Pain or gain? JCT’s new Target Cost Contract

The Joint Contracts Tribunal (JCT) has introduced its first ever Target Cost Contract (TCC) family, concluding the publication of the JCT 2024 suite.

The TCC family includes the main Target Cost Contract 2024, the Target Cost Sub-contract Agreement and Conditions, and accompanying guides.

TCC’s suitability

Based on the JCT Design and Build Contract 2024, the TCC introduces a new cost-reimbursable pricing model that promotes financial risk sharing between employer and contractor.

Target cost contracts are cost reimbursable contracts where the contractor is paid the ‘actual cost’ of carrying out the works, but subject to a pre-agreed target cost. At completion, the parties will calculate any savings made or overspend. In either event the parties will share the savings or contribute to the overspend.

This ultimately creates risk sharing for the project, helping align objectives of the contractor and employer. The TCC is likely to be best suited to larger projects, where the employer has set out a clear and defined scope of works but are not fully designed at the tender stage.

Key features of the TCC

The TCC is similar to the JCT Design and Build Contract 2024 with the core terms being almost identical, but with reworked payment provisions around a target cost arrangement. Ultimately, the main difference between the TCC and other forms in the JCT suite lies in its payment provisions.

The key features are as follows:

• Payment under the TCC is built around a target cost, as opposed to the usual contract sum, this may be adjusted over the project timeline, resulting in the adjusted target cost.

The Contractor is paid:

• The allowable cost, which is the cost to the contractor of complying with its obligations
• The contract fee, which may either be a fixed sum, or a percentage of the allowable cost
• Any amount payable in respect of the difference share. This is the difference between the adjusted target cost and the product of the allowable cost and the contract fee.

Target cost

Target cost contracts include a ‘day one’ breakdown of the target cost in a pricing document. This cost is specified within the articles and the figure is established through the employer’s requirements, contractor’s proposals, and the target cost analysis.

The target cost can be adjusted to take account of things such as changes, acceleration quotations, cost incurred by the contractor and loss and expense claims.

Allowable cost

These costs must be “reasonably and properly incurred by the contractor” in carrying out its obligations.

The costs that are recoverable by the contractor are determined by reference to Schedule 2 (allowable cost), and the contract particulars. Typical categories include:

• Sub-contract work
• Contractor’s management and design staff on site
• Contractor’s direct workforce
• Materials provided by the contractor
• Plant, services and consumable stores provided by the contractor
• Sundry costs incurred by the contractor.

If parties wish to supplement further details into the Schedule 2, this can be done in the contracts particulars which allows the list to be adjusted to reflect project specific requirements. Generally, any costs that come outside the list in Schedule 2 will be “disallowed”.

Contract fee

The contractor is entitled to payment of the contract fee on top of the allowable cost. The parties choose whether to set the fee as a fixed sum, or as a percentage of allowable cost.

Where a fixed sum is chosen, the sum may be adjusted in line with the formula set out in Schedule 3. This formula is the difference between the adjusted target cost and the target cost.

Difference share

This is how the parties share the cost savings or overruns of the project, an arrangement more commonly known as a ‘pain/gain’ mechanism.

For simplicity:

• Overspend = pain
• Saving / underspend = gain

The difference share is the difference between the actual cost (allowable cost + contract fee) and the adjusted target cost.

The parties must choose via the contract particulars:

• How any saving or overrun will be distributed between them – this can be via percentage bands or monetary bands
• Whether a difference share will be included within the interim payments.

Conclusion

The TCC is a welcome addition to the JCT family, with its appeal mainly to parties familiar with JCT’s core provisions and risk allocation, and who wish to foster its potential for greater collaboration.

While it may require a learning curve for new users, its detailed provisions and modernised terms make it a valuable tool for the construction industry.