Last edited 28 Jun 2016

Target contract for construction

NEC was first published in 1993 as the New Engineering Contract. It is a suite of construction contracts intended to promote partnering and collaboration. The third edition, NEC3 was published in 2005.

The suite of documents includes a range of contract forms. Of these, the Engineering and Construction Contract (ECC), Professional Services Contract (PSC) and Term Service Contract (TSC) offer target contract options:

Option C is a target cost contract with an activity schedule where the out-turn financial risks are shared in an agreed proportion.
Option D is a target cost contract with a bill of quantities where the out-turn financial risks are shared in an agreed proportion.

Effectively, these are a form of target cost contract, or ‘gain/pain’ share arrangement. They introduce a mechanism enabling the contractor, and/or the consultant team, to share in the benefits of cost savings, but also to bear some of the cost when there are cost overruns. Contracting the contractor and the consultant team on a target cost basis can be an effective way of ensuring good collaboration.

NEC describe the target contract option as ‘…a type of pricing mechanism that allows the employer and the contractor (in the ECC) an approach for sharing risk and opportunity. The employer retains the cost and time risk linked to contractual changes, the financial effects of cost overruns can be shared. Target contracts should encourage delivery of a project on time and to budget, allowing a greater emphasis on Contractor’s cost than other arrangements.’