary pay
hikes in their employment contracts to retain current employees and hire
new employees. (See links below references)
- A construction company enters into a Fixed-price Incentive contract
to build a large, multi-phase project. The company would be paid a fixed
price for each phase of the project. It would also receive an
incentive award if they met the incentive terms (under budget, early
completion, etc.) for the phase (Eriksson, 2017).
Using Contracts to Transfer Risk
Contracts can be used to transfer risk. There are several ways in
which risks can be transferred. Two of these ways include the use of an
indemnification clause and the use of a contract breach. CFI Education
Inc (2020 states that an indemnification clause ensures that potential
losses will be compensated by the opposing party. In comparison, a
contract breach occurs when one party breaches the contract due to
non-justifiable reasons. If this occurs, the risk and related costs are
transferred to the offending party (CFI Education Inc, 2020).
- PCL Construction may include an indemnity clause in the contract
which indemnifies the company from the responsibility for loss or damage
caused by contractors during the project.
- AAA Maintenance Co. does not maintain the outside of the BBB and a
client is injured due to the lack of maintenance. Due to a breach of
contract, AAA Maintenance Co. would be responsible for the risk and any
Baily, P., Farmer, D., Crocker, B., Jessop, D., & Jones, D. (2015). Procurement, principles, & management (11th ed.). United Kingdom: Pearson (Intl) Inc. Hardback ISBN: 978111813009
CFI Education Inc. (2020). Risk transfer. Retrieved from
Eriksson, P. E. (2017). Procurement strategies for enhancing exploration and exploitation in construction projects. Journal of Financial Management of Property and Construction, 22(2), 211-230. doi:http://dx.doi.org.csuglobal.idm.oclc.org/10.1108/J...
Target, Amazon, and Walmart:
https://www.cnbc.com/2020/03/20/target-pays-bonuses-increases-pay-by-2-an-hour-as-coronavirus-causes-surge-in-shopping.html (Links to an external site.)
https://www.cnbc.com/2020/03/16/amazon-to-hire-100000-warehouse-and-delivery-workers.html (Links to an external site.)
https://www.cnbc.com/2020/03/19/walmart-announces-special-cash-bonuses-for-hourly-associates-during-national-health-crisis.html (Links to an external site.)
Contracts in the time of coronavirus: Force majeure and frustration:
https://www.citmagazine.com/article/1677928/contracts-time-coronavirus-force-majeure-frustration (Links to an external site.)
Edited by Marybeth Dunlap on Mar 23 at 11:06am
Why do contracts include incentives?
Contracts will include incentives to either secure a new business
relationship or maintain and improve an existing one
(Kelly&Yang.2017.). These incentives have the ability to encourage
better performance. However, poor performance can lead to incentives
being taken away and the supplier or organization being penalized. To
put it into terms that I can understand better, a running back in the
NFL will have a base salary provided that he makes the team. Based on
his position he is expected to preform at a very high level as he is
playing a position that generally scores numerous times a season. The
incentives in his contract are usually based on the number of times he
scores and the number of rushing yards he totals during the season. More
touchdowns means more commas and zeros added to his pay. This usually
leads to a higher paid contract the following season.
When is it best to use incentives?
It is best to use incentives when as soon as the desired outcome is
produced or the goal has been reached. The longer a group or
organization must wait for their anticipated incentive the more the
momentum and excitement is lost for any future projects.
- NFL players performance during the season
- When a sub-contractor completes the services that are required a head of time.
How are contracts used to transfer risk?
Risk transfer involves passing the risk to a third party. The risk is
still there it just gets transferred to a third party to manage.
Examples of contracts being used to transfer risk would be things like
property insurance, or Fixed price contracts.
Kelly, C., & Yang, J. (2015). Improving the bottom line.Internal Auditor, 72(1), 54.