Target cost contracts on construction projects

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Target cost contracts on construction projects
  • What is a target cost contract?
  • Pain/gain share
  • When is a target cost contract used?
  • Fixing the target cost
  • Management and administration of a target cost contract
  • Standard form target cost contracts

Target cost contracts on construction projects

What is a target cost contract?

A target cost contract is a type of cost reimbursable contract under which the contractor is paid the ‘actual cost’ (usually defined in the particular contract) it incurs in carrying out the works, but subject to a target cost which is agreed by the parties at the beginning of the project.

The target cost is the cost to the contractor of completing the project, comprising:

  1. the base cost of the physical works (based on the sum of prices in a bill of quantities, schedule of rates or an activity schedule), the cost of temporary works, sub-contractor costs and preliminary costs

  2. overheads and profit

  3. a contingency for contractor’s risks under the contract

At the end of the project, the parties will apply a mechanism/formula to calculate whether savings were made and the project delivered for less than the target cost, or whether costs overran and the cost of delivering the project was more than the target cost. The contractor will then either share the savings with the employer or contribute towards the overspend. Therefore the parties share the risk of undertaking the project.

A target cost approach can be beneficial because it helps to align the objectives of both the contractor and the employer as they are both aiming to control costs to their best advantage. This, along

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