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Rice University



Incentives in Contracts
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Incentives in Contracts
Worth a note, effective use of incentives is an integral component to creating prosperous
business arrangements that intensify the value for all parties as they attract, reward and motivate
contractors to guarantee high performance (Chen, Klastorin & Wagner, 2015). Notably,
incentive contracts are categorized into two types namely reimbursement incentive contracts and
fixed-price incentive contracts. Moreover, some of the reasons why contracts include incentive
entail, one an incentive plays an imperative role in creating a reasonable and achievable target.
That is, a well-communicated incentive to the contractor discourages inefficiency by motivating
contractor efforts to achieve the set targets and objectives. Secondly, incentives present
reasonable beneficial opportunities for providers without putting them at a possible loss during a
contract period (Farrell, Goh, & White, 2014). In addition, incentives foster the ability of
contractors to get more fees by lowering cost, attaining the desired schedule as well as rising
above the performance objective. Subsequently, it is best to use incentives when the contracts are
anticipated to overruns the s...

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