A Note on Incentive Fee Contracting

R. M. Thrall

Expert InsightsPublished 1965

A brief analysis of several difficulties with the incentive fee concept when applied to subcontractors. The author finds that (1) if individual components have a strictly additive effect on the total project, the incentive fee concept can safely be extended to subcontractors; but (2) if the performance of the total project is measured by that of the poorest of the components, one must beware of substantial magnification effects; or (3) if the performances of the components combine like independent probabilities to determine overall performance, the range of variability for individual components is severely restricted.

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Thrall, R. M., A Note on Incentive Fee Contracting. Santa Monica, CA: RAND Corporation, 1965. https://www.rand.org/pubs/papers/P3191.html.
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