Target Cost contracts compared: NEC4 Option C versus JCT TCC

The launch of the Joint Contracts Tribunal's (JCT) Target Cost contract (TCC) 2024 introduces a compelling new contender to NEC4 Option C's dominance in target cost contracting, potentially reshaping procurement strategies across both public and private sectors.

While NEC4 Option C has traditionally been associated with public sector and infrastructure projects, the introduction of JCT's TCC marks its formal entry into this procurement space.

It remains to be seen whether it will challenge NEC's dominance in the public sector or simply offer an alternative for JCT's established private sector clientele.

This article compares NEC4 Option C and JCT TCC, exploring their philosophies, payment mechanisms, which costs are claimable, fees, and pain/gain share.

Unlike fixed-price contracts, no lump sum is agreed upfront. Instead, the parties collaboratively establish a target cost, which serves as a benchmark for performance and is refined on an open-book basis.

Disallowed costs are defined by contract. Throughout the project, the contractor's records are reviewed to ensure only legitimate costs are reimbursed.

At completion, the actual cost-plus fee is compared to the target cost to determine any savings or overspend, with the outcome influencing the contractor's financial gain or loss, often referred to as pain/gain.

It is designed to be flexible and internationally applicable, with a modular structure that allows for bespoke tailoring via Z clauses.

JCT TCC is rooted in the JCT Design and Build framework but offers a more prescriptive and structured approach than JCT contracts are known for. It retains the traditional JCT emphasis on clearly defined roles and responsibilities but introduces mechanisms for cost sharing and open-book accounting to foster collaboration.

Both contracts operate on the principle of reimbursing actual costs plus a fee, compared with the target cost, with a pain/gain share mechanism.

NEC4 Option C uses the concept of defined cost-plus direct fee, excluding disallowed cost, and calculates the contractor's share at the end of the project against the target cost.

Meanwhile, JCT TCC introduces allowable cost plus a contract fee, which can be fixed or percentage-based, with exclusions set out in 'Schedule 2'. It calculates the difference share at interim stages or at final payment, against the target cost depending on what is agreed in the contract.

NEC4 uses 'Defined Cost' detailed in the 'Schedule of Cost Components', while JCT relies on 'Allowable Cost' as outlined in 'Schedule 2'.

NEC4 defines and excludes 'Disallowed Costs' explicitly, whereas JCT achieves a similar outcome by narrowly defining 'Allowable Costs' and listing specific exclusions.

As with the NEC4 Option C contract, it is likely that the cost audit industry will still be required for JCT TCC projects.

NEC4 Option C applies a single 'Direct Fee' percentage to the defined cost, which replaces the multiple fee types used in earlier NEC versions, streamlining the approach. 

The percentage remains fixed and is applied consistently across all defined costs. NEC4 operates an open-book system, with costs subject to audit and a clearly defined disallowed cost.

JCT TCC applies a 'Contract Fee', which can be structured either as a fixed sum subject to adjustment if applicable under 'Schedule 3' or a percentage of the allowable cost as specified in the contract particulars.

'Schedule 3' contains a formula for the adjustment of the lump sum contract fee based on the difference between the adjusted target cost and target cost. 

The contract operates on an open-book basis, requiring the contractor to justify costs.

The contractor's share in NEC4 Option C is a central component of its pain/gain mechanism.

Under this model, the contractor is reimbursed for defined cost plus a fee, and any difference between the total of the prices – the target cost – and the price for work done to date – actual cost incurred – is shared between the client and contractor.

The share percentages are agreed in the contract data and can be tiered. This mechanism is assessed at completion of the whole of the works.

The difference share in the JCT TCC is similar to the pain/gain principle in NEC4 but offers greater flexibility in timing and structure.

The contractor is paid allowable cost plus a contract fee, and the difference share is calculated as the variance between the adjusted target cost and the sum of allowable cost-plus contract fee.

Unlike NEC4, JCT TCC allows the difference share to be assessed either at interim payment stages where clause 4.7.1 is stated as applying in the contract particulars, or at the final payment.

Monthly assessments of the difference share will require the target to be kept up to date, including claims for loss and expense due to delay, which are traditionally left for the 'bunfight' at the end.

Both contracts embrace open-book cost management and pain/gain share mechanisms, but differ in philosophy and structural differences as to how they achieve it.

There are a number of nuanced distinctions between the two contracts.

• NEC4's defined cost and disallowed cost model contrasts with JCT's allowable cost approach, which achieves similar outcomes through detailed exclusions.
• NEC4 keeps it simple with a fixed direct fee percentage on defined costs, while JCT TCC adds flexibility but also complexity by offering a fixed but adjustable contract fee or a percentage-based approach.
• NEC4 locks in the contractor's share at project completion with a tiered split of pain/gain, while JCT TCC adds choice by allowing difference share assessments either during the project or at final payment.

JCT TCC's range of contractual choices could either enhance strategic alignment with project needs or risk overwhelming users with complexity.