In developing a contract it is important to understand how the payment and performance regimes will interact. This can involve including incentives to encourage the contractor to perform/deliver the services or goods early or to a higher standard. Alternatively the contract can include penalties for contractor under-performance. There are many ways of approaching incentives and penalties, including liquidated damages regimes, service credits and rebates, and incentive payments. Liquidated damages regimes are useful in situations where it is reasonably easy to calculate what the loss will be for the delay, or other failure to perform the contract obligation. Retention arrangements are useful where the contractor needs a significant cash flow in order to be able to do the work, but the overall quality of the work is not easily judged until the deliverables have been provided by the contractor. Any mechanisms that link payment with performance (either by penalty or incentive) should always be clearly specified in the contract. |
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