At long last, the TCC is here – the JCT's first new addition to its building contracts in a number of years and the final contract in its 2024 suite.
The TCC comes as a family of documents:
- Target Cost Contract 2024 (TCC 2024)
- Target Cost Sub-Contract Agreement 2024 (TCCSub/A 2024)
- Target Cost Sub-Contract Conditions 2024 (TCCSub/C 2024)
- Target Cost Contract Guide 2024 (TCC/G 2024)
- Target Cost Sub-Contract Guide 2024 (TCC Sub/G 2024)
The suite is labelled '2024' even though it makes its debut in 2025.
The sub-contract is split, in the usual JCT manner, into an Agreement (TCCSub/A 2024) and a separate accompanying set of Conditions (TCCSub/C 2024).
What are target cost contracts?
Target cost arrangements are often associated with cost-reimbursable contracts. A cost-reimbursable contract (sometimes referred to as a cost-plus contract) is one that provides for the contractor to be reimbursed the actual cost of carrying out and completing the works and paid an additional fee towards its overhead and profit.
When negotiating and drafting these types of agreements, the parties need to define:
- the allowable costs that are to be reimbursed to the contractor;
- the exclusions from the reimbursable costs; and
- how the additional fee to be paid to the contractor is calculated.
A target cost contract is a type of cost-reimbursable contract where the contractor is paid its actual costs which are measured against a pre-agreed "target cost". The key feature of target cost contracts is that they include a mechanism that enables the contractor to share the cost savings, if the actual costs come in below the target cost, but the quid pro quo is that any cost overrun has to be shared between the client and contractor if the actual costs incurred exceed the target cost. The cost savings and overruns that are shared between the parties and calculated according to a pre-agreed formula are often referred to as pain share/ gain share (or simply the pain–gain).
Target cost arrangements require the parties to agree the target cost upfront and the contract will set out how the pain–gain mechanism works. The aim of this type of procurement is to promote and foster positive collaboration between the parties, create an effective partnering environment and incentivise and encourage both sides to manage cost control effectively.
Target cost contracts can be seen to represent a happy medium for construction clients in that they lie between lump sum contracts (where the contractor takes most of the risk) and cost‑reimbursable contracts (where the contractor is paid its costs plus a fee). The pain-gain mechanism lies at the very heart of target cost contracting and is key to aligning the parties' objectives and governing their behaviours.
Target cost contracting is common in sectors where projects are complex, involve significant cost fluctuations and require careful risk management – such as major infrastructure and engineering projects – and where collaborative working is crucial.
In recent years, the use of this type of procurement in the UK has increased dramatically and target cost procurement has been utilised successfully on major projects such as Terminal 5 at London's Heathrow Airport, the London 2012 Olympic and Paralympic Games infrastructure, the Crossrail project (the Elizabeth line), the Thames Tideway Tunnel and Hinkley Point C, the UK's first new nuclear power station in over 30 years which is currently under construction.
The evolution of target cost contracting in the UK
The TCC is the JCT's first ever target cost agreement. In the UK, the main domestic contract for this type of procurement has traditionally been the NEC Engineering and Construction Contract Options C and D:
- Option C is a target cost contract with an activity schedule where the out-turn financial risks are shared between the parties in an agreed proportion; and
- Option D is a target cost contract with a bill of quantities where the out-turn financial risks are shared between the parties in an agreed proportion.
In 2018, the Infrastructure Conditions of Contract (ICC) Target Costs Version arrived on the market; the ICC contracts are the successors to the ICE Conditions of Contract.
Across the process industries, the IChemE suite of contracts is primarily used and the IChemE Burgundy Book is a target cost contract with detailed provisions for testing on completion, commissioning and takeover requirements that are designed for process engineering industries that include nuclear and power, water, food manufacturing and pharmaceutical production.
The TCC – a new contract for the built environment
The advent of the TCC marks a new phase in the evolution of target cost contracting in with other sectors that embrace attaining value for money through collaborative risk and reward-sharing now able to turn their attention to a new industry standard form contract.
As part of the raison d'etre for the new contract suite, the Introduction to the JCT Guide to the TCC (TCC/G 2024) states that "JCT appreciates that parties and their professional advisers are assessing the nature of the risks involved in their projects to an increasing extent. JCT contracts are reviewed on an on-going basis to ensure that JCT standard terms address allocation of risk in detail." The Guide also makes specific reference to the government's public sector and private sector Construction Playbooks.
The TCC – Based on the JCT Design and Build Contract
The TCC is based on the 2024 edition of the Design and Build Contract (DB 2024) and is aimed at projects that involve large scale works. It therefore retains the concepts of the Employer’s Requirements and Contractor’s Proposals.
Unlike the Contract Sum in DB 2024, which provides for a lump sum, TCC provides (in Article 2) for a Target Cost, the detail of which is set out in the Target Cost Analysis, which is similar to the Contract Sum Analysis in the DB 2024.
As with DB 2024, the TCC requires an Employer's Agent, either an external consultant or employee, to administer the contract. The works can be carried out in sections.
The terminology used and the structure of the TCC will be familiar to JCT users, but with a different pricing mechanism (and change provisions) that have been drafted to facilitate the target cost approach. Unlike the other main JCT forms, there is no section specifically dealing with "Changes"; the terms are to be found in clause 3.9 and Schedule 1, which deals with the Adjusted Target Cost. The Contractor's loss and expense is also dealt with in the same schedule. Payment is dealt with in the Contract Particulars, Section 4 (Payment) and Schedules 1, 2 (Allowable Cost) and 3 (Adjustment of the Contract Fee).
The TCC – Remuneration
Under the TCC, the Contractor is paid the Allowable Cost of the Works plus the Contract Fee and any Difference Share.
|
Remuneration |
= |
Allowable Cost |
+ |
Contract Fee |
+ |
Difference Share |
|
What the Contractor gets paid |
|
The actual cost of the Works … "the 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" |
|
A fixed sum (£) or percentage (%) of the Allowable Cost |
|
This is the difference between (1) the Allowable Cost and the Contract Fee (on the one hand) and (2) the Adjusted Target Cost (on the other). The Difference Share is shared by the parties in pre- agreed percentages or amounts stated in the Contract Particulars. The Difference Share can, as an option, be applied to each interim payment, as well as to the final payment |
|
|
|
Schedule 2 |
|
Contract Particulars Clause 4.6 |
|
Clause 4.7 |
The TCC – Pricing mechanism
The pricing mechanism can be broken down into the following key components:
The Target Cost
Instead of setting a fixed Contract Sum, the TCC operates on the basis of a Target Cost. The Target Cost:
- has to be agreed at the outset, is mentioned in the Second Recital, detailed in the Target Cost Analysis (Third Recital and Article 6) which is identified in the Contract Particulars, and a financial amount has to be inserted in Article 2;
- is the sum to be paid under the TCC and includes both Allowable Cost and the Contract Fee; and
- should represent a genuine and realistic estimate of the actual cost of the works/ the most likely outturn cost.
The Adjusted Target Cost
Just as the Contract Sum is capable of being adjusted under other JCT forms of contract, the Target Cost may also be adjusted and, and once adjusted, it becomes the Adjusted Target Cost.
Schedule 1 sets out the grounds for adjustment which include changes, acceleration, fluctuations, suspension and loss and expense. The most notable grounds that lead to an Adjusted Target Cost are changes to the works and loss or expense incurred by the contractor due to a "Relevant Matter". The value of work for the purposes of adjusting the Target Cost is determined by reference to the rates and prices in the Target Cost Analysis.
Allowable Cost
The Contractor is paid the actual costs it incurs in carrying out and completing the works, which is termed "Allowable Cost" under the TCC (it is the "Defined Cost" in the NEC ECC).
"Allowable Cost" is defined as the "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 confirms that Allowable Cost comprises the VAT exclusive costs incurred by the Contractor that relate to the following, provided that the costs were "reasonably and properly incurred":
- Sub-Contract work
- Contractor's management and design staff on site
- Contractor's direct workforce
- Materials and goods provided by the Contractor
- Plants, services and consumable stories
- Sundry costs incurred by the Contractor
The finer detail of each of the above heads of costs is provided in Schedule 2. Any costs that do not fall within these categories do not form part of the Approved Cost which the Contractor is to be paid. There is no separate concept of “Disallowed Cost” but Schedule 2 does exclude certain categories of cost which might otherwise fall within the definition, such as the cost of making good. The list of what may fall within Allowable Cost can also be modified; the documents that set out the modifications need to be referenced in the Contract Particulars.
In addition, Schedule 2 provides that these costs need to be "reasonably substantiated by the contractor's accounts and records" and gives the employer/ employer's agent the right to verify the calculation of the Allowable Cost.
The Contract Fee
The Contract Fee is an allowance for overheads and profit. It can be either a fixed sum or a percentage of the Allowable Cost and is specified in the Contract Particulars.
Where the Contract Fee is a fixed sum, Schedule 3 sets out the formula to be applied for adjusting the lump sum where the difference between the original Target Cost and the Adjusted Target Cost (the final Target Cost) exceeds a pre-agreed threshold (stated in the Contract Particulars).
The Difference Share
The Difference Share is the TCC's pain/gain share mechanism:
- The relevant provisions are set out in clause 4.7 (Sharing differences from the Adjusted Target Cost).
- It is the difference (positive or negative) between the Allowable Cost and the Contract Fee, on the one hand, and the Adjusted Target Cost, on the other – in JCT parlance, "The difference between the Adjusted Target Cost and the product of Allowable Cost and the Contract Fee is the ‘Share’."
- It is shared by the parties in the pre-agreed amounts/ percentages stated in the Contract Particulars; if no other percentages are stated, the default is 50/50.
- It can be assessed and applied to monthly interim payments as an alternative to just being calculated at final payment (or termination payment) stage, provided that the parties indicate this is to apply in the Contract Particulars.
The TCC Sub-Contract (TCC SC)
There is no overarching requirement to use the TCC SC alongside the TCC: the Introduction to the TCC on the JCT TCC Hub states that the JCT appreciates that the target cost basis may not always be suitable for use at second tier and that the generic JCT 2024 sub-contracts (the Short Form of Sub-Contract and Sub-subcontract) can be used with the TCC. Most sub-contracts used with the TCC will be standard lump sum or measurable sub-contracts.
The JCT Target Cost Contract Hub
To support the launch of the TCC, the JCT has created a dedicated page on its website called The JCT Target Cost Contract Hub. This an extremely useful resource that contains
-
Overview – An Introduction to the TCC that sets out its key elements and explains how it works
-
Worked Examples – The webpage contains a link to 11 examples of different mechanisms for operating the TCC's pain-gain provisions: these examples contain calculations that are designed to illustrate the following key TCC concepts (which are explained below)
-
Vlogs – The webpage contains video commentary of each of the Worked Examples given
-
Further Resources – This will be added in due course and will include articles on the TCC and information on JCT training to be provided on the new suite.
Getting to grips with the new suite
The JCT's new suite gives employers in England and Wales a contract that is specifically aimed at delivering value for money. The Scottish Building Contract Committee (SBCC) has not yet created a TCC for use in Scotland.
The TCC's key features – the pricing adjustment provisions, open-book cost verification/ cost transparency and risk sharing (the pain/gain mechanism) – all point to a market entrant that could become popular for larger and more complex projects. Any contract that fosters collaborative behaviours between the parties and promotes the early identification of issues merits careful consideration.
The fact that TCC is based on DB 2024 will be of comfort to frequent JCT users. However, navigating the waters of target cost procurement will be new to some construction clients. The TCC also gives parties choice – on how to express the Contract Fee, the bands used for the Difference Share bands and whether the Difference Share should be made on an interim payment basis or at the end of the project upon completion of the works.
Clients also need to think about their working practices; collaboration requires clear and open lines of communication, information sharing, more focused coordination and pro-active risk management and they need to consider how these can be introduced or improved.
The TCC also requires an open book approach to accounting, with contractors keeping good records and clients ensuring that costs are properly verified; the TCC's provisions here do not appear in DB 2024.
Initial considerations for construction clients include:
- the types of projects where the TCC would deliver value for money;
- how setting both the Target Cost and the pain/gain mechanism can best incentivise the contractor to minimise costs;
- the extent to which the design is sufficiently advanced to set an accurate Target Cost (and, if this cannot be achieved, there may need to be a spilt for costs arising out of finalising the design);
- how the TCC will promote collaboration between the client, its main contractor and supply chain; and
- what is required to ensure that incentivisation is maintained after the contract is entered into.
Contacts
If you would discuss the content of this article or find out more about our experience and expertise in this area, please contact:
- James Huckstep
- Michael Mullarkey
