A Target Cost Contract sets an estimated target cost for the project, with incentives for the contractor to stay within this target. If costs come in under the target, savings may be shared between the contractor and the Client. Conversely, if costs exceed the target, the additional expenses may be shared or borne by the contractor, depending on the contract terms.

How Target Cost Contracts Incentivise Cost Control

Target cost contracts encourage contractors to control costs by aligning their financial interests with the client’s. By sharing the financial rewards of cost savings, contractors are motivated to find efficiencies in project delivery. These contracts are ideal for projects where costs are uncertain but can be reasonably estimated.

Best Practices for Managing Target Cost Contracts

Contractors should conduct thorough cost estimation before agreeing to a target cost contract. Regular financial reporting throughout the project is essential to monitor progress against the target. Clear communication with the client is needed to manage expectations, especially if costs begin to exceed the target.

Related Terms: Guaranteed Maximum Price (GMP) Contract, Cost-Plus Contract

FAQs

How does a Target Cost Contract work?

A: A target cost is set, and any savings or excess costs beyond that target are shared between the contractor and the Client, incentivising cost control.

What happens if costs exceed the target in a Target Cost Contract?

A: The contract will specify whether the contractor, the client, or both are responsible for covering costs beyond the target.

Target Cost Contract Definition

How Target Cost Contracts Incentivise Cost Control

Best Practices for Managing Target Cost Contracts

FAQs

How does a Target Cost Contract work?

What happens if costs exceed the target in a Target Cost Contract?

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