The JCT Target Cost Contract 2024 (TCC): A Real Alternative to the NEC ECC Option C? A Crystal Ball?

We asked AI to write us a joke about the JCT Target Cost Contract 2024. Here’s what we got: “Why did the contractor bring a crystal ball to the JCT Target Cost Contract 2024 negotiation? Because it’s the only way to forecast who’ll actually share the cost savings”. Ahem…

Now that we’ve got your attention, down to the nitty gritty.

The TCC fills a considerable hole in the JCT's suite of contracts (which traditionally use a lump sum pricing model) by introducing a financial risk-sharing model to align the interests of the employer and the contractor and encourage collaboration. 

The TCC is based on the JCT Design & Build Contract and therefore drafted for projects where the contractor is to take on design responsibility as well as carry out the works. Until now, the advice from lawyers to employers looking at a target cost model for design and build projects has almost always been 'you should consider using an NEC4 ECC Option C.' 

The question is, will that change now that JCT have thrown their hat in the ring?

Key Features of the TCC

At its heart, the TCC introduces a cost-reimbursable framework, replacing the conventional “Contract Sum” with a “Target Cost”. This Target Cost is agreed at the outset and adjusted throughout the project to reflect changes, acceleration, and fluctuations - becoming the “Adjusted Target Cost”.

The contractor is reimbursed for the actual costs of performing the works, the “Allowable Costs”, plus a fixed sum or percentage to cover overheads and profit, the “Contract Fee”. Crucially, the contract incorporates a “pain/gain” mechanism, known as the “Difference Share”, which enables both parties to share the financial consequences (in pre-agreed proportions) of any variance (upwards or downwards) between the actual cost of the works and the Adjusted Target Cost.

Upon completion, the final Allowable Cost and Contract Fee are compared against the Adjusted Target Cost. Any difference, whether a saving or an overspend, is shared between the employer and contractor based on the Difference Share. If actual costs fall below the target, the contractor shares in the savings; if they exceed it, the contractor contributes to the overrun.

Comparison with NEC4 ECC Option C

The TCC naturally invites comparison with the NEC4 ECC Option C, which has long dominated the target cost space. Whilst the ECC Option C is known for its procedural rigour, i.e. early warnings, compensation events, and real-time programme updates, the TCC offers a streamlined alternative. It also retains the familiar structure of JCT’s D&B contract, making it more accessible to JCT users who may find NEC’s administrative demands burdensome.

The Allowable Cost (“Defined Cost” under NEC) and Contract Fee are the equivalent of the “Price for Work Done to Date” under NEC4 ECC Option C. The TCC includes detailed provisions setting out how the Allowable Cost is calculated, which we do not go into detail on here, save to say that there is the option to use lump sums or maximum amounts as part of the Allowable Cost. Whilst the use of lump sums and maximum amounts may ease the administrative burden, query whether it detracts from the very essence of a Target Cost, which is to collaborate to find solutions to achieve savings and mitigate the effects of any event negatively impacting cost.

A key distinction is the absence of “Disallowed Costs” in the TCC, a concept often seen as contentious and administratively heavy in NEC contracts. A subtle distinction, but NEC contains a broad list of recoverable Defined Costs with an explicit list of Disallowed Costs expressly carved out (i.e. everything is allowed unless it is explicitly disallowed), whereas the TCC sets out a comprehensive list of Allowable Costs which are recoverable if properly incurred; anything outside that list is, by default, not recoverable (i.e. prescriptive list of recoverable costs and everything else is excluded).

Another notable feature is the flexibility of the pain/gain mechanism. Unlike the NEC’s typical end-of-project reconciliation, the TCC has an option for the parties to agree to apply the pain/gain mechanism to interim payments. This optional provision is valuable in providing real-time cost control and incentivising proactive cost management and collaboration throughout the contract term to achieve the target cost.

Conclusion

The TCC marks a bold evolution in the JCT suite, promoting a more collaborative and financially sustainable model. 

Whilst we do not anticipate that the TCC will tempt well versed proponents away from the NEC4 ECC Option C, for those that prefer to work with the JCT suite, this contract may open up new dialogues around pricing options. Those used to operating JCT contracts will, however, need to switch to a collaborative, pro-active risk management mindset and adjust their contract management procedures to allow for the open book approach to Allowable Cost, which requires contractors to keep accurate records and employers to ensure that such costs are properly verified.

The key for employers and contractors using the TCC (as with the NEC4 ECC Option C) will be to ensure that the Target Cost is realistic. All too often we see a Target Cost set too low resulting in a pain share from the off, which defeats the objective of the collaboration that target cost contracting seeks to achieve. 

The TCC’s success will depend on the industry’s willingness to embrace its mechanisms. Whilst many employers remain committed to lump sum models that shift risk to contractors, the TCC offers a compelling middle ground which will doubtlessly be attractive to contractors.

Burges Salmon’s Construction & Engineering team are experienced in advising on fixed price and target cost models across the JCT and NEC suites on a variety of projects, as well as on collaborative contracting.  Please get in touch if you’d like to discuss any of the points set out in this article and how we might be able to assist you.

This post was written by Nia Stewart, Elliot Hawes and Nick Lee