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Target Cost Contracts in Construction

Advantages Over Conventional Contracts

Thursday, February 23, 2017

Target Cost Construction Contracts
Available in P.D.F Format

1. Conventional Construction Contracts

1.1   Introduction

The conventional ad-measurement contract is one in which the Employer employs Consultants to design The Works and to supervise a Contractor in the performance of the Work.

The construction Contractor is selected on the basis of suitability for the type of work and the competitiveness of proposed price relative to other Contractors. He enters into a contract with the Employer undertaking to perform the Works in accordance with the terms and conditions of the contract for an agreed price.

The Engineer, who is usually one of the Consultant's team, acts as the Employer's expert; as the Employer's Manager (with delegated responsibilities); and as initial Arbiter between Employer and Contractor.

The conventional procedure goes along a path that requires development of sufficient information for Contractors to tender in competition against each other in respect to the whole scope of works that is the subject of the contract.

Almost invariably for large projects, bet not of necessity, the price is on a firm basis, either a lump sum or unit prices with provision for re-measurement of quantities. Provisional sums for certain undefined items may also be included together with escalation for certain agreed items.

The advantages of this conventional approach include the following

The disadvantages of conventional contracts include the following:

1.4 Conclusion

The foregoing is a brief statement on advantages and disadvantages of conventional contract seen in the context of a single contract. When related to a single contract that stands by itself without a great deal of inter-relationship with other contracts, then the advantages of the conventional approach probably outweighs the disadvantages subject to there being sufficient time to allow all the conventional processes, from appointment of the Engineer to award of contract, to take place., Further the conventional and customary approach has, because it is the norm, been found to be acceptable for Public Sector business but there is no doubt that when time is not available and/or where flexibility is needed then the advantages of adherence to all the usual normal processes are outweighed by the disadvantages of this procedure,
The conventional approach is inappropriate when:

One of the alternatives to the ad-measurement form of contract which takes account of the above factors is the construction Target Cost Contract described below.

The 'Target Cost Contract ' Alternative

2.1 Introduction

Two major weaknesses of simple cost-reimbursable contracts are the lack of knowledge of financial commitment by the Employer and lack of incentive for the Contractor to control costs. Both may make it difficult for publicly accountable Employers to demonstrate that they are able to control their financial commitment. In addition, in sate organizations, there is an attitude that cost-reimbursable contracts are a last resort.

However, cost-reimbursable contracts - referred to as construction cost plus contracts, in some text books- , particularly when incentives are incorporated, have many advantages for both Employer and Contractor. These include flexibility to change, fairer apportionment of risk, potential saving in the time and cost of tendering, men-book accounting, and a reduction in the resources of all parties expanded on claims. One of the greatest benefits is the opportunity for the Employer to establish a common objective for both parties to a contract, with the resulting identity of interest and elimination of the adversarial stance between them. It is with these parameters in mind that the Target Cost/Fee type of contract has been developed with the added advantage that design and construction can coincide leading to early completion reducing the inflation effect on Capital cost and to sate extent interest charges on borrowings. A further advantage in the case of a hydro plant or other revenue earning utilities is the benefit of receiving early income from sales.

At the outset of the Contract, targets are agreed in respect of cost, time and when applicable, plant performance and formulas are devised for the distribution between parties to the contract of the gains or losses arising from actual variations to the targets.

2.2 Basic Principles

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