Introducing the new JCT Target Cost Contract 2024 Edition

JCT has recently welcomed a new “member” to its family of standard form construction documents – the JCT Target Cost Contract 2024. But what do new users of the contract need to know about it?

Ross Galbraith, partner and Zi Chuen Gwi, solicitor, both in our construction and engineering team, explain the details of the JCT Target Cost Contract.

The JCT Target Cost Contract 2024 suite

The JCT Target Cost Contract 2024 suite comprises the following:

·        Target Cost Contract;

·        Target Cost Sub-Contract Agreement and Conditions;

·        Target Cost Contract Guide; and

·        Target Cost Sub-Contract Guide.

The whole concept of this Target Cost Contract (“TCC”) is risk sharing. Its goal is to encourage collaboration between the parties to share risks, reduce costs of work, and improve work delivery in general.

The concept of target cost

Here’s a brief introduction of “Target Cost” for any readers that are not familiar with it.

A TCC is a contract where:

·        the parties to the contract agree an estimated target cost for the project at the outset;

·        the contractor carries out the works;

·        the client pays the contractor its costs of carrying out the works;

·        the actual cost incurred is then compared with the target cost when the works are completed; and

·        the parties split the savings (if the actual cost is lower than the target cost) or the parties share the additional costs incurred (if the actual cost is higher than the target cost).

This type of “gain/pain share” contract is normally used for larger and complex projects or where the final scope of works is not fully defined at the time of entering the contract. It allows both parties to benefit from keeping the costs down, but also share the pain of overruns.

Main features of TCC

It should be straightforward enough for those that are familiar with the JCT standard contracts to navigate through this new TCC, as many substantive provisions are worded essentially the same as the other standard form JCT contracts.

The main differences between the TCC and the other JCT contracts are the payment provisions. In the TCC, the contractor is paid the “Allowable Cost”, the “Contract Fee” and any amount payable in respect of the “Difference Share”.

The TCC’s payment provisions

The TCC’s payment provisions can be broken down into the following features:

        i.          Target Cost

Unlike the other standard JCT contracts which use a Contract Sum as the base for price, the TCC sets out a Target Cost which is agreed at the outset and detailed in the Employer’s Requirements, Contractor’s Proposals and Target Cost Analysis.

It is recommended that the Target Cost Analysis (which is similar to a Contract Sum Analysis in the JCT Design & Build Contract) is as detailed as possible to avoid having to adjust the Target Cost too much during the course of works.

      ii.          Allowable Cost

Allowable Cost is defined in the TCC as costs incurred by the contractor in carrying out its obligations under the contract. Allowable Cost is made up of the following six components:

·        sub-contract work;

·        contractor’s management and design staff on site;

·        contractor’s direct workforce;

·        materials and goods provided by the contractor;

·        plant, services and consumable stores provided by the contractor; and

·        sundry costs incurred by the contractor.

All of these costs must be reasonably and properly incurred, and the contractor is expected to keep records of these costs for inspection. If the parties wish to include a category of cost that is not already included, they can do so by including it in the Contract Particulars of the TCC.

Any other costs that are not an Allowable Cost will be a “Disallowed Cost”, which will not normally be recoverable by the contractor.

     iii.          Contract Fee

The Contract Fee is either a fixed sum or a percentage of Allowable Cost. It is basically the contractor’s profit and overhead percentage for carrying out the works.

Where a fixed Contract Fee is adopted, Schedule 3 of TCC provides a formula for adjustment of the lump sum fee if the difference between the Target Cost and the Adjusted Target Cost exceeds the pre-agreed threshold (if applicable).

Where a percentage-based Contract Fee is adopted, the parties are required to include the agreed percentage threshold in the Contract Particulars because if not, the default position in the TCC for this will be zero per cent.

     iv.          Adjusted Target Cost

Just as the Contract Sum in the other JCT contracts may be adjusted, the Target Cost in the TCC may be adjusted by the following:

·        changes/variations;

·        acceleration quotation;

·        fluctuations;

·        sundry payments made or costs incurred by the contractor;

·        costs of suspension;

·        loss and expense; and/or

·        other adjustments.

If the Target Cost is adjusted, it will be an Adjusted Target Cost.

      v.          Difference Share

The Difference Share is the difference between the actual costs of the works (which is the sum of the Allowable Cost and Contract Fee) and the Adjusted Target Cost. The amount of Difference Share can be negative or positive, as the actual costs of the works can be lower or higher than the Adjusted Target Cost. It is rare, but the amount of Difference Share can also be zero.

The parties will share the Difference Share in pre-agreed proportions (the default position is 50:50 if not agreed otherwise) and this can be calculated at each interim payment stage or final payment stage.  This is also known as the pain/gain share mechanism, as mentioned above.

Final Thoughts on the TCC

The TCC may be new to JCT contract users but certainly not to anyone who uses NEC4 contracts that provide a Target Cost option.

The launch of the TCC allows construction contract users to be reminded once again of the existence of this type of “pain/gain share” contract, or even to be introduced to this type of contract for the first time. Whether it sparks a major shift in contracting behaviours in the construction industry remains to be seen, but at least more people in the industry now know about this type of contract.

For those who are open to working more collaboratively, sharing risks more evenly and maybe achieving better outcomes, TCC is now available to be used. For more information on anything discussed in this article, or on construction law in general, please contact Ross via 0191 211 7999 or [email protected] or Zi via 0191 211 7837 or [email protected].