The Art of Offering Contract Incentives to Outsourced Vendors

Posted by Marcell Haywood on Dec 3, 2015 9:00:00 AM
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Facility maintenance costs are hefty, so finding savings anywhere possible, can mean more budgetary room for other essential areas.

One of the best ways to cut costs is to incentivize outsourced vendors to help you reach your savings goals. By using performance-based contracting and contract incentives, you can easily get vendors on board with saving you money.

Performance-Based Contracting

Performance-based contracting is a results-oriented contracting method. According to CIPS and NIGP, this type of contract focuses on “the outputs, quality or outcomes that may tie at least a portion of a contractor’s payment, contract extensions, or contract renewals to the achievement of specific, measurable performance standards and requirements.”

In order to accomplish this, your organization needs to describe requirements in terms of the end results required rather than “specifying how the work is to be accomplished.” You’ll also need to set measurable performance standards, describe how the vendor’s performance will be evaluated, and “identify and use positive and negative incentives.”

Contract Incentives

Contract incentives make implementing a performance-based contracting approach easier and more organic, as it aligns your vendor's interests with your goals.

These incentives will reward your outsourced vendors for completing actions above and beyond the stated contract requirements. They can be monetary or nonmonetary, and even offered as award fees, meaning vendors will receive a portion of the savings realized.

During the RFP phase, these incentives will encourage competitors to develop and implement cost-effective means of performing the work and innovative approaches to resolve obstacles you face.

They may also incentivize outsourced vendors to go the extra mile, meaning you’ll have more budget for other essential areas.


You may also want to incorporate disincentives, so that if a contractor isn’t meeting performance standards, they will be penalized accordingly. The Office of Federal Procurement Policy and the Office of Management and Budget recommend that “the deduction should represent as close as possible the value of the service lost.”

This can be computed by “determining the percentage of contract costs associated with each task.” The OFPP and OMB give the following example:

If a given task represents 10 percent of the contract costs, then 10 percent will be the potential maximum deduction in the event of task failure.


Remember, these contract incentives and disincentives should apply to the most important aspects of the work, not every individual task. Overall, they should be used in order to induce better quality outcomes, discourage inefficiency, and motivate contractor efforts that might not otherwise be emphasized.

The purpose of both performance-based contracting and the use of contract incentives is to obtain better performance, better value, and lower costs. This approach will also motivate the contractor to devise the most efficient, effective, and innovative way to get the job done. Therefore, it’s crucial you select a competent and innovative vendor who’s willing to go the extra mile to meet performance requirements and bring you savings. 

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Topics: Outsourcing

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