2-16.2 Different Types of Performance-Based Contracts

The contract type selected should motivate suppliers to perform as well as possible. To do this, the client must specify what it wants and know what the project will do for it. The two most frequently used are fixed-price incentive contracts and cost plus incentive-fee contracts.

The two constants are that a portion of supplier payment is based on performance and that the supplier shares some degree of risk on the contract. Possibilities for the structure of a performance-based contract include:

• The supplier receives a share of any increased revenue generation in return for risking a share of its profits to pay for overruns.
• The supplier’s profits are contingent on meeting explicit performance measures of the indicators.
• The supplier is required to make a substantial up-front investment and assume most of the project risk.

Additional information on contract types can be found in Section 2-18, Select Contract Type and Period of Performance.