To motivate the sellers, incentives should be given. An incentive fee is a set of monetary incentives that are given as a reward for the technical performance and effective handling of cost and schedule of the seller.
In project management jargon, the word “fee” is equivalent to “profit”. It is the amount of money that sellers receive after the costs have been paid. Therefore, incentive fees are used to stimulate the of the seller’s schedule, cost, technical and quality performance. It is used to motivate the seller to deliver the output early or to reach a particular quality or performance standards.
It is important to take note that not all incentive fees are the same. There are different types of incentives that are offered to the sellers. For instance, an incentive fee may be given if the seller has met a specific target outcome within the shortest possible time. An incentive may also be given as part of the contract after completing the entire project. Incentives are stipulated in the contract. The fixed price contract, for example, incorporates an incentive fee to exceeding project objectives.
This term is defined in the 5th edition of the PMBOK.