APPLICATION OF INCENTIVES IN CONSTRUCTION CONTRACTS IN SINGAPORE

Abstract

Incentives can be perceived as a useful management tool to direct contractors' energies towards the owners' objectives so that both parties will work towards the same goal. It is hoped this dissertation will serve as a practical guide to incentive contracting in Singapore. The concept of 'incentive' and how it motivates people are thoroughly discussed. Personal interviews were conducted to study the current market practices and obtain the opinions of local professionals. Based on the project objectives, the owners have to identify the area that needs emphasis or improvement and formulate a plan to achieve it. The incentive parameters could be cost, schedule, technical (for example quality, safety or responsiveness) or a combination of any of these. The sharing of cost savings may motivate contractors to tap their knowledge and experience to propose more cost-efficient equipment and methods of construction. A schedule incentive will reward contractors for early completion. Quality is the most common technical parameter to be incentivised. It is usually based on CONQUAS score. Financial incentive is deemed to be the most effective extrinsic motivator to be used in construction contracts. In establishing any incentive plans, the following considerations have to be considered to ensure effectiveness of the plan: 1. Positive and/or negative plan 2. Unilateral and/or negotiated plan 3. End-of-project and/or milestone plan 4. Quantitative and/or qualitative plan 5. Win/lose or conditional award The decision to use incentives is influenced by the characteristics of the project, the type of contract used, the market condition and the people involved in the project. The human factor seemed to have the strongest influence. The following principles need to be observed to ensure success of the incentive scheme: 1. The scheme should be easily understood. 2. The objectives must be specific, clear and consistent. 3. The targets set must be achievable and realistic. 4. The quantum should not be a mere sharing of owner's cost savings. It must meet the contractor's expectations. 5. Some flexibility is needed to deal with unforeseen circumstances. 6. Changes should be minimised. 7. The intention to implement an incentive scheme must be agreed prior to commencement of the project. 8. Both parties must 'truly' jointly accept the scheme. 9. The performance evaluation mechanism must be deemed fair and equitable. 10.Incentive plans should be designed to interface with the existing project control system. 11.No bonus flow down should be considered. A case study is presented to apply the concepts discussed. There is no single solution to incentive contracting. The examples provided in the research can only give owners and contractors an idea of how incentives can be combined in many ways to address the various project objectives. The application will rest on the project team itself.