ABSTRACT
The purpose of incentive mechanism is to align the objectives of the contracting parties. The payment terms are extremely useful for the client as a negotiating device. However, as well as negotiating a better deal, the payment terms should be structured to operate as an incentive motivating mechanism. Well thought-out payment terms can make a significant difference to a contractor's gross margin and a company's cash flow. Custom and practice in the construction industry is to measure the work achieved on a monthly basis. Incentive strategies need to be determined as part of the contracting strategy and payment strategy. A company with an effective bonus scheme can develop a culture where the dominant performance criteria is meeting project objectives and having a happy client. A corporate performance bonus scheme should not be based on a formula, whereby everyone shares in a corporate pot, since it eventually becomes an expected norm and its effect is dissipated.
