Contract performance incentives

Contract performance incentives are contractual rewards or other benefits that motivate and reward a contractor for achieving specified performance outcomes. Those outcomes can be technical results, schedule improvements or other measurable results that go beyond the contract's baseline requirements. CanadaBuys describes incentives as tools that maximize value for both Canada and the contractor by motivating and rewarding the outcomes Canada wants.

The idea comes from incentive contracting and performance-based contracting. A reward, usually added profit, fee, payment or recognition, is tied to the achievement of defined contract objectives. Incentives can be financial or non-financial, and they can be short-term, aimed at a specific goal, or long-term, aimed at sustained behaviours.

Incentive types in Canadian federal guidance

The Government of Canada's Practitioner's Guide for Procurement Pricing identifies the main forms of incentive:

• Technical performance incentives, which reward specified technical outcomes.
• Schedule performance incentives, which reward delivery or other schedule outcomes.
• Award fees, which reward performance judged against agreed criteria.
• Non-financial incentives, which reward performance without a direct payment.

The guide states that incentives can be used in both competitive and non-competitive procurements, and with all bases of payment.

Rewarding performance above the baseline

An incentive is not payment for meeting the contract. The guide says incentives should reward superior performance that exceeds the baseline standards set in the statement of requirements or statement of work. Meeting the minimum is what the contract price already covers.

The same guidance sets out how an incentive should be designed:

• The objectives should link to contract outcomes.
• The contractor should control the performance factors involved.
• Achievement should be measurable and verifiable.
• The incentive and its administration should be reasonable.

When incentives enter a contract

CanadaBuys advises that incentives can be introduced in two ways. They can appear in the solicitation, as part of the resulting contract clauses. They can also be introduced during price negotiations, for application over the life of the contract. Bidders should therefore expect incentive terms in the draft contract or at the negotiation table.

How defence acquisition uses the term

Defence procurement uses the term for incentives linked to identifiable targets. U.S. Department of Defense guidance says contractor performance incentives should relate to areas such as delivery or test schedules, quality controls, maintenance requirements, and reliability or maintainability requirements. Its incentive contracting guidance describes incentive contracts as giving the contractor an opportunity to earn increased profit for meeting cost, performance or schedule criteria. It also notes that negative incentives can reduce profitability when results fall short.

In Canada, Public Services and Procurement Canada material on defence and marine procurement identifies performance-based contracting as an emerging model concerned with value, price and incentivization, including in sustainment-related work.

What it means for a supplier bidding on Canadian public contracts

Read the solicitation and the draft contract for any incentive provisions. Look for the defined performance metrics, the baseline standards, the measurement method, the verification process and the incentive formula or amount. Check the applicable milestones and any reporting or evidence requirements.

Price and plan only for outcomes you control, because Canadian guidance expects incentive objectives to sit within the contractor's control. Keep records that can verify achievement, since incentives depend on measurable results. If a solicitation is silent on incentives, they may still be raised during price negotiations.