As part of the new 2024 suite, JCT recently released the JCT Target Cost Contract 2024 (TCC24) – JCT’s first dedicated form of target cost contract.
Described by the JCT as a way to “incentivise the Contractor”, a target cost contract is a type of cost reimbursable contract under which the contractor is paid the ‘actual cost’ of carrying out the works (ie based on a bill of quantities or schedule of rates plus a fee) subject to a target cost which is agreed by the parties at the outset.
This allows the parties to share the risk and at the end of the project, depending on whether the project was delivered for more or less than the contract sum, the contractor will either share the savings with the employer or contribute towards the overspend (this is usually described as a pain/gain share mechanism).
When to use a target cost contract
The decision to use a target cost contract will depend on the needs of the project and the parties’ approach to risk and costs. Good project management is also essential to allow for the increased visibility and oversight on costs.
JCT has said that,
- the ethos of this form is risk sharing. This conceptually is apposite for the current difficult marketplace. The parties can both benefit from their joint efforts in ensuring the project has a successful financial outcome.”
The key advantages and disadvantages are listed below:
Advantages
- Both parties are aiming to control costs so this, together with the open book approach needed, can mean that there is more efficiency, trust and collaboration.
- Likely to be a more accurate and realistic impression of spend on the project as against its original budget/anticipated cost.
- Increased visibility of costs may help to reduce the potential for claims.
Disadvantages
- There is greater risk and uncertainty for the employer than under a fixed price contract because the final cost of the project is unknown.
- The need for good project management and oversight of costs can be expensive and time-consuming for the employer, and its team, to administer and manage.
TCC24 – key features
You may be aware that that the JCT already has the “Constructing Excellence Contract” (CE) as part of its suite, which allows for either a lump sum or target cost model. However, the CE contract is set up very differently to the more commonly used JCT forms (D&B, Intermediate, Minor Works) and potentially as a result, not as often used.
The TCC24 is based on the JCT Design and Build Contract 2024 so it shares many of the same provisions (and so may be much more familiar to developers and contractors) and the main difference is in the balance of risk on costs and the payment provisions. There is also a form of subcontract which includes a target cost arrangement as a pricing option together with lump sum and remeasurement.
The key features of the target cost mechanism in TCC24 are:
- Payment is based on the Target Cost not the Contract Sum and the Target Cost can be adjusted over the course of the Works ie the Adjusted Target Cost
- The Contractor is paid
- The Allowable Cost ie the cost of the Contractor of complying with its obligations under the Contract;
- The Contract Fee which is either a fixed sum or percentage of the Allowable Cost; and
- The Difference Share (a pre-agreed percentage or sum representing the pain gain share) which is the difference between the actual cost of the works and the Adjusted Target Cost.
TCC24 compared with NEC4
Leaving aside the very different ethos underpinning the NEC form as compared to the JCT form, two of the key differences between NEC4 Options C and D and the TCC24 are:
- that the parties can choose to calculate and include the pain/gain share as part of the interim payment process; and
- there is no concept of Disallowed Cost in the TCC24 and instead it lists costs which are not included in the Allowable Costs.
Time will tell how the TCC24 competes with the more established NEC4 Options C and D.
Conclusion
It is early days and whilst JCT have indicated that there is market demand for a target cost contract, the reality is that much of the sector is used to lump sum, design and build models where Employers are able to push more of the risk onto the Contractor on complex projects.
Ultimately it might be that there is a not a significant shift to target cost contracts across the sector. Instead, the uptake of this new JCT contract might be limited to those that like the target cost model but prefer the JCT form of contract to the NEC form of contract. ie it might be that the impact is a switch from NEC target cost to the JCT target cost.
Please contact us if you would like to discuss target cost contracts further and whether they would be suitable for your project.
