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International Journal of Project Management 30 (2012) 352 – 362

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The impact of incentive mechanisms on project performance

Xianhai Meng ⁎, Brendan Gallagher
School of Planning, Architecture and Civil Engineering, Queen's University Belfast, David Keir Building, Stranmillis Road, Belfast, BT9 5AG, UK

Received 1 December 2010; received in revised form 18 August 2011; accepted 23 August 2011

Abstract

Contractual incentives have been increasingly practised in construction projects. In this study, a questionnaire survey is carried out in the United
Kingdom (UK) and the Republic of Ireland (ROI) to analyse the relationship between the use of incentives and the performance of a project. The
analysis is made in a comparative way. First of all, four payment methods are compared in terms of their impact on cost performance. Secondly,
incentive projects are compared with non-incentive projects in terms of time and quality performance. Thirdly, both time and quality performances
are compared between the projects with a single incentive and those with multiple incentives. The analysis results provide empirical evidence for
the significant impact of incentive mechanisms on project performance. Subsequent to the questionnaire survey, a case study is conducted to ex-
amine how to appropriately apply incentives in practice, revealing that the use of incentives aligns the contractor's objectives with the client's ex-
pectations in a project and in order to ensure the success of incentive mechanisms the contractor needs to make extra efforts for the enhancement of
project management processes, the creation of collaborative working environments, and the motivation of his staff and workforce.
© 2011 Elsevier Ltd. and IPMA. All rights reserved.

Keywords: Incentive; Disincentive; Performance; Construction project

1. Introduction
Completion on time, on budget and with the specified quality
is widely recognised as the major objectives of a construction pro-
ject and time, cost and quality are generally identified as the key
indicators of project success. From the client perspective, it is
ideal that a project is completed in minimum time, at minimum
cost, and with the best quality (Arditi et al., 1997). However, it
is often difficult to achieve these major objectives in practice, es-
pecially for large and complex projects (Harris et al., 2006). Many
construction projects suffer from time delay, cost overrun and
quality defect (Sun and Meng, 2009). So far, a large number of re-
search efforts have been made to identify various possible solu-
tions to performance problems, according to which project
performance can be improved by adopting total quality manage-
ment (Arditi and Gunaydin, 1997; Pheng and Teo, 2004), project
risk management (Baloi and Price, 2003; Kwak and Smith, 2009),
benchmarking (Love and Smith, 2003; Luu et al., 2008), learning
⁎ Corresponding author.
E-mail address: x.meng@qub.ac.uk (X. Meng).
0263-7863/$ - see front matter © 2011 Elsevier Ltd. and IPMA. All rights reserved.
doi:10.1016/j.ijproman.2011.08.006
and innovation (Dulaimi et al., 2005; Wong and Cheung, 2008),
cooperative procurement and relational contracting (Eriksson
and Westerberg, 2011; Matthews and Howell, 2005), and etc.
On the other hand, incentive provisions can be used as a con-
tractual strategy with a significant potential to address perfor-
mance problems (Jaafari, 1996). According to Bubshait (2003),
clients can provide time incentive for early completion, cost in-
centive for cost saving, quality incentive for zero or minor de-
fects, and sometimes safety incentive for complying with
stricter safety rules and standards. In addition, different types
of incentives can be combined in order to make improvement
in two or more performance areas. The combination of incen-
tives is often called multiple incentives, which have proven com-
plicated to manage but may be fairly successful (Bower et al.,
2002). In recent years, the importance of incentive mechanisms
to project success has received an increasing recognition from
construction researchers and practitioners. For example, Love
et al. (2011) emphasised that project participants' behaviours
can be aligned through the use of incentives towards a project's
performance objectives. Similarly, Rose and Manley (2011) saw
the use of incentives as a key means of improving project
 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
performance by simulating the motivation to work harder and
smarter in pursuit of high-order performance objectives.
As mentioned above, existing research efforts mainly con-
tribute to the wide recognition of the importance of incentive
mechanisms to project success. Other contributions of existing
research efforts are reflected in the following four aspects: (1)
introducing the principle of contractual incentives; (2) estab-
lishing different types of incentive contracts; (3) providing ref-
erential experiences for clients and contractors to practise
contractual incentives; and (4) investigating the perceptions of
clients and contractors about the use of incentives. For exam-
ple, Bower et al. (2002) pointed out that the basic principle of
incentive contracting is simply to take advantage of a contrac-
tor's general objective to maximise his profits by giving him
the opportunity to make greater profits if he performs the con-
tract efficiently, whilst Herten and Peeters (1986), Bower
et al. (2002) and Bubshait (2003) defined time, cost, quality
and multiple incentives as the common types of incentive con-
tracts in construction projects. On the other hand, Jaraiedi et al.
(1995) developed a set of guidelines for the use of incentives in
highway construction contracts, and Rose and Manley (2010)
provided practical recommendations for clients who design
and implement financial incentives in their projects. In addi-
tion, Arditi and Yasamis (1998) and Bubshait (2003) compared
the perceptions of clients and contractors regarding the use of
incentives. According to Bubshait (2003), for example, approx-
imately 64.0% of clients in the survey agreed that incentive pro-
visions should be included at the bidding stage whilst 60.0% of
contractors believed that incentive provisions should be includ-
ed at the construction stage.
Although previous studies contribute to a good understand-
ing of incentive knowledge and experience and a wide recogni-
tion of the importance of incentive mechanisms to project
success, there are obvious limitations within these studies.
First of all, most previous studies, such as Bubshait (2003),
Ling et al. (2006), Chapman and Ward (2008) and Rose and
Manley (2011), have not provided any empirical data for the
performance outcomes of incentive projects. Therefore, it is
not possible to measure the real effect of the use of incentives.
Secondly, amongst the limited studies that link financial incen-
tives to real performance, most of them address only one per-
formance area. For example, Arditi et al. (1997) only paid
attention to the effect of time incentive on time performance
whilst Berends (2000) focused on the effect of a particular pay-
ment method on cost performance. Therefore, there is a lack of
systematic research on the impact of incentive mechanisms on
project performance in all three performance areas. Thirdly, a
lack of comparison between incentive and non-incentive pro-
jects and a lack of comparison between a single incentive and
multiple incentives within almost all previous studies under-
mine their value. Finally, another limitation of previous studies
is that only a few of them such as Walker et al. (2002) and
Bower et al. (2002) have given a light touch on quality incen-
tive when focusing their research on something else, e.g. pro-
ject alliancing and other types of incentives. Therefore, there
is a barrier to a penetrating understanding of the link between
quality incentive and quality performance.
353
In order to overcome the limitations within previous re-
searches, a comparative study is undertaken in the UK and ROI.
The research questions in this study concern: (1) whether the
use of incentives has a significant influence on performance im-
provement; (2) what incentive approach is more effective; and
(3) how an incentive mechanism works. This study is charac-
terised by (1) analysing the real data of performance outcomes
rather than the respondents' perceptions; (2) investigating the
roles of incentives in improving performance in terms of
time, cost and quality; (3) comparing incentive projects with
non-incentive projects; (4) distinguishing a single incentive
from multiple incentives; and (5) exploring the use of incentives
combined with disincentives. For time and cost performance,
both the certainty of performance and the difference between ac-
tual and target performance are analysed. Similar to time perfor-
mance, quality performance is also compared between incentive
and non-incentive projects and between the projects with a single
incentive and those with multiple incentives. In doing so, this
study addresses the problem identified from existing literature
on quality incentive. Unlike previous studies using either a quan-
titative or a qualitative method, this research adopts a combina-
tion of questionnaire survey and case study. Based on empirical
information in breadth and depth, it provides an important oppor-
tunity to look at the application of incentive mechanisms in more
detail and in a clearer way. The findings of this study are
expected to benefit to both industrial practitioners and academ-
ic researchers in designing and implementing suitable contrac-
tual incentives to pursue and achieve project success.
2. Incentive mechanisms
As discussed above, there are different types of incentives in
construction projects, e.g. time, cost and quality incentives.
These incentives can be used individually or collectively. In ad-
dition to incentives, disincentives are often seen in practice, e.g.
time disincentive for late completion of a project (Shr and
Chen, 2004). Similarly, cost disincentive can be set for cost
overrun, and quality disincentive can be set for major defects.
Obviously, an incentive refers to a reward whilst a disincentive
represents a penalty (Bubshait, 2003). If completion on time, on
budget and with the specified quality is considered as normal
performance, the purpose of an incentive/disincentive scheme
is to motivate the contractor for excellent performance or demo-
tivate the contractor for poor performance. Incentives and disin-
centives can be used separately. On the other hand, it is possible
for disincentives to accompany incentives (Arditi et al., 1997;
Bubshait, 2003).
By comparison, time and cost incentives have received
much more research attention than quality incentive. For exam-
ple, Shr and Chen (2004) analysed how to set maximum time
incentive for highway construction projects whilst Chan et al.
(2010) evaluated how to achieve better performance through
target cost contract in an underground railway station modifica-
tion project. On the other hand, Jaafari (1996) twinned time and
cost incentives in marine construction projects. Time incentive
is generally paid to the contractor in the form of a bonus, e.g. a
certain amount for each day of early completion (Arditi et al.,
354 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
1997). Similarly, quality incentive is also paid through a bonus.
Instead of a bonus, cost saving is often split between the client
and the contractor in terms of a sharing ratio (Al-Harbi, 1998;
Broome and Perry, 2002). The role of cost incentive greatly de-
pends on the selection of payment methods because one payment
method may involve cost incentive but another may not. This will
be discussed in detail in the following.
The role of payment methods has been highlighted by many
construction researchers. For example, Broome and Perry
(2002) provided seven examples of using target cost contracts
and discussed the sharing ratios for cost under and over runs.
Generally, there are four common types of payment methods:
fixed price, cost plus fee, target cost, and payment based on
final outcome. Fixed price and cost plus fee are widely recog-
nised as two basic and simple payment methods (Chapman
and Ward, 2003). With a fixed price contract, the client pays
the contractor a specified fixed amount for the entire scope of
work and the risk of overspending is carried by the contractor
(Al-Harbi, 1998; Berends, 2000). For this reason, the fixed
price contract can be considered as a cost disincentive. Some-
times, a cost incentive is incorporated into the fixed price con-
tract to form a fixed price incentive contract (Rubin et al., 1999;
Ward and Chapman, 1995). The purpose of the incorporation is
to motivate the contactor to complete the project under budget
so that the contactor can share cost saving with the client. A
cost plus fee contract is mainly divided into cost plus fixed
fee contract and cost plus percentage fee contract (Chappell
et al., 2001). When a cost plus fee contract is used, the contrac-
tor is reimbursed for all the expenses incurred from his work to-
gether with a fee (Al-Harbi, 1998; Broome and Perry, 2002).
According to Bubshait (2003), this contract should be limited
to low cost projects, emergency work and short duration pro-
jects because it lacks both an incentive for cost reduction and
a disincentive for cost increase.
The weakness of a cost plus fee contract can be overcome to
some extent by introducing a target cost concept (Twort and
Rees, 2004). In recent years, the target cost contract has
gained increasing popularity. A main reason is that it provides
gain/pain sharing and therefore facilitates collaborative working
(Chan et al., 2010; Walker et al., 2002). With this payment meth-
od, a target cost is estimated and mutually agreed by the two con-
tracting parties and meanwhile a sharing formula is established
(Bower et al., 2002; Perry and Barnes, 2000). A target fee is
paid to the contractor if the actual cost equals the target cost.
According to Twort and Rees (2004), the contractor shares a pro-
portion of cost underrun as a reward if his expenditure is less than
the target whilst he has to bear a proportion of cost overrun if he
expends more than the target. That is to say, both saving and
overspending are shared between the client and the contractor
according to the formula. Sometimes, a guaranteed maximum
price is added in the contract as a cost disincentive (Bower et
al., 2002; Chan et al., 2011). In addition to the target cost contract,
payment based on final outcome is another payment method pro-
posed by the Office of Government Commerce (OGC). With this
payment method, the contractor is paid on the basis of final out-
comes such as the achievement of expected standard of reliability
and capability (OGC, 2003). Therefore, the contractor should
take into account the long-term needs of end users. On the
whole, it is more related to quality performance although some-
times delivery on time or overall performance is the basis of
payment.
Existing literature mainly focuses on time and cost incen-
tives. Research efforts for quality incentive are quite limited
and there are no research efforts specific to quality-only incen-
tive. In the current vision, Walker et al. (2002) may be the only
example in which both incentive and disincentive for quality
performance were specified together with incentives and/or dis-
incentives for time and cost performance when comparing pro-
ject alliancing with project partnering in the National Museum
of Australia Project. On the other hand, quality disincentive
was briefly introduced by Bower et al. (2002) through several
case studies, in which the central theme was cost incentive
and disincentive. The lack of sufficient evidence for quality in-
centive results in some questions, e.g. (1) is it possible to sepa-
rate quality incentive from time and cost incentives in practice?
and (2) does quality incentive has a significant effect on quality
performance improvement? These questions will be answered
in this research based on the analysis of empirical data collected
from questionnaire survey and case study.
3. Research methods
The exploratory nature of this study requires a combination
of quantitative and qualitative methodologies. In this study,
the research methods include literature review, questionnaire
survey and case study. First of all, the literature on incentives
and performance was reviewed in the context of construction
projects. Based on the identification of strengths and weak-
nesses within previous studies, the critical review helped to dis-
cover the need for the current research. Subsequent to the
literature review, a preliminary questionnaire was developed.
As a pilot study, the preliminary questionnaire was reviewed
by some industrial experts, whose feedbacks contributed to a
refinement of the questionnaire. The main purpose of this
study is to analyse the relationship between incentive mecha-
nisms and project performance in construction, e.g. whether
an incentive project is significantly better than a non-incentive
project in terms of project performance, and whether a single
incentive or multiple incentives are significantly more effective
for performance improvement. As a typical quantitative meth-
od, a questionnaire survey was adopted as the main instrument
to achieve the purpose. This is because it is easy to get informa-
tion from many people and its results are generalisable to the
survey population (Gillham, 2000; Presser et al., 2004). In
order to make comparative analysis, the questionnaire survey
targeted both the projects in which incentives were established
between clients and main contractors and the projects in which
there were no incentive mechanisms. Both building and civil
engineering projects were investigated. The questionnaire sur-
vey also covered both public and private sector projects
throughout the UK and ROI. Each questionnaire response was
specific to a completed project in which performance outcomes
were measurable.
 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
The questionnaire was divided into five sections. Section A
was designed to collect the information on the respondent orga-
nisation, project region, project type, and project sector. Section
B contained two questions, concerning the adoption of partner-
ing and payment method. Section C was related to the presence
of incentives, type of incentives, choice of a single incentive or
multiple incentives, and components of multiple incentives. A
respondent's perception on the influence of incentives on pro-
ject management and working relationship was rated in Section
D according to a five-point scale (1 = Strongly agree; 2 = Agree;
3 = Neither agree nor disagree; 4 = Disagree; and 5 = Strongly
disagree). Section E was used to explore the characteristics of
time, cost and quality performance in a completed project.
“Time certainty” was measured in terms of three options
(1 = Early; 2 = On time; and 3 = Delayed). Similarly, three op-
tions were provided for “Cost certainty” (1 = Under budget;
2 = On budget; and 3 = Over budget). In addition to “Time cer-
tainty” and “Cost certainty”, a respondent was asked to provide
the information of project duration and project budget. If pro-
ject completion was not on time and/or not on budget, the re-
spondent further needed to answer how many months the
project was completed early or delayed (“Time advance” or
“Time delay”), and/or how much the actual cost was saved or
overspent (“Cost saving” or “Cost overrun”). On the other
hand, “Defect” considered the condition of a completed project
with respect to quality performance by using a five-point scale
(1 = Defect free; 2 = Some defects with no significant impact on
the client; 3 = Some defects with some impact on the client;
4 = Major defects with major impact on the client; and 5 = Totally
defective).
Given that many organisations have good connections to the
Internet, the use of email and online survey is especially advan-
tageous in terms of convenience and access to many people
(Gray, 2009). For this reason, the formal questionnaire was
sent to 270 construction practitioners through email. In this
study, the questionnaire respondents should be familiar with
project management and performance measurement in con-
struction projects. On the other hand, the questionnaire survey
needed both the respondents who had experienced incentive
contracts and the respondents who had not such experience
for the purpose of comparing incentive with non-incentive pro-
jects. The 270 potential respondents were selected from expert
databases and other available sources. In order to ensure a rep-
resentative sample, the potential respondents were selected
carefully through the following criteria: (1) having sufficient
experience in project management; (2) holding key manage-
ment positions such as senior managers, project managers and
contract managers; (3) covering different regions of the UK
such as England, Scotland, Northern Ireland and Wales as
well as the ROI; and (4) working in different types of construc-
tion organisations such as project clients, main contractors, pro-
ject management consultants, and other types of organisations.
The majority of clients were local authorities or government
agencies. Other types of organisations mainly referred to archi-
tectural firms. A respondent had a flexibility of either filling in
the attached questionnaire or answering the online question-
naire by clicking the web link provided in the email. In doing
355
so, it was possible for the researchers to understand who had
responded. As a result of the questionnaire survey, a total of
60 completed questionnaires were returned with a response
rate of 22.2%. The response rates of client, contractor, consul-
tant and other groups were 21.1%, 20.0%, 23.0% and 35.0%
respectively.
The statistical analysis of questionnaire results helps to ex-
plore the relationship between incentive mechanisms and pro-
ject performance. Even if a statistical relationship is identified,
however, it is still not very clear about how an incentive mech-
anism works in construction practice. This is why Tang et al.
(2008) recommended that incentive mechanisms should be
linked not only to the final outcomes but also to the whole pro-
ject management process. Similarly, Rose and Manley (2011)
argued that offering an incentive does not assure project motiva-
tion and performance automatically and the impact of any incen-
tive will be compromised if clients ignore the importance of
working relationship with contractors. Although project man-
agement process and working relationship were briefly consid-
ered in the questionnaire, a need was further identified to
explore how to ensure the success of incentive mechanisms dur-
ing a project. For this reason, the questionnaire survey was fol-
lowed by a case study, which is a suitable method for the
research need.
According to Punch (2005), properly conducted case studies
will make a valuable contribution to the research especially in
situations where existing knowledge is shallow, fragmentary
or incomplete. The contribution is mainly reflected in three dif-
ferent ways. First of all, it provides an important opportunity to
learn from the study of a particular case in its own right. Sec-
ondly, only in-depth case studies can give a clear understanding
of the key aspects of a new research area. Thirdly, the case
study can be combined with other research methods to make
a contribution to knowledge. In this research, the case study
was conducted to examine the role of incentive mechanisms
in performance improvement. To achieve this, three experts in-
volved in a civil engineering project adopting multiple incen-
tives were interviewed, who represented client, contractor and
designer organisations respectively. As a complement to the
questionnaire survey, the case study made it possible to get a
better and deeper understanding of incentive mechanisms in
construction practice, e.g. how to establish incentive mecha-
nisms appropriately in a project, and how to convert the use
of incentives into the achievement of excellent performance.
4. Analysis of questionnaire results
Based on the data collected from the questionnaire survey, a
quantitative analysis is made in a comparative way, based on
which it is clear to see the influence of different payment methods
on cost performance, the difference between incentive and non-
incentive projects in terms of time and quality performance, and
the difference of time and quality performance between a single
and multiple incentives. In addition, the statistical analysis pro-
vides quantitative evidence for the successful application of in-
centive mechanisms in construction projects.
356 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
4.1. Application of incentive mechanisms
Four types of incentives are reported in the survey: time, cost,
quality and safety. Safety incentive is only found in one civil en-
gineering project together with time and quality incentives. This is
because contractors have to comply with the latest safety regula-
tions and generally there is no need for additional incentive to en-
sure safety performance. Cost incentive is usually incorporated
into payment methods. Therefore, cost performance in a project
is mainly affected by selecting the most appropriate payment
method, which will be discussed in detail later in this section. In-
deed, disincentives are found in some surveyed projects either
separately or combined with incentives. In order to simplify the
research, however, disincentives usually do not distinguish from
incentives in the questionnaire analysis. As a result, time incentive
covers both time incentive and time disincentive. Similarly, qual-
ity incentive covers both quality incentive and quality disincen-
tive. In the questionnaire analysis, disincentives distinguish from
incentives only when discussing the influence of different pay-
ment methods on cost performance.
According to early studies such as Herten and Peeters (1986),
incentive contracts had only limited use in construction projects.
By comparison, the use of incentives has been greatly increased
in today's construction practice. As shown in Table 1, time-only
incentive is applied in 12 (20.0% of) surveyed projects whilst in
13 (21.7% of) surveyed projects time incentive is combined
with other incentives. In total, 25 (41.7% of) surveyed projects
adopt time incentive. On the other hand, quality-only incentive
exists in six (10.0% of) surveyed projects whilst in seven
(11.7% of) surveyed projects there is a combination of quality
and other incentives. Compared to other incentives especially
quality and safety incentives, time incentive is in common use.
The finding illustrates that timely completion is usually the main
concern of a project client because it is directly related to return
on investment. As for the use of different payment methods and
their impact on cost certainty, please see Table 3.
The 60 completed questionnaires are returned from different
regions throughout the UK such as England, Scotland, Northern
Ireland and Wales as well as the ROI. The responses cover both
civil engineering and building projects, both public sector and pri-
vate sector projects, and both the projects without partnering and
those with partnering (project partnering or strategic partnering).
As seen in Table 2, comparisons are made between time incentive
and no time incentive projects in terms of project type, project
Table 1
Distribution of various incentives in surveyed projects.
Incentive Frequency
Time Time incentive A single time incentive 12 (20.0%)
Time-involved multiple incentives 13 (21.7%)
No time incentive 35 (58.3%)
Quality Quality incentive A single quality incentive 6 (10.0%)
Quality-involved multiple incentives 7 (11.7%)
No quality incentive 47 (78.3%)
Safety Safety incentive A single safety incentive 0 (0.0%)
Safety-involved multiple incentives 1 (1.7%)
No safety incentive 59 (98.3%)
sector and partnering adoption. Although time incentive is not sig-
nificantly associated with project type and project sector, it is ob-
vious that the use of time incentive is more commonly used for
civil engineering projects and the projects with partnering ar-
rangements compared to building projects and the projects with-
out partnering arrangements. On the other hand, a significant
association is found at the 0.004 level between the use of time in-
centive and the sector of project. Time incentive is included in
most of public sector projects but is excluded in most of private
sector projects. A probable reason is that public sector projects
are not as effective as private sector projects, and therefore public
sector clients have to highlight the importance of value for money.
In order to achieve this, they tend to adopt incentive mechanisms
as their contractual strategies. In addition, time constraints for
public sector projects may be another reason.
Similar to time incentive, quality incentive is not significantly
associated with project type and partnering adoption although
quality incentive is more commonly seen in civil engineering pro-
jects and the projects with partnering arrangements than in build-
ing projects and the projects without partnering arrangements.
Unlike time incentive, the use of quality incentive in public sector
projects is quite similar to that in private sector projects, and
therefore quality incentive is not significantly associated with
project sector. By comparison, 65.2% of public sector projects
in the survey involve time incentive whilst only 26.1% of such
projects involve quality incentive, implying that time objective
may have a higher priority than quality objective in public sector
projects. There are different levels of statistical significance
(Yung and Yip, 2010). Generally, the result of a statistical test
is significant if P-value is less than 0.05. If P-value is more
than 0.05 but less than 0.10, the statistics can be considered to
be marginally significant (Oo et al., 2008). There is no statistical
significance if P-value is more than 0.10. The Chi-square test
shows that payment methods are not significantly associated
with both project type and project sector. On the other hand,
there is a marginally significant association between payment
methods and partnering adoption at the 0.053 level. For example,
58.8% of the projects using the target cost contract adopt partner-
ing whilst there is no partnering in 54.5% of the projects using the
cost plus fee contract.
4.2. Impact of payment methods on cost performance
Four payment methods are reported in the survey: fixed price
contract is reported in 20 (33.3% of) surveyed projects; target cost
Table 2
Use of time incentive in terms of three project characteristics.
Time No time Chi-square test
incentive incentive P-value
n = 25 n = 35
Project type Civil engineering 19 20 0.131
Building 6 15
Project sector Public sector 15 8 0.004
Private sector 10 27
Adoption Partnering 17 18 0.199
of partnering Non-partnering 8 17
 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
contract in 17 (28.3% of) surveyed projects; payment based on
final outcome contract in 12 (20.0% of) surveyed projects; and
cost plus fee contract in 11 (18.3% of) surveyed projects. As
shown in Table 3, in terms of “Cost certainty” the fixed price con-
tract performs better than the other three payment methods. In
35.0% of the surveyed projects using the fixed price contract,
the actual cost is under budget. On the other hand, 30.0% of
such projects are over budget. Compared to the other three pay-
ment methods, the fixed price contract is most likely to save
cost whilst it is least likely to overspend. In addition, the fixed
price contract represents the largest percentage (35.0%) of the
projects completed on budget. With a fixed price contract, the cli-
ent has a maximum cost certainty. According to the Chi-square
test, “Cost certainty” is marginally significantly associated with
payment methods at the 0.095 level. It is evident that the likeli-
hood of under budget completion decreases and the likelihood
of over budget completion increases gradually when moving
from the fixed price contract to the cost plus fee contract. Placing
fixed price and cost plus fee at the two extremes of the spectrum is
because under the fixed price contract the client pays a certain
amount for the contractor's work and the risk of overspending
is completely taken by the contractor. On the other hand, cost is
reimbursed in full under the cost plus fee contract and therefore
the contractor has no motivation to save cost. For this reason, a
client should be very careful for the choice of a cost plus fee con-
tract due to its high cost uncertainty. The finding is consistent
with previous studies such as Bubshait (2003). Unlike Bubshait
(2003), the finding in this study is based on the analysis of real
cost performance data rather than the analysis of respondents'
perceptions.
The analysis result presented in Table 3 also shows that the
target cost contract performs relatively well in terms of “Cost
certainty” and is ranked second. The surveyed projects that
adopt the target cost contract are 29.4% under budget, 23.5%
on budget, and 47.1% over budget. The finding indicates that
most of such projects are within budget (under budget or on
budget), which mainly results from the contractor's motive
for sharing cost saving or at least ensuring the target fee. How-
ever, loss sharing may put a lower pressure on the contractor's
cost control. As a result, a higher risk of overspending exists in
such projects compared to those using the fixed price contract.
Of the projects in which payment is determined by the final out-
come, 75.0% are over budget and the risk of overspending is
quite high, which is only 6.8% less than 81.8%, the percent fre-
quency of over budget completion for the projects under the
cost plus fee contract. As discussed above, payment based on
final outcome depends on the achievement of expected standards
such as reliability and capability. Little or no emphasis has been
placed on cost performance. The finding provides evidence to
Table 3
Cost certainty under different payment methods.
Fixed price Target cost
n = 20 n = 17
Under budget 7 (35.0%) 5 (29.4%)
On budget 7 (35.0%) 4 (23.5%)
Over budget 6 (30.0%) 8 (47.1%)
357
suggest that overemphasis on high quality may be compromised
by additional payment. For this reason, it is important for a client
to clearly identify the objectives and appropriately provide the re-
quirements at the beginning of a project.
The percent frequency of “Cost certainty” describes the like-
lihood of a project completed under budget, on budget, or over
budget. If a project is under budget or over budget, “Percentage
cost saving” is defined as the ratio of cost saving to project bud-
get whilst “Percentage cost overrun” is defined as the ratio of
cost overrun to project budget. The definition of these two vari-
ables makes it possible to compare the extent of cost saving and
cost overrun between different projects. Similar to the percent
frequency of under budget completion and the percent frequen-
cy of over budget completion, as shown in Table 4, “Percentage
cost saving” decreases and “Percentage cost overrun” increases
step by step from the fixed price contract to the cost plus fee
contract. The only abnormality is 5.68% for “Percentage cost
overrun” under payment based on final outcome. The finding
supports the ranking of payment methods as follows: fixed
price, target cost, and cost plus fee. On the other hand, payment
based on final outcome has more effect on quality performance
than on cost performance because amongst the surveyed pro-
jects under payment based on final outcome 41.7% are defect
free, 25.0% have some defects with no significant impact,
16.7% have some defects with some impact, 16.7% have
major defects with major impact, and none is totally defective.
If one-way analysis of variance (ANOVA) is further made, no
significant differences are found at the 0.050 level for the
means of “Percentage cost saving” and “Percentage cost over-
run” across four payment method groups.
Most existing studies such as Al-Harbi (1998) have com-
pared the payment methods in terms of which party is responsi-
ble for taking the risk of overspending. As a matter of fact, the
payment methods can also be analysed from a perspective of in-
centives or disincentives. For example, the fixed price contract
mainly represents cost disincentive whilst the target cost con-
tract is more characterised by cost incentive. Cost incentive en-
courages saving. Compared to cost incentive, cost disincentive
discourages overspending and may be more effective for cost
control in practice. If a disincentive is combined with an incen-
tive, the joint effect should be more remarkable, e.g. more saving
and less overspending. This is the reason for the development of
fixed price incentive and guaranteed maximum price contracts.
As discussed above, a major advantage of the target cost contract
is gain/pain sharing. However, gain/pain sharing is a double-edge
sword. On one hand, it has become a common understanding that
gain/pain sharing is a motivator of collaborative working. On the
other hand, the possibility of loss sharing to some extent weakens
a contractor's awareness of cost control if the contractor is not
Payment based on final outcome Cost plus fee Chi-square test
n = 12 n = 11 P-value
1 (8.3%) 1 (9.1%) 0.095
2 (16.7%) 1 (9.1%)
9 (75.0%) 9 (81.8%)
358 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
Table 4
Percentage cost performance under different payment methods.
Fixed price Target cost Payment based on final outcome
n = 20 n = 17 n = 12
Percentage cost saving 2.97% 2.34% 2.00%
Percentage cost overrun 1.60% 1.72% 5.68%
mature enough. As for the cost plus fee contract, both incentive
and disincentive do not exist. Unsurprisingly, it ranks last
amongst the payment methods in terms of cost performance.
4.3. Relationship between time incentive and time performance
As mentioned above, time incentive are employed in 25
(41.7% of) surveyed projects whilst a lack of time incentive is
seen in 35 (58.3% of) surveyed projects. Of the projects with
time incentive, 40.0% are completed early, 32.0% are on
time, and 28.0% are delayed (Table 5). On the other hand, the
projects without time incentive are 5.7% completed early,
51.4% on time, and 42.9% delayed. By comparison, the pro-
jects with time incentive are more likely to be completed
early whilst they are less likely to be delayed. For the projects
without time incentive, it is difficult to achieve early comple-
tion whilst it is easy to suffer late completion. Since there is
no time incentive, the time objective in such projects is to com-
plete on time. This is why on time completion is more common
in such projects compared to those with time incentive. The
Chi-square test demonstrates a significant association at the
0.005 level between “Time certainty” and time incentive.
Therefore, it can be concluded that time incentive has a signif-
icant impact on time performance. In other words, the use of
time incentive significantly contributes to the improvement of
time performance in a construction project. If a project needs
to be completed as early as possible, time incentive is identified
as an effective way of ensuring project success.
Similar to “Percentage cost saving” for under budget comple-
tion and “Percentage cost overrun” for over budget completion,
“Percentage time advance” can be defined as the ratio of time ad-
vance to project duration for early completed projects whilst
“Percentage time delay” can be defined as the ratio of time
delay to project duration for delayed projects. The independent
sample T test is used to analyse the difference of “Percentage
time advance” and “Percentage time delay” between time incen-
tive projects and no time incentive projects (see Table 6). Al-
though there are no significant differences between the two
groups, it is obvious that the mean of “Percentage time advance”
Table 5
Time certainty comparison between time incentive and no time incentive projects.
Time incentive No time incentive Chi-square test
n = 25 n = 35 P-value
Early 10 (40.0%) 2 (5.7%) 0.005
On time 8 (32.0%) 18 (51.4%)
Delayed 7 (28.0%) 15 (42.9%)
Cost plus fee ANOVA
n = 11
F-statistics P-value
0.50% 0.104 0.956
3.79% 2.447 0.085
for time incentive projects is greater than that for no time incen-
tive projects whilst the mean of “Percentage time delay” for time
incentive projects is smaller than that for no time incentive pro-
jects. In terms of the extent of time advance or time delay, time
incentive projects are also found to perform better than no time
incentive projects. Therefore, it is appropriate to conclude that
the use of time incentive not only leads to a higher likelihood
of early completion but also results in a greater extent of time ad-
vance. On the other hand, both the likelihood of late completion
and the extent of time delay can be reduced if time incentive is
established in a construction project.
Table 7 provides a comparison of “Time certainty” between
the projects with a single time incentive and those with both
time and other incentives. Of the projects with a single time in-
centive, 66.7% are completed early, 25.0% are on time, and
8.3% are delayed. On the other hand, the projects with both
time and other incentives are 15.4% completed early, 38.5%
on time, and 46.2% delayed. The Chi-square test reveals that
there is a significant association at the 0.022 level between
“Time certainty” and the selection of a single time or time-in-
volved multiple incentives. The finding indicates that in terms
of “Time certainty” a single time incentive performs signifi-
cantly better than time-involved multiple incentives. This is be-
cause pursuing multiple objectives at the same time and with
the same importance is really a distraction for the performance
improvement efforts. Therefore, it is more appropriate to focus
on a single time incentive rather than look after multiple incen-
tives if time objective is the primary concern of a project. Even
if two or more objectives need to be considered at the same
time, the identification of their priorities is extremely important
and a trade-off is needed between different incentives.
4.4. Relationship between quality incentive and quality
performance
In the survey, a single quality incentive is reported in six
(10.0% of) surveyed projects, half of which are paid based on
final outcome. Again, payment based on final outcome here is
Table 6
Percentage time performance between time incentive and no time incentive projects.
Time incentive No time incentive Independent sample
n = 25 n = 35 T test
t-statistics P-value
Percentage time 9.41% 8.25% 0.303 0.768
advance
Percentage time 10.77% 14.91% 1.168 0.256
delay
 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
Table 7
Time certainty comparison between a single time and time-involved multiple
incentives.
A single time incentive Time-involved Chi-square test
n = 12 multiple incentives P-value
n = 13
Early 8 (66.7%) 2 (15.4%) 0.022
On time 3 (25.0%) 5 (38.5%)
Delayed 1 (8.3%) 6 (46.2%)
used as a tool of ensuring quality performance. Compared to a
single time incentive, the use of a single quality incentive is
halved. On the other hand, there are seven (11.7% of) surveyed
projects with both quality and other incentives, in which the use
of payment based on final outcome is not found. 42.9% of such
projects use quality and time incentives; 28.6% use quality and
cost incentives; 14.3% use quality, time and cost incentives;
and 14.3% use quality, time and safety incentives. Obviously,
quality incentive is more combined with time incentive in prac-
tice. Compared to time-involved multiple incentives, the use of
quality-involved multiple incentives is nearly halved. The com-
parisons between quality incentive and time incentive in both
single and multiple may explain why quality incentive specific
studies are quite limited within existing literature.
Of the 13 surveyed projects (21.7%) with quality incentive
in both single and multiple, as shown in Table 8, 30.8% are de-
fect free and 69.2% have some defects with no significant im-
pact. On the other hand, there are no signs of some defects
with some impact, major defects with major impact, and totally
defective. The finding can be viewed as strong evidence for the
contribution of quality incentive to quality performance im-
provement. Unlike the 13 projects with any quality incentive,
some defects with some impact and major defects with major
impact appear in 47 projects without any quality incentive,
which represent 78.3% of the survey sample. Although 25.5%
of such projects are defect free and 42.6% have some defects
with no significant impact, some defects with some impact
and major defects with major impact account for 23.4% and
8.5% in such projects respectively. By comparison, the projects
without quality incentive have to face greater risks of defects
and rework. Since both the projects with quality incentive and
those without quality incentive are not subject to totally defec-
tive, defect free and some defects with no significant impact
can be merged into “No defect impact” whilst some defects
Table 8
Comparisons between quality and no quality incentive and between a single quality and quality-involved multiple incentives.
Quality incentive
n = 13
A single quality incentive
n=6
Defect free 2 (33.3%)
Some defects with no significant impact 4 (66.7%)
Some defects with some impact 0 (0.0%)
Major defects with major impact 0 (0.0%)
Totally defective 0 (0.0%)
359
with some impact and major defects with major impact can be
merged into “Defect impact”. If the Chi-square test is used be-
tween quality/no quality incentive and defect/no defect impact,
a significant association is found at the 0.019 level. Therefore,
the adoption of quality incentive proves to have a significant ef-
fect on the reduction in various defects. In addition to the em-
phasis on total quality management, the role of quality
incentive should not be ignored when pursuing zero or minor
defects in a construction project.
Of the six projects with a single quality incentive, 33.3% are
defect free, and 66.7% have some defects with no significant
impact. Of the seven projects with quality-involved multiple in-
centives, 28.6% are defect free and 71.4% have some defects
with no significant impact. For both types of surveyed projects,
there are no responses to some defects with some impact, major
defects with major impact, and totally defective. According to
the Chi-square test, there is no significant association between
“Defect” and a single quality/quality-involved multiple incen-
tives (P-value = 0.853). In spite of that, it is evident that in
terms of “Defect” a single quality incentive performs somewhat
better than quality-involved multiple incentives. This is similar
to the finding aforementioned, which indicates that in terms of
“Time certainty” a single time incentive performs significantly
better than time-involved multiple incentives. The two findings
suggest that using a single incentive is relatively simple and
more effective because it concentrates on a particular perfor-
mance area. However, it does not necessarily mean that multiple
incentives cannot be pursued in construction practice. As for
whether multiple incentives can be achieved successfully,
please see case study.
4.5. Impact of incentives on project management and working
relationship
Contractual incentives are based the contractor's perfor-
mance. Incentives can be considered as the input of a project.
On the other hand, project performance in terms of time, cost
and quality is the output of a project. During a project, there
are two key aspects: one is the project management processes
and the other is the working relationship between the client
and the contractor. The former is a hard measure whilst the lat-
ter is a soft measure. These two key elements link project input
with project output. Based on the experience in using contractu-
al incentives, 36 respondents have answered the questions
No quality incentive
n = 47
Quality-involved multiple incentives Total
n=7 n = 13
2 (28.6%) 4 (30.8%) 12 (25.5%)
5 (71.4%) 9 (69.2%) 20 (42.6%)
0 (0.0%) 0 (0.0%) 11 (23.4%)
0 (0.0%) 0 (0.0%) 4 (8.5%)
0 (0.0%) 0 (0.0%) 0 (0.0%)
360 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
regarding the influence of incentives on the effectiveness of
project management and relationship management. As seen in
Table 9, the majority of respondents either strongly agree or
agree that incentives have an important influence on both project
management and working relationship. By comparison, incen-
tives are believed to have more influence on project management
than on working relationship. Although there are a small number
of negative voices, no one strongly disagrees with the influence
of incentives on project management and working relationship.
The respondents' perceptions reflect the fact that the use of incen-
tives enhances the contractors' awareness of performance im-
provement, which in turn leads to much greater emphasis on
project management processes and working environments. Effec-
tive project management and collaborative working provide a
solid basis for achieving excellent performance.
5. Case study
The case study described the design and construction of an
18.2 km section of a standard national road in the ROI. The dura-
tion of the project was 22 months, and the value of the contract
was €81,000,000. As a county council, the client in this project
decided to adopt the Design and Build approach. A joint venture
between construction company A and civil engineering company
B was awarded the Design and Build contract. The task of design
was subcontracted to consulting company C. A standard form of
contract by the International Federation of Consulting Engineers
(FIDIC) and a target cost payment method was chosen in the pro-
ject. On the other hand, multiple incentives were established, in-
cluding both rewards and penalties. A penalty was set if late
completion took place. A bonus was expected if the project was
completed earlier than the target date. Similarly, bonuses and
penalties were designed to ensure pollution from construction in
the nearby river under a certain level and the avoidance of any
major defects. The use of target cost contract received a cost sav-
ing of €500,000. As a result of using time incentive, the project
was completed two months ahead of the schedule.
Three experts involved in this project were interviewed. The
interviewee from the client organisation was a senior manager.
The roles of interviewees from the Design and Build contractor
and the design subcontractor were site manager and senior engi-
neer respectively. They provided their perceptions on the success-
ful application of incentive mechanisms and their impact on
performance improvement. The consensus was that the target
cost contract provided a gain/pain sharing scheme and it played
an important role in encouraging cost reduction efforts. According
to the interviewee from the client perspective, this was a public
Table 9
Influence of incentives on project management and working relationship.
Influence on project Influence on working
management relationship
Strongly agree 17 (47.2%) 10 (27.8%)
Agree 16 (44.4%) 11 (30.6%)
Neither agree nor disagree 2 (5.6%) 12 (33.3%)
Disagree 1 (2.8%) 3 (8.3%)
Strongly disagree – –
sector project in which the client's funding was limited. The client
pursued value for money and also sought certainty of cost. For
this reason, the target cost contract suited the requirements best.
The client believed that they would benefit more from cost saving
than the Design and Build contractor. All three interviewees rea-
lised the importance of establishing an accurate target cost. In
this project, the initial target cost was agreed when forming the
Design and Build contract. It was possible for the target cost to
be adjusted at a later stage. For example, the final target cost
was reached through value engineering during the design process,
which was 5% lower than the initial target cost.
The incentives/disincentives to time, quality and environ-
mental performance were established through the negotiation
between the client and the selected Design and Build contractor
after tender competition. According to the client interviewee,
this arrangement meant that they could lower the tender price
and negotiate the incentive provisions once the Design and
Build contractor was selected. During the negotiation, both
parties discussed the probabilities of potential risks and ana-
lysed their impact on each party so as to appropriately define
the rewards/penalties in terms of monetary value. In order to
maintain a good relationship with the contractor and encourage
the contractor to improve performance, the client had to balance
the incentives with the disincentives. A common understanding
amongst the three interviewees was that incentives/disincen-
tives had a significant impact on the effectiveness of project
management processes. The interviewee from the contractor
stated that they took full advantage of management techniques
such as critical path analysis (CPA) in order to respond to time
incentive. The contractor also selected management staff care-
fully so that they were competent enough. In addition, the con-
tractor brought in a six day week with which bonus would be
passed down to workers on construction site. All these efforts
provided the contractor with more opportunities for early com-
pletion of the project.
The client required that defects should be controlled at a
minimum level. For this reason, a quality incentive/disincentive
was adopted in this project. A defect liability period was incor-
porated into the contract, according to which the contractor still
had to pay the cost of rework after the defect liability period if
there were any avoidable defects. From the contractor perspec-
tive, quality control had a high priority and therefore increased
attention was paid to the elimination of any major defects. The
use of incentives/disincentives led to the identification and es-
tablishment of common goals and objectives, which made it
possible for both parties to work collaboratively together. Dur-
ing the project, there were no claims, conflicts and disputes be-
tween the parties, which could be viewed as evidence for a good
working relationship. Based on the use of multiple incentives,
the project had achieved a remarkable success. The client was
satisfied with early completion, cost saving, no major defects,
and environmental protection. On the other hand, the contractor
received incentive payment. The excellent overall performance
also helped the contractor to earn a high reputation and therefore
could be viewed as a recognition reward. Based on the cooper-
ative experience in the project, the client intended to establish
a long-term business relationship with the contractor.
 X. Meng, B. Gallagher / International Journal of Project Management 30 (2012) 352–362
The case study is a complement to the questionnaire survey.
Compared to the findings from the questionnaire survey, the
analysis of case study provides further evidence for the use of
incentives in construction practice, which mainly include:
• In addition to time, cost, quality and perhaps safety incen-
tives, it is also possible to use environmental incentive in a
construction project;
• Compared to a single incentive, the use of multiple incentives
is complicated to manage and therefore becomes a challenge
to project participants, in spite of which the use of multiple in-
centives makes it possible to improve the overall performance
of a project if project participants can make extra efforts;
• The combination of incentives and disincentives can be used
not only for cost performance but also for time, quality and
environmental performance, which may have dual effects on
a contractor's performance;
• It is more appropriate to prepare incentive mechanisms care-
fully through the negotiation between the client and the con-
tractor in a project rather than specify them solely by the
client because the identification of mutual benefits is ex-
tremely important to the success of incentive mechanisms;
• In order to ensure the success of incentive mechanisms, espe-
cially for multiple incentives, the contractor in an incentive
project needs to enhance project management processes and
develop good working relationships with the client and other
project participants, in addition to which attention should be
paid by the contractor to the motivation of his staff members
and workers; and
• The success of incentive mechanisms in a project can help to
achieve a win–win result, which means that the client may
benefit from value for money whilst the contractor may ben-
efit from financial rewards and further business opportuni-
ties due to client satisfaction.
6. Conclusions
Based on a questionnaire survey in quantitative and a case
study in qualitative, this research provides empirical evidence to
establish a link between incentives and performance in construc-
tion projects. On the whole, the embrace of incentives proves to
play a driving role in encouraging best practice and ensuring pro-
ject success. The main findings include: (1) the use of incentives is
a trigger of aligning the objectives of different project parties and
devoting special efforts to significant performance improvement;
(2) incentives should be used along with disincentives in order
to have a more positive effect on project performance; (3) multiple
incentives may help to achieve an overall improvement of project
performance whilst a single incentive may be more effective in a
certain performance area; and (4) the contractor in an incentive
project needs to make both internal and external efforts, amongst
which project management enhancement and staff motivation
are internal whilst inter-organisational relationship development
is external. In terms of time, cost and quality performance, it is
possible to draw the following conclusions: (1) time incentive is
in common use due to the importance of time objective; (2) the ap-
propriate use of payment methods such as fixed price and target
361
cost contributes to the improvement of cost performance; and (3)
zero or minor defects can be achieved through the use of quality
incentive as well as payment based on final outcome.
Every research has its limitations. This study is not exceptional.
A major limitation of this study is the small sample size of ques-
tionnaire, which is partly due to the current economic climate. Fur-
ther research may be conducted to collect more empirical data so
that greater reliability will be provided for the results of data anal-
ysis. For example, cost incentive is only found in three surveyed
projects using the fixed price contract. For this reason, the fixed
price incentive contract is not considered separately in this study.
If more empirical data can be collected, it is possible to distinguish
the fixed price incentive contract from the fixed price contract and
make more accurate comparison of cost performance amongst dif-
ferent payment methods. If more empirical data can be collected, it
is also possible to distinguish incentives from disincentives. When
incentives are combined with disincentives in practice, a balance
should be kept between them. However, how to define an optimal
balance is a challenge in practice. For this reason, there is a need for
further research in this particular filed. In addition, further inves-
tigation is recommended for the appropriate balance of different
performance objectives when multiple incentives are adopted in
construction projects.
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