In this article, Kate Evans, a Senior Associate in our Construction team provides an overview of the main distinguishing features of the latest form of contract released by the Joint Contracts Tribunal (“JCT”) in Summer 2025, the JCT Target Cost Contract 2024.
How does a Target Cost Contract differ to other JCT Contracts?
The Target Cost Contract differs from other traditional JCT Contracts in two main ways:
- Pricing structure
- Risk sharing between Employer/Contractor of costs (the ‘Difference Share’)
Whilst the Target Cost Contract is based substantially on the 2024 edition of the JCT Design and Build Contract, which is based on a fixed fee (a ‘lump sum’ contract), remuneration under the Target Cost Contract is based on a ‘Target Cost’.
The Target Cost is made up of both an ‘Allowable Cost’ and a ‘Contract Fee’ and should represent a genuine estimate of the actual cost of the works.
The Target Cost can be adjusted through the life of the contract, via specific contractual mechanisms set out in Schedule 1, for example such as due to changes, acceleration, suspension and loss and expense. Once the Target Cost is adjusted, it is then referred to as the ‘Adjusted Target Cost’.
As part of the Target Cost, the Contractor is entitled to be paid for actual costs it incurs in carrying out and completing the works (what is referred to as an ‘Allowable Cost’).
Costs which are deemed to be ‘Allowable Cost’ are contained within Schedule 2, and include sub-contract work, management and design staff on site, direct workforce, materials and goods, amongst other things. Provided that these items are included within Schedule 2 and are reasonably and properly incurred, they are entitled to be claimed by the Contractor. If a cost does not fall within the scope of Schedule 2 or is specifically excluded, it cannot be claimed.
Separately, the Contract Fee is an allowance for overheads and profit. It can either be a fixed sum, or a percentage of the Allowable Cost, and the choice made by the parties should be recorded within the Contract Particulars.
Difference Share
The Target Cost Contract has also introduced a ‘Difference Share’, which is sometimes called a ‘pain/gain’ mechanism.
It is the difference (either positive or negative) between the Allowable Cost and Contract Fee on one hand, and the Adjusted Target Cost on the other.
It is shared between the parties in pre-agreed amounts or percentages inserted into the Contract Particulars. If not specified, then the default position is a 50/50 split.
The introduction of the Difference Share means that if the costs exceed the Adjusted Target Cost, then the parties will share that overspend in the percentages / amounts stated within the contract. If the total cost is less than the Adjusted Target Cost, then the parties split the savings between them in the percentages / amounts stated within the contract.
The introduction of the Difference Share shares the risk of an overspend between the parties, which differs from prime cost scenarios, where the Employer takes on the majority of the cost risk.
Why use a Target Cost Contract?
This new form of contract is beneficial for parties who want to contract on a traditional procurement basis, but with a flexible contract sum arrangement. This is an increasingly sought after procurement route.
Owing to issues surrounding supply of materials, labour shortages and inflationary pressures, fixed price lump sum contracts can be a less attractive option for parties in today’s construction market. Contractors often price in significant contingency to cover cost fluctuation, which can lead to Employer’s paying an inflated sum for the works they instruct.
Instead, by contracting under a Target Cost Contract, Employers can see the benefit of a prime cost scenario, potentially resulting in a lower contract price, than if a fixed price was selected; sharing the benefit of any savings made, and sharing the risks of overspend with the Contractor.
Our Construction team at Stephens Scown can advise you as to whether this form of contract is the best procurement method for your project, based on your requirements, and would be happy to discuss further.