微密圈

Complex developments, which may encompass challenging ground conditions, logistical hurdles or undefined scopes, demand a problem-solving culture. Subjecting such projects to a fixed-price arrangement that places many key risks squarely on the contractor can be a recipe for disputes and financial failure.

A cost-reimbursable regime 鈥� where the contractor is paid for the actual cost of the works, plus overheads and profit 鈥� would alleviate contractor apprehensions. From a client鈥檚 perspective, however, this is generally only suitable for simple, repetitive work or projects where budget is not a primary constraint.

Target cost agreements offer a sensible compromise. This variant of cost-reimbursement forgoes the notion of an absolute price. Instead, the parties set a target cost and a pain/gain share formula that economically incentivises them to deliver the project at or below this figure. The result is a structure that compels the parties to work co-operatively for the good of the project.

A key question is whether target cost is suitable where development finance is required. Even with pain/gain sharing, a contract with open-ended costs may offer little comfort to funders. For this reason, target cost is occasionally used with a guaranteed maximum price to cap the employer鈥檚 financial exposure. This in effect transforms the arrangement into something akin to a fixed-price agreement but satisfies a funder鈥檚 need for certainty on the maximum outlay. Of course, the introduction of such a ceiling can cause an evaporation of the collaborative mindset that the contract seeks to foster.

As the basis for some of the UK鈥檚 current infrastructure mega-projects, target cost is of increasing interest as a means of balancing risk transfer with budget predictability

The launch of the JCT Target Cost Contract (TCC) should raise interest in this pricing model. The cost-reimbursable aspects of the new contract are derived from the JCT鈥檚 Prime Cost Contract, while the remainder is based on the popular Design and Build Contract (DB). Instead of a contract sum, the contractor is paid the allowable cost plus the contract fee. The former constitutes the actual cost of the works but excludes costs arising from the contractor鈥檚 breach of contract or those that cannot be reasonably substantiated. The contract fee, which covers the contractor鈥檚 overheads and profit, can be a fixed amount or a percentage of the allowable cost.

To this, the JCT has added a pain/gain share mechanism, the 鈥渄ifference share鈥�. Should the final allowable cost be lower or higher than the target cost, the resultant saving or overrun is shared between the parties according to the pre-agreed difference share. Unusually, as well as in respect of the final payment, this is assessed and applied to each interim payment. The target cost can be adjusted 鈥� for instance, due to changes or to loss and expense 鈥� as can the contract fee (where it is a fixed amount). 

Elsewhere, the contract has all the hallmarks of the DB. The contractor is responsible for both the design and construction of the works and must complete the project by the agreed completion date, subject to any extensions of time.

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Many would have preferred the concept of 鈥渄isallowable cost鈥� to have been incorporated. While the TCC lists a number of exclusions from the allowable cost, a defined list of disallowed cost items would have removed ambiguity.

This omission perhaps illustrates the contrasting philosophies of the JCT and its primary competitor, the NEC. The NEC Engineering and Construction Contract, which offers the best-known examples of target cost pricing through options C and D, adopts a highly proactive approach, underpinned by meticulous programme management and strict notice procedures. That can be resource-intensive. The JCT鈥檚 lighter touch may arise from the TCC鈥檚 roots in the DB, where the contractor鈥檚 assumption of fixed-price risk is balanced with wider discretion, reducing the need for rigorous project management. This may mean, however, that the TCC鈥檚 terms lack sufficient direction to mitigate poor attitudes or inexperience, particularly where parties are transitioning from a fixed-price mentality.

More robust procedures appear elsewhere in the JCT suite. The Management 微密圈 Contract, for example, sets out strong cost-management and collaboration tools, such as regular financial reporting, competitive tendering of component packages and joint problem-solving meetings. Despite the addition of a collaborative working provision across its 2024 suite, the JCT could have included some of these as optional supplemental procedures within the TCC.

Regardless, the TCC represents one of the most exciting contract developments in years. As the basis for some of the UK鈥檚 current infrastructure mega-projects, target cost is of increasing interest to the real estate sector as a means of balancing risk transfer with budget predictability. Previously, property developers using it would typically amend the DB contract. With the inception of the TCC, the JCT has done the hard work.

Lastly, the associated Target Cost Sub-Contract includes pricing options for target cost, lump sum and cost-reimbursable. Such versatility offers the welcome possibility that the JCT鈥檚 subcontract line-up may be streamlined in future. 

Francis Ho is a partner at Charles Russell Speechlys