Contractors and developers must understand new JCT Target Cost Contract

The JCT recently released a new contract – Target Cost Contract– taking the basic structure of the popular JCT Design and Build Contract, but changing the basis of payment entirely from the current fixed price model to a cost reimbursable model.

Under a cost reimbursable model, the contractor is reimbursed for actual costs incurred, plus a fixed overhead and profit. In the Target Cost Contract, the parties share pricing risk through a target cost mechanism, setting out the contractor’s responsibility to either pay “pain” or earn “gain”, depending on whether final costs come over or under the target cost (with the target cost adjusted for relevant matters). JCT have said that this has been produced in response to market demand.

Anne-Marie Friel, collaborative contracting and construction expert at Pinsent Masons, said: “For users who are ready to make the mindset shift needed to work in a different way, the JCT target cost contract has great potential to drive better project outcomes and to encourage collaborative working.” However, she added that “introducing a target cost contract will not be a magic bullet and needs to be approached in full awareness of the other features of successful collaborative contracting.”  If this is not possible to achieve, this could result in risk for both parties.

In recent years, the JCT has publicly acknowledged an increased commitment to collaboration. This was reflected in the 2024 updates to its contract suites. However, to truly contract in an open and collaborative way, cost reimbursable models are more likely to work successfully. This is because fixed price models do not generally encourage the open sharing of commercial information and are based on an assumption that claims will need to be raised by the contractor to increase the fixed price in any event of change or any other unpriced events occurring, which can lead to defensive behaviours being adopted by parties.

The popular fixed price design and build model works best when the parties to the contract know exactly what they need from the outset of the procurement and are therefore able to pass this specification fully to the contractor to complete the design. If there is a high level of uncertainty in the design and/or a high likelihood of substantive changes being instructed, this undermines the risk transfer to the contractor and erodes price and programme certainty.

For developers, navigating commercial and regulatory uncertainty, in fast moving sectors it is increasingly important to maintain flexibility in the construction design and management process. Friel says “In fast moving sectors, we are seeing a trend whereby fixed prices are being provided on a largely provisional, based on the finalisation of design, which undermines the pricing certainty.” At the same time, it is increasingly difficult to find contractors who are prepared to price the risk of uncertainty. Friel said: “We are in a very busy construction market, with increasing pressure on finite resources, at a time when construction projects are becoming ever more complex and dynamic. Many contractors (and their shareholders) have become averse to fixed price contracting and are increasingly reluctant to see businesses committing precious resources towards delivering projects which run the risk of generating significant losses against a fixed price.”

Cost reimbursable contracts can offer an attractive potential solution. However, moving from a fixed price contracting mindset to a cost reimbursable approach requires a mindset shift by all parties to be successful as it’s a fundamental change of approach and requires more collaborative working models to be successful.

These features may include investment in people and behaviour, strong contemporaneous contract management capability, strong governance underpinning decision making, and a general open book approach.,

“The JCT 2024 amendments are a helpful start towards achieving some of these but may need to be taken further still to really ensure that the benefits can be felt. It is important for employers and contractors to understand that this is a wholly different commercial approach, and requires much more transparency,” said Friel.

Parties will generally find that the use of a target cost model will permeate other commercial discussions on liability, as it is a fundamental shift in commercial approach. For contractors, understanding the costs that are incurred but are not recoverable, is one of the commercial lessons to learn.

More generally, Mike Allan, a development construction expert at Pinsent Masons warns of a potential lack of enthusiasm for uptake of this new form by developers and funders, saying:

“JCT have said that there is a market demand for this. That remains to be seen. Many commercial real estate funders and developers are wedded to lump sum, design and build with full risk transfer. A move to a more collaborative model of contracting with shared risks may not be a road they are willing to travel unless demand/supply for contractor resource forces their hand.”

Regardless of the scepticism, the publication of the Target Cost Contract is indicative of a trend towards collaborative contracting, supported by extensive data, that can no longer be ignored by the market.

The new approach follows concerns raised in the Private Sector Construction Playbook, titled Trust and Productivity (84 pages/4.75 KB PDF) which was published to address persistent productivity challenges in UK construction. The report critiques the traditional fixed price design and build model, highlighting its tendency to create adversarial relationships, suppress innovation, and shift excessive risk to contractors. It argued that this model often leads to poor outcomes, including cost overruns, delays, and quality issues, especially when used inappropriately for complex or uncertain projects. Instead, the playbook advocates for more collaborative procurement approaches, such as early contractor involvement and shared risk/reward mechanisms, to improve productivity and trust across the supply chain. This aligns closely with the JCT Target Cost Contract.