A conceptual framework to investigate the optimisation of financial incentive mechanisms in construction projects

Implementation of financial incentive mechanisms in the contractual arrangements of a construction project can impact significantly on the motivation of contractors and hence project performance. Positive incentives (as a component of the project delivery strategy) aim to motivate contractors to align their goals with those of the client, via a financial reward. These incentive mechanisms take many forms in construction contracts, including: profit sharing in cost plus incentive contracts, bonus performance provisions attached to various lump sum and cost reimbursable contracts, and multiple financial incentive mixes. The optimisation of financial incentive mechanisms depends greatly on how they are designed in the context of specific project environments. For example, if the client/contractor relationship is poor, the contractor may perceive the financial incentive as calculative and hostile, and therefore will be less committed to the client’s goals than the incentives intended. In order to establish a starting point for further research into this topic area, this paper outlines the results of an international review of the literature on financial incentive contract types and the factors that influence the motivation of contract agents under these arrangements. The paper then goes on to propose an analytical framework that is to be used in the evaluation of optimal financial incentive mechanisms in construction projects, drawing on economic and psychological motivational theories. The findings of this review provide a sound basis for the empirical work to follow in a PhD project investigating the optimisation of financial incentive mechanisms in the Australian commercial building industry.