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Incentive and Penalty Contract

A contract arrangement where the supplier earns a monetary bonus for delivering the project's products by the agreed date and incurs financial penalties if delivery is late.

Key Points

  • Combines rewards for on-time delivery with penalties for late completion.
  • Requires clear, measurable delivery dates and acceptance criteria to avoid disputes.
  • Typically implemented as a clause within fixed-price or time-and-materials agreements.
  • Uses defined formulas and caps for bonuses and penalties to align schedule performance incentives.

Example

A city contracts a vendor to deliver a new permitting system by June 30. The contract pays a 5% bonus if the system is accepted by that date, but charges $7,500 per week of delay, capped at 20% of the contract value.

PMP Example Question

During procurement planning, the buyer specifies that the seller will receive a 3% bonus if final delivery meets the agreed date, and will be charged $10,000 per week for late delivery. What best describes this arrangement?

  1. Cost-plus-incentive-fee (CPIF) contract
  2. Fixed-price contract with an incentive and penalty clause
  3. Time and materials (T&M) contract
  4. Cost-plus-fixed-fee (CPFF) contract

Correct Answer: B — Incentive and penalty contract

Explanation: The scenario combines a bonus for on-time delivery with financial penalties for lateness, which characterizes an incentive and penalty contract provision.

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