Target Cost Contracts (NEC Option C/D)

Question 1

What is a Target Cost Contract?

Answer 1

A contract where the client and contractor agree on a target price, and the actual cost is compared to that target. Any over/underspend is shared between parties (pain/gain mechanism).

Question 2

Which NEC contract options are Target Cost based?

Answer 2

• Option C: Target cost with activity schedule
• Option D: Target cost with bill of quantities

Question 3

How are contractor payments calculated in Target Cost contracts?

Answer 3

Based on Defined Cost
+ Fee (Overheads and Profit)
– Disallowed Costs = Price for Work Done to Date (PWDD)

Question 4

What is ‘open book accounting’?

Answer 4

A requirement in target cost contracts for the contractor to share all cost data transparently, allowing the client to see what is being spent and how.

Question 5

What is the ‘pain/gain share’ mechanism?

Answer 5

If actual cost < target: Contractor gains a % of the savings
If actual cost > target: Contractor bears a % of the overspend
The percentages are agreed in the contract.

Question 6

What are typical share percentage brackets in Target Cost Contracts?

Answer 6

Example (customisable):
* Less than 95%: 50/50
* 95%–105%: 10/90 or 40/60
* 105%–110%: 60/40
* Over 110%: 70/30 or 90/10
(Exact splits must be defined in the contract)

Question 7

Why would a client use a Target Cost Contract?

Answer 7

• When scope is not fully defined
• Encourages collaboration & innovation
• Shared risk → team works together to avoid overruns
• Better for quality and time-focused projects

Question 8

What are some benefits of Target Cost Contracts?

Answer 8

• Shared risk and reward
• Encourages trust and transparency
• Supports value engineering
• Promotes teamwork
• Helps control costs when used correctly

Question 9

What are some risks of Target Cost Contracts?

Answer 9

• Disputes over defined/disallowed costs
• Poor cost records = reduced transparency
• Requires strong management & trust
• Can lead to gaming the pain/gain system if not policed

Question 10

How is target cost adjusted during the project?

Answer 10

Target cost is updated through Compensation Events (NEC Clause 60), e.g. scope change, delays, or access issues.

Question 11

Where are Target Cost Contracts often used?

Answer 11

• Public sector (e.g. NHS via ProCure21+)
• Large infrastructure projects
• Design-and-build or early contractor involvement frameworks

Question 12

What does the Construction Playbook say about Target Cost Contracts?

Answer 12

They are encouraged for public sector projects as they promote collaboration, early supply chain involvement, and value-based outcomes.