What Is A Target Cost Contract?

How does a target cost contract work?

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.

What are target contracts?

A target cost contract is an agreement between the contractor and a client wherein they negotiate a target cost based before signing the contract on an estimate of the expenses which will be incurred for the project.

What is the aim of target cost contract in construction projects?

The target cost is set early in the project, and then cost savings or overruns are shared based on an agreed formula. The aim is to provide a financial incentive encouraging cost control, rather than to penalise. Bonus and penalty payments are usually capped to prevent over-zealous or adversarial behaviour.

Related Question What is a target cost contract?

What are the differences between cost plus contract and target cost contract?

Cost-plus pricing starts with an estimate of the costs incurred to build a product, and a certain profit percentage is added to establish the price. Target costing integrates the product design, desired price, desired profit, and desired cost into one process beginning at the product development stage.

How are target fees calculated?

  • Target Cost = 1,000.
  • Target Fee = 100.
  • Benefit/Cost Sharing Ratio for cost overruns = 80% Client / 20% Contractor.
  • Benefit/Cost Sharing Ratio for cost underruns = 60% Client / 40% Contractor.
  • What is a target cost model?

    Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. The design team needs to determine the set of product features that customers are most likely to buy, and the amount they will pay for those features.

    What is a priced contract?

    It is a suite of construction contracts intended to promote partnering and collaboration between the contractor and client. The contractor largely bears the risk of carrying out the work at the agreed prices.

    What is a cost plus percentage of cost contract?

    A CPPC contract is one that is structured to pay the contractor his actual costs incurred on the contract plus a fixed percent for profit or overhead (that is not audited/adjusted) and which is applied to actual costs incurred.

    How many NEC contracts are there?

    There have been four editions, the first in 1993, the second in 1995, the third in 2005 and the most recent in 2017. The NEC3 was launched in 2005 and it was amended in April 2013. NEC4 was announced in March 2017 and has been available since June 2017.

    What is a Labour only contract?

    Labour-only contract

    You are responsible for project managing the whole building process yourself if you have labour-only contracts with the tradespeople you hire. The tradespeople will only be responsible for the trade you have hired them to complete.

    What is a guaranteed maximum price contract?

    The guaranteed maximum price is the most a contractor can bill a customer for a project. Also known as "not-to-exceed price" contracts, these agreements require customers to compensate contractors for their direct costs and a fixed fee for overhead and profit, but only to a certain threshold.

    What is negotiated contract?

    A negotiated contract is one where a specific firm is targeted, for a variety of reasons, to perform the contract, even though there is more than one firm that can perform the contract. Under usual circumstances, a competitive tender or proposal would be issued.

    What are the disadvantages of target costing?


  • Often the development process is very lengthy because the product has to go through several alterations to meet the target cost.
  • Reducing cost may sometime hurt employee's morale.
  • Since the approach involves the contribution of several people, it often gets difficult to reach consensus.
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