Pain/Gain Clauses

TermiKnowledge - Supply Chain, Procurement and Inventory Terminologies
View All

The term "Pain" is defined in procurement theory as an unexpected loss that results from either a partial loss or complete loss of a specified good that is necessary to perform a particular activity. The concept of Pain/Gain Clauses is the underlying premise of the construction industry's supply chain management systems. Pain/Gain Clauses are designed to allow project managers to better manage and monitor contract costs. Procurement theory says that the best way to maximize the productivity of any manufacturing process is to first identify the problems that are causing production delays, set a time frame to resolve these problems, and then address those problems. The primary mechanism by which Pain/Gain Clauses is using to address these problems is by allowing project managers to hire additional contract labor whenever a need for such labor arises (i.e., to meet a demand created by the over-all loss of an item) without having to re-introduce contractual obligations to that person (i.e., the principal obligator).

The concept of Pain/Gain Clauses was first applied in the US when, in 1980, Congress passed the Contract Cost Act. The purpose of this law was to protect American companies from unnecessarily spending their money on activities that do not directly benefit the company. Under the terms of the Contract Cost Act, once a company has reached its maximum contractual obligations with a subcontractor, the company may no longer require that the subcontractor to provide materials or services for a specific amount of time, and may terminate any relationship that it has with that subcontractor once it has reached its maximum obligated amount. In short, the Contract Cost Act allows a company to "break the relationship" with a subcontractor if it is unable to perform its responsibilities under the agreement. For example, a company may break the relationship with a subcontractor when the subcontractor fails to submit a bid on a construction project, or if the subcontractor does not comply with the design requirements required by the construction project.


The Contract Cost Act is considering a strategic vehicle by many in the construction industry because it requires a contractor and a client to develop a mutually beneficial relationship by establishing a contract. However, while the Contract Cost Act enables a business owner to effectively protect his investments, it is important to realize that a contract does not have to be in writing; a business can create a written contract with its client which establishes a strategic alliance between the business and the contractor. Strategic alliancing between a business and its subcontractors provides all of the benefits of a contract while avoiding the costly pitfalls associated with binding the entire company.

Related Articles

Five Key Provisions You Should Have in Your Supply-Chain Contracts
Supply Chain Solutions with the Best Pain to Gain Ratios
Collaborative construction: incentivising the supply chain
New conditions of contract include pain/gain clause
Pain/Gain Clauses

Certified Inventory Optimization Professional 

CIOP is an end-to-end supply chain certification that contains 30 modules such as Introduction to Supply Chain Management, All About Inventory, Production Planning System, Strategic Business Planning, Sales & Operations Planning, Master Scheduling, Material Requirements Planning, Demand Management, Capacity Management, Forecasting, Production Activity Control, Procurement, Order Quantities, Independent Demand Ordering Systems, Warehouse Management, Transportation Management, Supplier Relationship Management (SRM), Customer Relationship Management (CRM), Introduction to Quality, Introduction to Packaging, Introduction to Process, Lean, Six Sigma, Total Quality Management, Theory of Constraints, Supply Chain Technologies, Supply Chain Techniques, Industry 4.0, International Standards and Supply Chain Risk, Safety and Security. 

Learn More

CIOP Knowledge Series

One-Minute Supply Chain Facts

The most recent video is available here. To access the past videos in the One-Minute Supply Chain Facts Series, please click the playlist icon located on the Top-Right of the video.





Do you want more information on Certified Inventory Optimization Professional?

Fill in the form to download the quote.