Fee Caps Do they act an an effective incentivisation mechanism?

NEC3 and NEC4 Contracts Payment
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How effective are Fee caps in incentivising Contractors? Currently undertaking research in this area and I am keen to draw on the experiences’ good’ and ‘bad’ from the Built Intelligence community.

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Other feedback received suggests that incentivisation is not universally seen as being a good thing.

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feedback so far is that ensuring a robust target cost is essntial to making the incentivisation models work effectively

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Barry – an interesting question. As I know you are already aware, the idea of the pain/gain mechanism is to incentivise/encourage performance and alter the risk profile of the project to suit the Employer’s specific requirements. I don’t think fee caps in themselves are an issue, providing they have been well thought out and pitched at what the Employer thinks will encourage the performance and the initial tender price that they are trying to promote.

A fee cap that limits the Contractor from earning any benefit after a certain threshold below the Target Cost may be fair enough if it is set at 80 or 75% as you wouldn’t normally expect the Contractor to be able to make savings of that magnitude. However if the cap is set at 90 or 95% which I have seen before, then that does not give the Contractor much incentive to drive costs down if they have already reached that level. It may also limit the Contractor from putting quite such a competitive price in the first place at tender stage

Equally, if Contract Data part 1 states that after a small percentage above the target Price the “pain” switches to 100% Contractor, then again it will not encourage the Contractor to put in a very tight price in the first place at tender stage.

So, to summarise I think that “caps” and the more general percentage bandings and values that you can set can be constructive and encourage performance/measured tender price. However, caps set at the wrong level will dis-incentivise the Contractor from either looking for further efficiencies on the project or could significantly increase the tender price for that project, neither which the Employer presumably wants.