From what you have said it looks like a part of the Fee is paid as an incentive for meeting the requirements in the Incentive Schedule, which has not happened due to the Contractor's performance.
The procedure is clearly collaborative and so the Contractor should have participated and carried out their stated obligations, which you say they haven't, that is to report on performance and to submit proposals for improvement where necessary.
Payment is due when a target has been achieved, which it hasn't, so the corresponding payment, therefore, does not become due. The amount is not removed from the Incentive Schedule, it is simply not actually due for payment. The budget, however, can be used, if the Client so desires, to 'fund' an additional Key Performance Indicator which may be added to the Incentive Schedule.
Perhaps any further KPIs could be described so as to include compliance with the requirements of option X20, possibly even linked to part of the incentive amount. That might focus attention and 'drive' the collaborative approach required to administer the procedure correctly.