Pain/Gain Clauses

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.