Strategies for aligning organizational incentive systems through contracts

A common issue in construction contracting is how to get contractors and suppliers to improve their performance. In improving performance, the most effective processes involve knowledge and information management activities, which cross organizational boundaries and supply chains. However, the complexity and fragmentation of the supply chain’s contractual interfaces often lead to the nonalignment of incentive contracts. By organizations mapping out and aligning incentives, performance measures and reward systems along their supply chain, beneficial incentive systems can be identified. In addition, dialogue will be encouraged and information made explicit. Information to be captured will include organizational needs, strategies, shared values and beliefs, resources, process issues, and internal and external influences. An illustrative case study revealed that a project suffered gross misalignment when the incentive flow-down along its supply chains was mapped out. Preliminary findings indicate that the majority of the contracts were fixed-price contracts. The use of standard forms of contract was also widespread in the supply chain for this project. The preliminary findings indicate that developing an 'incentive map' can be used to encourage negotiations between the various external organizations at the start of new projects. In addition, an 'incentive map' provides the basis for an incentivization structure that increases performance through collaborative working. In practice, mapping can be used to generate valuable information; secure innovative responses from the supply chain members; and identifying potential problems between incentives and performance measures at the different interfaces along the supply chain.