Definition:
A contract that ties contractor compensation to specific performance metrics such as efficiency, uptime, or cost savings.
Key Components:
- Performance Metrics: Measurable targets such as energy output or project completion time.
- Bonus & Penalty Clauses: Rewards for exceeding targets and deductions for underperformance.
- Risk Allocation: Contractors assume risk for meeting performance benchmarks.
Use Cases/Industries:
- Power Generation: Contracts linked to plant efficiency and emissions reduction.
- Transportation Infrastructure: Toll roads with payment tied to congestion reduction.
Advantages:
- Encourages Efficiency: Aligns contractor incentives with project success.
- Risk Transfer: Contractors are accountable for meeting performance goals.
Challenges:
- Measurement Complexity: Requires robust monitoring and verification systems.
- Dispute Risks: Performance-related disputes can arise if terms are ambiguous.
Related Terms:
Incentive Contract, Performance-Based Service Agreement
Example:
A wind farm operator signs a performance-based contract with a maintenance provider, tying payments to turbine uptime and power generation output.
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Synonyms:
Incentive-Based Contract, Outcome-Based Contract
