Research Paper: Use of Incentive Contracts

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[. . .] The authority to inflict a penalty punishing observable opportunism or reward observable but not contractible excellence needs the capability to react to adjustments in observable other than non-contractible variables with some proper sense of judgment on the division that observes non-contractible dimensions. It is also proper to point out that the moment discretion is essential for implicit contracting, it is clear that the doors of opportunistic behaviors by the persons charged with the responsibility of observing non-verifiable variables, this might be the buyer or some party entrusted by the buyer carryout such duties. For the fact that third parties like courts are not obligated to observe quality, the contractor remains vulnerable as the buyer may refuse to own up to the promised bonus or even go ahead and inflict penalties even though the quality is at the desired level. On the other hand, it is without doubt that the moment the buyer abuses the discretion in administering bonuses as well as penalties, it is clear that the credibility with the effect of averting serious contractors as well as coming up with implicit contracting techniques ineffective, at best will be lost by the buyer. Therefore the method can only be successful in the circumstance where the buyer is in a position to build a reputation on a fair behavior.

It is proper for the contractor to know that incentive contracts stimulates them to limit costs by allowing them a fraction of cost savings, it also reimburses them some cash in the circumstance of cost overrun. In the same way, an excellence incentive contract stimulates them to offer enhanced quality more so with the added bonuses if they achieve more that stipulated quality levels. It is then clear that the incentive format designed in the contract takes care of both the parties in the sense that it balances risk sharing as well as incentives. As elaborated above, it is proper to point out that the cost sharing parameter plays a major role as far as contractors' incentives for the purpose of reducing cost are concerned. This shows that the higher the parameters the lesser the contractors headache on overrun costs and the lesser the contractors gains from reduction costs (McMillan, 1992).


It is advisable for the contractors to be able to recognize and master the factors that influence labor productivity as well as implementation of strategies to moderate their effects. It is without doubt that this task is never easy and needs those contractors who have been in this field for quite some time and understands how to handle labor problems. It is also advisable for the overall contractor to adequately plan the third parties schedule to avoid problems as well as delays. As it is, there has been a lot of emphasis on quality which means every measure of upholding quality must be upheld at all levels regardless of the fast tracking of the project. It is well-known that safety has always remained a top priority in every job, the contactor has no choice but to be mindful of the safety.


Iossa, E. And Legros, P. 2004, "Auditing and Property Rights', The Rand Journal of Economics,

35, pp.356-372. Retrieved on March, 19, 2014

Kelman, S., 1990, Procurement and Public Management: The Fear of Discretion and the Quality of Government Performance, Washington, D.C.: American Enterprise Institute Press. Retrieved on March, 19, 2014

Kranton, K., 2003, "Competition and the Incentive to Produce High Quality," Economica, 70:

385, 404. Retrieved on March, 19, 2014 ae68799f40a5/TR%20DISS%201586(1).PDF

McMillan, J. 1992. Games, Strategies and Managers, New York NJ; Oxford University Press.

Retrieved on March, 19, 2014

Parker, J.M. And Belden, (1972). D.L. An Examination of Army, Navy and Air Force Incentive

Contract Outcomes. National Contracts Management Journal, 6(1), 59 Retrieved on March, 19, 2014 [END OF PREVIEW]

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Cite This Research Paper:

APA Format

Use of Incentive Contracts.  (2014, March 21).  Retrieved July 22, 2019, from

MLA Format

"Use of Incentive Contracts."  21 March 2014.  Web.  22 July 2019. <>.

Chicago Format

"Use of Incentive Contracts."  March 21, 2014.  Accessed July 22, 2019.