Incentives

Incentives in procurement refer to the ‘carrots’ that may be offered to suppliers to motivate the supplier to perform to or above agreed standards. For example, a risk and reward contract will typically feature a bonus payable to the supplier if they exceed agreed performance standards. Another incentive that may be used is an extension of the contract. For example, the contract may be for an initial two-year period with an option to extend for a further one-year and then another one year, subject to satisfactory performance. The contract extension is an incentive to motivate the contractor to perform. In practice the use of incentives seeks to equip the buyer with some way of motivating performance once competitive tension is no longer present. See also Performance Regime.