procurement guide - target cost
A contractor is appointed, either in competition or by negotiation, on the basis of pricing of simplified Bills of Quantities or a Schedule of Works. The tender price forms the Target Cost but the contractor is paid the actual costs for executing the work, as audited by the quantity surveyor, so long as this is less than the tendered Target Cost.
The Target Cost is, in effect, a ‘Guaranteed Maximum’. Any saving on the Target Cost is split, normally 50/50 (but can be varied) between the contractor and the client.
- Enables an early start to be made on site as the tender documents can be prepared and a contractor appointed before the full design is completed.
- Establishes the client's maximum financial commitment (subject to client variations). If the contractor's costs exceed the Target Cost, only the Target Cost sum is paid.
- Gives the opportunity for the client to benefit from any savings made by the contractor. It is particularly useful in cases where risks may be priced in the tender, as under this system if those risks do not materialise the saving is shared.
- Leads to a less adversarial attitude between contractor and client with both benefiting from savings made.
- Can give early warning of future financial problems as the auditing quantity surveyor has complete access to the contractor's actual costs.
- Can incorporate Design and Build and Performance Specified works if required.
- The contractor and design team need to fully understand the Target Cost process
- Can prove marginally more expensive than a more traditional contract where more risk is taken by the contractor
Appropriate for projects where an early start is required on site, and where the client wants to establish a maximum financial commitment, together with a less adversarial relationship.