“Pain/gain” clauses to spread construction risk between clients, contractors and the supply chain will be included in the JCT’s forthcoming target cost contract.
A member of the Joint Contracts Tribunal (JCT) drafting subcommittee has lifted the veil on the Target Cost Contract (TCC 2024) document before its official full release later this year.
Arbitrator and adjudicator John Riches, who is also managing director of quantity surveying firm Henry Cooper Consultants, described TCC 2024 as “our surprise package for everybody”.
Speaking at an online launch event yesterday (1 May), he said: “This is the first time we’ve introduced target costs into our suite of contracts.
“We’ve listened to users – there’s been demand from them. Member groups wanted a target cost that follows familiar and simple territory. We’ve even had a large law firm saying ‘if you produced a target contract [document] we would use it’.
“As we were revising all the [JCT] suite for 2024, this was an ideal opportunity to start something new. Our aim was to provide a familiar, and therefore simple, step into the world of target cost.”
The TCC 2024 family of documents includes a main contract, a subcontract and a guide.
The main contract and guide are each based on JCT’s new Design and Build Contract (DB 2024), released last month.
“It is possible to have design at all levels in the target cost contract,” said Riches.
“The system is flexible to use any form of subcontract arrangement.”
Under the TCC, the contractor would not only carry out and complete the works, but it would also complete the design.
The client would employ an agent such as an external consultant to administer the conditions of a TCC.
Unlike DB 2024, the TCC does not provide a lump sum.
Instead the contractor would be paid “allowable” costs together with a contract fee – either a fixed sum or a percentage of the allowable cost as determined in the negotiated contract.
In addition, a “difference share” may be payable as calculated under the contract “so there’s pain/gain sharing”, said Riches.
“It’s an odd thing to talk about when you’re using something which is supposed to de-risk things, so let’s hope there’s not much pain,” he added.
The difference is determined by deducting the allowable cost plus the contract fee from the target cost. It is then distributed in proportions that the parties choose in the contract particulars.
“So as the meerkats would say – ‘it’s simples’,” Riches said.
As well as clients, JCT is encouraging main contractors to subcontract on a target cost basis, although Riches said it is not mandatory.
Victoria Peckett, chair of the JCT drafting subcommittee and a partner at law firm Clyde & Co, said that the TCC is not the same as the target cost option already contained in JCT’s Constructing Excellence document.
“If you’re familiar with that [Constructing Excellence] then great, use it – but that’s being updated as well,” she said.
Riches said the TCC has “nowhere near the same philosophy as Constructing Excellence, and it’s much more thorough in the detail of how we deal with target costs and actual costs – because of that, it’s easier to use”.
Charles Pacey, a senior associate in law firm Mayer Brown’s construction team, pointed out that the NEC suite has its own form of target cost contract that is favoured by public sector clients.
“I think it’s interesting that the JCT would be publishing a target cost contract, and it would be interesting to see what its take on the target cost arrangements are, because that will target the private sector a lot more.”
Pacey told Construction News that the arrival of the TCC could signal a recognition that the high inflation of recent years, coupled with material supply problems and labour shortages, mean that fixed-price lump-sum contracts are less attractive nowadays.
“Actually the target cost contract might be more appropriate so that the parties can better allocate costs risk between them, while making sure there’s a focus that the project is completed as cost-effectively as possible,” he added.
