The JCT Target Cost Contract 2024 – what is it?
The JCT Target Cost Contract 2024 (TCC 2024) is a new addition to the JCT 2024 contract suite, comprising a Main Contract, Sub-Contract, and accompanying Guides. It focuses on risk-sharing and incentivising collaboration for financial benefits, aiming at large-scale projects in both private and public sectors, where the contractor is responsible for design and construction. This is achieved using a traditional target contract approach of pricing a target and paying against an actual cost account. Any difference between the target as adjusted and the actual cost is shared through a pain gain sharing mechanism.
Relation to the JCT Design and Build Contract
The JCT TCC 2024 is derived from the JCT Design and Build Contract (DB) framework but tailored for target cost payment structures. This includes the pain/gain mechanism to promote shared efficiencies, distinguishing it from traditional lump sum contracts.
Key Features and Updates
TCC 2024 is consistent with updates in the JCT 2024 Edition, including:
- Gender-neutral language
- Email use guidance for notices
- Integration of building safety regulations aligned with the updated Building Regulations 2010
- Flexibility for tailored contracts while upholding the framework of the JCT suite
Sub-Contracts within the TCC Family
The TCC Sub-Contract 2024 is versatile, serving as a Target Cost Sub-Contract and adaptable for settings with or without Sub-contractor design responsibility. It can be structured as:
- Lump-sum
- Remeasurement basis
Features from other JCT 2024 Sub Contracts can be included, and generic JCT Sub-Contracts can be used if needed.
Target Cost and Risk Allocation
The TCC 2024 replaces traditional Contract Sums and is derived from:
- Employer's Requirements
- Contractor's Proposals
- Target Cost Analysis
Adjustments to the Target Cost align with modifications, fluctuations, or specified events. A "pain/gain" mechanism forms the TCC 2024’s core, with differences between the Adjusted Target Cost and actual costs (“Allowable Cost”) plus Contract Fee shared according to pre-agreed percentages.
Allowable Cost
The Contractor's Allowable Cost encompasses seven categories, including Sub-Contract work, staff, and materials, detailed in Schedule 2. Costs are pre-agreed or vouched, and the Contractor must maintain records, accessible by the Employer or their Agent. Additional categories can be agreed upon within the Contract Particulars.
The Allowable Cost is calculated in accordance with Schedule 2 and the Contract Particulars. Schedule 2 comprises seven parts:
1. General provisions including those relating to lump sums in lieu of actual costs
2. Sub-Contract work
3. Contractor’s management and design staff on site, etc
4. Contractor’s direct workforce
5. Materials and goods provided by the Contractor
6. Plant, Services and Consumable Stores provided by the Contractor
7. Sundry costs incurred by the Contractor
Contract Fee
The Contract Fee, calculated as a fixed sum or a percentage of the Allowable Cost, is adjustable based on differences between the Adjusted Target Cost and the original Target Cost. The formula for adjustments is specified in Schedule 3, with a default adjustment percentage of zero if no agreement is reached.
Difference Share and Payment Provisions
The Difference Share, whether a surplus or deficit, is the variance between the Adjusted Target Cost and Allowable Cost plus the Contract Fee. This is distributed per pre-agreed percentages and can be processed through interim or final payments. These provisions ensure the pain/gain mechanism remains effective throughout the project.
Adjustment of the Target
The Target Cost is adjusted in a similar way to the Contract Sum for other JCT Contracts. The means by which the Target Cost can be adjusted is set out in Schedule 1 and comprises:
- Changes
- Acceleration Quotation
- Fluctuations (where applicable)
- Sundry Payments made or costs incurred by the Contractor
- Costs of Apense
- Other Adjustments, as defined in the Schedule
Appropriate Use of Target Cost Contracts
Target cost contracts are particularly suited for projects with incomplete designs or undefined scopes, which lead to large contingencies being priced into the lump sum. The intention being that risk can be managed out or controlled through collaborative management. Though riskier for contractors than cost reimbursable contracts, they are less risky than lump sum contracts. Target cost contracts are suitable for both public and private infrastructure projects as well as defence projects.
The JCT state:
“The Target Cost Contract fits perfectly within the JCT contract suite. Its base is the JCT Design and Build Contract. Like the DB form, it is designed primarily for use on larger works where the Employer has defined its requirements and where the Contractor is not only to carry out the works but also complete the design. It can be used on both private and public sector projects and allows for the works to be carried out in sections.”
Whilst projects using DB can vary in scale, it is more appropriate for TCC to be used on projects that require detailed provisions for the Contractor to complete the design. If the Contractor is not to complete the design of the whole of the works other JCT contracts should be considered.
Initial Thoughts on The JCT TCC2024
Although not new to the industry, target contracts have traditionally been something of a niche procurement route. With the advent of the NEC ECC Option C and D contracts, that is no longer the case and target contracts have been employed by a wide range of clients in a broad range of sectors.
There is a divide among clients and their procurement teams between those who have taken to NEC contracts and those whose processes are still firmly embedded in JCT contracts.
The introduction of the TCC 2024 form of contract has the potential to bring target contracting to a new set of clients. Basing the document on the JCT Design and Build Contract will make this familiar territory for those tasked with implementing the use of these contracts.
Many of the traditional risk allocation issues are implicit in the adjustment of the target and the responsibility for design. Amendments will be required but with a subtly different background of the pain/gain mechanism, simply transposing existing Design and Build schedules of amendments would be a mistake.
Careful thought needs to be given to the choice between using a standard JCT Design and Build Contract and TCC 2024. Target contracts are resource intensive and managing Allowable Cost is a significant burden on both parties, but the benefits can be significant in motivating collaboration and innovation from the construction team.
Whether TCC 2024 has all the mechanisms needed for managing risk is also an open question. The lack of a construction programme and the absence of early warning procedures and a commercial penalty for failing to operate them, such as disallowing costs that could have been avoided, as in the NEC4 ECC Option C and D contracts, may lead to greater risk of cost overrun. Sharing the pain is not as good as avoiding the pain. Management of risk will need careful thought.
Tim Willis – MA FCIArb AMICE Solicitor Advocate
Tim is an accredited NEC Project Manager and NEC trainer and has advised many clients on NEC target contracts and other forms of target contract. Tim is a senior associate in Irwin Mitchell’s construction team.
Further articles will be published looking at aspects of the contract in more depth.
