How can the JCT Target Cost contract work for my project?

Last year, the JCT Target Cost contract (TCC) introduced a number of new options to the JCT suite of contracts, most notably the shared cost mechanism.

Professionals have already reacted with interest to the new contract, viewing it as an opportunity to embed savings incentives for contractors.

Understandably, there have been comparisons to the more established NEC4 Option C, but the JCT contract has its own unique features.

This article seeks to respond to some of the queries that RICS members have raised about the use of the TCC.

For the purposes of this article, we are assuming that the client prefers to stay with the JCT family of contracts but requires advice and recommendations as to whether to use the TCC instead of another more traditional contract.

Choices range from lump-sum type contracts – such as the Standard Building contract or Design and Build – where the contractor has committed to a lump-sum figure and the risk profile favours the client, to the other extreme of a cost-reimbursable contract, with the contractor being paid their actual cost, together with a fee.

The TCC lies somewhere between the two – but closer to cost reimbursable – as there is an opportunity for both parties to gain something from the operation of the contract provisions, assuming that matters proceed smoothly.

It is this mutual-benefit opportunity that places the new TCC between the two other contract types – the ease of not having to spend time and effort arriving at a lump sum while having the flexibility of paying for what is actually spent and also potentially sharing a benefit 'pot'.

However, when advising their clients as to the wisdom or otherwise of using the TCC, readers should always consider whether another contract form might be more appropriate.

Factors to be considered might include:

• the size, complexity and value of the project
• the need to include incentives for the contractor to focus on
• the resource input needed to administer the contract effectively
• the potential attractiveness of offering an incentive and whether it is considered 'worth the effort'.

Target cost contracting has been used in the UK market for a number of years. 

This experience shows that a balance must be struck between the need to progress the design forward sufficiently to arrive at a sensible target cost, set against the programme delay caused by the need for such design development to be undertaken.

Typically, many schemes have commenced too early, with the 'pain' of increased cost, further delay and a considerable level of change being needed as a result.

As with other JCT contracts, there is always the opportunity for the client to offer a competitive tender to the market on the basis of bid offers for the fee element figure only, with the notional target cost figure being provided by the client.

Typically, the competitive bid process will include consideration of other related but non-financial matters, such as the proposed management team, previous and relevant project experience and project planning material.

Therefore, it could be that this target cost figure is generated from a cost plan prepared by a quantity surveyor. Such an elemental cost plan could then form the basis of the proposed target cost to be used as the bid basis.

Careful consideration should be given to the treatment of contingency or risk allocations in the bid process and whether the quantity surveyor's cost plan allowances might be retained by the client 'below the line'.

This subject could then be revisited during the post-bid phase, when a target cost is agreed between the parties.

Given that much of the value of a typical project is made up of subcontract work packages, it is likely that arrangements would need to be put in place for the tendering and identification of key subcontractors.

This could mean that once the target cost figure is agreed, a process is commenced that might see the various portions or packages of work being tendered, 'firming up' target figures as a result.

This would be a progressive process as the later phases of the design are completed, with the result that the original target cost, which never changes, would be refined into an adjusted target cost 'live' figure that varies over the life of the project.

Another popular potential route is the initial use of a pre-construction services agreement, which might be the first stage in a two-stage process to arrive at the target cost.

While this is familiar ground for the quantity surveying profession, there would need to be thought given to the fee structure to be agreed with the client, so as to avoid any commercial shocks.

In addition, the monthly or periodic assessment of the payment due – based on the demonstration of actual costs incurred – is likely to make the payment provisions a complex process.

This is also true if the calculation of the difference share is required at each interim assessment.

• the slow pace of political decisions causing delay, with key decisions driven by programme and not cost
• inability to deliver reliable cost and programme estimates
• lengthy validation of early cost estimates so that they can be embedded into TCC provisions
• benchmarking estimates to current cost without any reference to potential future inflation
• agreement and bolting down of work package cost figures too early
• the linking of incentive provisions to programme rather than cost
• failure to sensibly allocate package subcontractor risk.

Many of these matters relate to strategic issues that could be formulated at the start of the project as policy decisions, which can then be translated into contract formation provisions that seek to provide better outcomes.

The pain/gain share mechanism, in particular, represents a strong incentive for both parties and is a practical way of encouraging collaboration on a project.

There is a demand in the market for an alternative to both the NEC4 Option C and the traditional JCT suite of contracts, so professionals are watching the uptake of this new contract with interest.