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What is a target cost contract?

A target cost contract is a type of cost reimbursable contract under which the contractor is paid the ‘actual cost’ (usually defined in the particular contract) it incurs in carrying out the works, but subject to a target cost which is agreed by the parties at the beginning of the project.

The target cost is the cost to the contractor of completing the project, comprising:

1. •

   the base cost of the physical works (based on the sum of prices in a bill of quantities, schedule of rates or an activity schedule), the cost of temporary works, sub-contractor costs and preliminary costs

2. •

   overheads and profit

3. •

   a contingency for contractor’s risks under the contract

At the end of the project, the parties will apply a mechanism/formula to calculate whether savings were made and the project delivered for less than the target cost, or whether costs overran and the cost of delivering the project was more than the target cost. The contractor will then either share the savings with the employer