Time is Money: Construction Contract Times, Delays, and Schedules-Time is Money Construction Contract Times Delays Schedules HO3 Contractor Incentives

Time is Money Construction Contract Times Delays Schedules HO3 Contractor Incentives

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This blog post by Kevin O’Beirne discusses contractor incentives in construction contracts, contrasting the traditional "stick" approach (penalties and damages) with the "carrot" (positive inducements). While contract clauses often impose penalties such as liquidated damages for late completion or environmental mishaps, providing incentives can motivate contractors to exceed minimum requirements and offer greater value to owners.

Incentives must be included in contracts only with the owner's informed consent, as owners set goals and approve expenditures. Common incentives focus on early completion or cost savings, with clear terms on payment and often requiring change orders for bonus payouts.

Three primary incentive methods are detailed: 

1. <strong>Bonus Clauses</strong> – Simple bonuses reward early completion or superior performance, like more efficient equipment that reduces operating costs. Penalties differ from liquidated damages, which compensate the owner without being punitive. Sometimes, enforceable penalty clauses require matching bonus clauses.

2. <strong>Fixed Fee</strong> – In cost-plus-fee contracts, a fixed fee (either a set amount or percentage of a guaranteed maximum price, GMP) incentivizes contractors to reduce costs, as they retain the same fee regardless of final expenses, unlike percentage fees that diminish with lower costs. Fixed fees are included in the contract price upfront and don’t need change orders for payment.

3. <strong>Target Price/Shared Cost Savings</strong> – These provisions allocate savings between the owner and contractor if the final price is under a target (often the GMP). Some contracts also share cost overruns to reduce contractor risk, typically on large projects. Savings and overruns can be shared based on graduated scales or fixed formulas. While encouraging cost-saving substitution requests, these clauses can burden design professionals and risk project delays.

No U.S. standard contract currently contains model language for shared savings or overrun sharing.

In summary, while penalties are common, the “carrot” of bonuses, fixed fees, and shared savings can be powerful motivators for contractors when incorporated judiciously and directed by the owner. The blog emphasizes the need for clear contractual terms and awareness of potential risks and trade-offs in incentive structures.

Keywords

contractor incentives

construction contracts

penalties and bonuses

liquidated damages

bonus clauses

fixed fee contracts

target price

shared cost savings

cost-plus-fee

contractual risk management