Ensuring optimum output from catering contractors through incentives and penalties

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By: Sujit Kumar -- Senior Research Analyst, Facilities Management

01 January, 2017

ARTICLE

Abstract:

Developing countries such as India have generally looked at penalties in the contract as a measure to control quality and ensure compliance. However, several global companies are looking at incentives as a tool for achieving the same result. In this article, we discuss how to develop an incentivized contract and evaluate the performance of the contractors for the same.

Introduction:

Incentives and penalties have been a part of the catering world for long, especially in the UK, the U.S. and Europe. They have slowly made inroads into the mainstream operations in regions such as India and other Asian countries. However, while operating in a highly unorganized catering market such as India, incentives and penalties become a whole new ball game as opposed to the west. While the developed nations have focused on incentivizing the contracts to ensure that the service provider does their best to improve their better performance and compliance to the established KPIs, in India, the focus has been predominantly on embedding a penalty structure within the contract to achieve the same result.

Incorporation of penalties in the contract definitely ensures that the service provider would strive hard to achieve the desired levels, however, there are some concerns such as:

  • Negative threat to the service provider in terms of parting with his revenue in case of lapses
  • No motivation to do better than the stipulated terms and add value to the engagement

It is therefore better to have a reward structure in the form of incentives rather than penalties. This may be constructed as a maximum bonus fee per year incorporated into the total management fee or other compensation arrangement. This has the same effect as a penalty, but framed as a bonus/reward. It therefore induces the operator to perform better and not perceive it as a threat.




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