JCT Target Cost Contract 2024: back to the future?

JCT has released its JCT Target Cost Contract (TCC 2024) with accompanying sub-contracts and guides. JCT’s objectives in issuing this new form are to meet concerns about the current uncertain market and the high level of supply chain failure. As such, this perhaps is JCT “dipping its toes” back into a collaborative procurement vehicle once again, after the JCT Constructing Excellence contract, which was little used.  

TCC 2024 is based on the JCT Design and Build 2024 contract, which means that the risk allocation reflects the Design and Build form, but with the crucial exception that there is not a fixed contract sum at the outset. Rather, TCC 2024 includes a collaborative framework where the employer and contractor share cost savings and overruns against a pre-agreed “target cost”. To do this, TCC 2024 introduces a cost-reimbursable payment model where the contractor is reimbursed for allowable costs plus a fee. A pain/gain share mechanism is then utilised to allocate between the employer and contractor any difference between the actual cost incurred and the target cost. Hence, unlike JCT Design and Build, cost risk is shared. 

JCT suggest that TCC 2024 is used on more complex projects where the contractor is carrying out works and completing design, and where construction costs are in the region of £4-6 million as a minimum. 

Key features 

• Greater visibility: the contractor is paid the “Allowable Cost” and the “Contract Fee”. This then requires the contractor to disclose cost records and calculation methodologies for all reimbursable items. Other JCT forms only give employers limited visibility of these costs.  

• Target cost: baseline of the anticipated costs of the works and established through the Employer’s Requirements, Contractor’s Proposals and a “Target Cost Analysis” provided by the contractor. This sets out a breakdown of anticipated direct and indirect costs and is included as a contract document. 

• Contract fee: a specified fixed percentage or sum which is added to the allowable costs. This reflects the contractor’s profit. 

• Pain/gain share mechanism: an agreed split of any underrun or overrun against the target cost, which can be applied at defined intervals and not only at final account. Savings can be incentivised, whereas other JCT forms impose contractor risk for delays and cost overruns without recognising a contractor’s expertise in buildability.   

Clearly, the TCC 2024 represents a material change of approach from JCT. For those who have grown comfortable with the traditional approaches of JCT, it does, however, offer key benefits, namely:   

• collaborative working – it encourages risk management and joint problem solving thereby reducing adversarial behaviour 

• cost management – transparent costs allow proper verification 

• cost savings – as both parties benefit directly from cost savings, and so commercial interests are aligned in seeking improvements and a reduction in costs. 

However, parties looking to engage with TCC 2024 should note that utilising it will also require a different approach in delivery, with an increased administrative burden. For example: 

• cost reimbursement requires robust cost reporting and thorough audit processes.   

• outturn costs are not ascertained until completion of the works, so for the employer there is a need to ensure the parameters for proper cost reporting, including templates, deadlines and audit trail,  are clearly set out 

• ratios for pain/gain share need to be agreed at the outset  

• risk that participants will not understand the cost reimbursement model or open book accounting, and training may be required 

• risk that participants will simply revert to normal behaviours without appreciating the need for a different approach. Again, training may be needed.  

Conclusion 

JCT is responding to current market trends and concerns by releasing the TCC 2024, which combines the traditional JCT approach with a cost-sharing rather than fixed-cost pricing mechanism. It also seeks to balance this by incentivising the parties to look for savings and efficiencies.   

Initiatives to improve construction delivery are always welcome, and JCT report that 10 per cent of its current sales are for the TCC 2024. Experienced organisations may be prepared for the different disciplines required to operate and manage this form of contract, but it remains to be seen whether this is converted into wider use.