Target Cost Agreement

It should be set at a level of incentive. Too low and the contractor will recover the costs in another way. Too much work and inefficiency can be rewarded. The English High Court reviewed a dispute review board`s decision on this point and concluded that it was “entirely correct.” The board had concluded that the contractor would recover additional costs above the ceiling, since the contract indicated that its liability for additional costs above the maximum price should not exceed that amount. However, calculating actual costs above the cap would not reimburse the contractor for undue or unfair costs incurred, as this would be a departure from the contract-wide payment approach. The shares that apply to actual costs (relative to target costs) are also defined in a contract plan. The objective price contract is a certain type of cost reimbursement contract in which a contractor is paid his actual costs, but at the end of the project, a formula that can give rise to a share of pain or profit for the contractor. The risk of a purely refundable contract for the employer is therefore mitigated, as the contractor should be encouraged to seek savings in order to bring the total cost below the target costs and, therefore, to resort to possible under-expenditure tranches. Conversely, adjustments are made between certificates to ensure that there is no overpayment to the contractor if, according to the project manager, the actual costs are expected to be greater than the final value of the target cost, according to the project manager.

Because these certificates are based on the project manager`s estimates, there is a provision that, if later found to be incorrect, a certificate of correction may be issued. Therefore, the employer`s position is protected by the prevention of overpayment to the contractor. Target costs should be realistic, based on a series of operating information. Cost-target contracts are sometimes misinterpreted as incentives for development and design approaches, in which a project team is encouraged to work from a framework concept to provide a solution tailored to a client`s needs. Unfortunately, it is highly likely that a project leased from an incomplete development of construction without accurate information about the work requires substantial changes and results in compensation events and changes in objective costs. In reality, the documents required to support the contract will be as detailed as a lump sum contract. The ICC`s series of contracts was previously published by the BRITISH Institution of Civil Engineers and contains a target cost form in its suite. Unlike the NEC form, the contractor`s royalty percentage is based on the project`s target cost. Each monthly contractor count shows the estimated target value of the work until the end of the month and the total expected cost for the completed work. If the final cost of the project is less than the target cost, the contractor and the client distribute the savings (gainshare).

If the final cost exceeds the target cost, both parties are responsible for paying the extra money (the “action of pain”). Goal cost contracts often take longer than other trade agreements, but they also result in costly contractual litigation. The target price is offered by the contractor in the form of its price estimate based on a business plan or quantity.