Blog Authors: Tom Booth, Associate and Helen Johnson, Partner – CMS Cameron McKenna Nabarro Olswang LLP
In June the Joint Contracts Tribunal (JCT) published its new Target Cost Contract 2024 (along with a sub-contract form and guidance notes). This Law-Now provides a brief introduction to the new JCT form.
What is Target Cost?
Briefly, for readers new to target cost contracting, the features of a target cost contract include:
- No overall fixed price at the outset of the project
- Price calculated on an actual cost plus fee basis
- Pre-agreed disallowed costs
- An open-book approach to valuations
- A pain/gain mechanism in relation to any under or overspend.
The aim is to encourage parties to work collaboratively to manage the costs and risks associated with delivering the works on a more open basis.
Key Features of the JCT Target Cost Contract 2024
The JCT Target Cost Contract 2024 adopts a familiar structure and terminology for seasoned JCT users, but with reworked pricing and change mechanisms to facilitate the target cost approach. The contract is built around a clear and structured cost mechanism, which can be broken down into the following key components:
- Target Cost: Instead of a fixed contract sum, the contract operates on a Target Cost, which is agreed at the outset and detailed in the contract particulars. This Target Cost is substantiated by a Target Cost Analysis, akin to the Contract Sum Analysis in the JCT Design & Build form. The Target Cost includes both Allowable Cost and the Contract Fee.
- Allowable Cost: The contractor is paid for Allowable Costs, defined as “costs incurred by the Contractor in carrying out its obligations under this Contract of the types specified in Schedule 2 and calculated in accordance with that Schedule.” Schedule 2 is comprehensive, covering general costs, sub-contracted work, management and design staff, direct workforce, materials, plant, and sundry costs. Only costs falling within these pre-agreed categories are recoverable; anything outside is, by default, disallowed. The contractor must substantiate these costs with appropriate records, and the employer or their agent has inspection rights. Whilst there is no separate concept of “Disallowed Cost”, unlike other target cost contracts, Schedule 2 does exclude certain categories of cost which might otherwise fall within such a definition, such as the cost of making good.
- Contract Fee: In addition to Allowable Costs, the contractor is paid a Contract Fee, which can be either a fixed sum or a percentage of the Allowable Cost, as specified in the contract particulars. Where a fixed sum is used, Schedule 3 provides a formula for adjustment if the difference between the original and final Target Cost exceeds a pre-agreed threshold.
- Difference Share (Pain/Gain Mechanism): The contract introduces a clear pain/gain share mechanism. The “Difference Share” is the percentage of any difference (positive or negative) between the Adjusted Target Cost and the sum of Allowable Cost and the Contract Fee. This is shared between the parties in pre-agreed proportions, with a default of 50:50 unless otherwise stated in the contract particulars. The assessment can be made either at each interim payment or at final account stage, depending on the parties’ preference. This incentivises both parties to collaborate and manage costs effectively throughout the project.
- Adjustments to Target Cost: The Target Cost is not static. It can be adjusted in a similar way to the Contract Sum in other JCT forms, with Schedule 1 setting out the grounds for adjustment, including changes/variations, acceleration, fluctuations, suspension, loss and expense, and other defined adjustments.
Lessons learned
The new JCT form directly addresses a number of issues which have arisen on other standard form target cost contracts. In Doosan Enpure Limited v Interserve Construction Limited, an NEC3 Option C Target Cost Contract was found not to allow the pain/gain mechanism to be operated until after completion of the works. This approach helps to simplify the interim payment process, but puts the employer at risk of needing to recover overpayments after completion of the work at a time when the contractor may have substantial counterclaims or may be at risk of insolvency. The JCT Target Cost Contract provides an optional provision to allow the pain/gain mechanism to be applied to interim payments to avoid this situation. For our Law-Now on the Doosan Enpure decision, please click here.
In Network Rail Infrastructure Ltd v ABC Electrification Ltd, a question arose as to whether an amended ICE Target Cost Contract permitted the contractor to recover costs arising from delays to completion for which it was responsible. The contract disallowed costs arising from “negligence or default” and this was held to disallow costs arising from delays to completion even though such delays may not have been within the contractor’s control. The JCT Target Cost contract deals with this issue by making clear that management and design costs are recoverable up until practical completion even where that occurs after the Completion Date, although claims for costs incurred after the Completion Date are limited to the rates which applied immediately prior to the Completion Date. For our Law-Now on the Network Rail decision, please click here.
A Shift in JCT’s Approach?
The introduction of the Target Cost Contract marks a significant step for JCT, potentially signalling a shift towards more open and cooperative contracting. The contract’s structure, while familiar to JCT users, incorporates mechanisms for risk sharing and cost transparency that have made NEC’s target cost options so popular. The pain/gain share, open-book cost verification, and flexible adjustment provisions are all designed to foster collaboration and early identification of issues.
Time will tell whether – and to what extent – these provisions will be adapted to fit employer and contractor needs, but initial indications suggest this could become a popular form of contract for larger and more complex projects.
Conclusion
The JCT Target Cost Contract 2024 brings a new dimension to the JCT suite, offering a transparent cost management mechanism that incentivises collaboration. For those familiar with JCT’s traditional forms, the learning curve is gentle, but understanding the nuances of the target cost approach will be key to successful project delivery under this new contract. It is essential that parties using this form are fully aware of the cost mechanism and the risks, as well as the rewards, it can bring.
This article was originally published on CMS Law-Now.
