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