HKSM
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?
- Cost-plus-incentive-fee (CPIF) contract
- Fixed-price contract with an incentive and penalty clause
- Time and materials (T&M) contract
- 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.
