The grant, worth £130 million this year and £170 million in 2005-06, rewards councils that have improved their performance on handling applications.
Under government targets, planning departments should determine 80 per cent of minor and major applications within eight and 13 weeks respectively.
A recent high-level meeting at the ODPM heard allegations of "sharp practices" by councils to meet these deadlines. They include turning down difficult applications without negotiation, delaying registration of applications and cashing cheques that accompany proposals but failing to register the application.
The ODPM wants councils to review start and decision dates submitted for all applications. It warns that if local authorities have "overstated" their performance, they will be penalised in next year's grant awards.
The move follows the crisis engulfing the Planning Inspectorate, which is set to miss all of its performance targets and is taking nearly a year to organise appeal site visits. The government's decision to cut the deadline for submitting appeals to three months is blamed for a 21.5 per cent jump in the inspectorate's workload.
RTPI secretary-general Robert Upton said: "We have been a strong supporter of the idea of the planning delivery grant from the time it was first discussed, but as a means to ensure that the operation of the planning system gets the funding it needs, not as a competitive financial sport.
"All local planning authorities should adhere to a common standard of high accuracy in reporting performance. But the ODPM needs to ensure that performance targets represent quality and efficiency in the operation of the planning system - not just a numbers game."
Royal Institution of Chartered Surveyors planning and development chief Faraz Baber added: "Local authorities are in a Catch-22 situation, having to pull through applications to meet planning delivery grant targets, but that means cutting corners."