JCT Target Cost Contract 2024 – Is the industry crying for help?

The JCT 2024 suite of contracts is the JCT’s first major update to its contract forms since 2016. It is largely considered to be ‘evolution, not revolution’, with the majority of commentary on the changes focusing on the updates that have been introduced to address some (but not all) of the requirements of the Building Safety Act 2022.

That said, the JCT Target Cost Contract 2024 (“TCC 2024”) is a significant development; it is the JCT’s first attempt at a Target Cost Contract. In producing this form, it seems like the JCT is making a move on the NEC’s near monopoly on publicly-procured construction and engineering projects – certainly, the philosophy behind a target cost contract lends itself well to meeting many of the objectives of the Construction Playbook¹.

However, the TCC 2024 may also be seen as the Contractor market’s plea for help; a recognition that the traditional model – where a Contractor gambles on the strength of a lump sum contract with terrible margins (in 2024, the average profit margin of the top 100 Contractors in the UK was just 1.87%²) – is broken. This message is supported by the JCT itself as it says “the ethos of this form is risk sharing … this conceptually is apposite for the current difficult marketplace”³.

Might the TCC 2024 be the solution?

What is a Target Cost Contract?

In the world of construction and infrastructure projects, target cost contracts have long been a popular procurement method. These contracts are a variant of cost-reimbursable agreements (in which the Contractor is reimbursed for the actual costs of completing the Works and paid an additional fee for overheads and profit). However, what sets target cost contracts apart is their "pain-gain" mechanism, which seeks to align the interests of both the Employer and the Contractor.

Under a target cost contract, the Contractor's actual costs are measured against a pre-agreed target cost. If the actual costs are below the target, the Contractor shares in the cost savings (gain share). Conversely, if the actual costs exceed the target, the Contractor shares the overrun with the Employer (pain share). This mechanism is designed to incentivise both parties to collaborate effectively, manage risks, and control costs throughout the project lifecycle.

Target cost contracts strike a balance between lump sum contracts (where the Contractor bears most of the risk) and traditional cost-reimbursable contracts (where the Employer assumes the majority of the risk). They are particularly well-suited for complex projects with significant cost fluctuations, such as major infrastructure and engineering Works. Indeed, high-profile examples of their successful application in the UK include Heathrow Terminal 5, the London 2012 Olympic infrastructure, The Elizabeth Line, the Thames Tideway Tunnel, and Hinkley Point C.

How is the TCC 2024 structured?

The TCC 2024 is based on the JCT Design & Build 2024 (“DB 2024”), sharing a similar structure and contents (other than the pricing model). The key parties are still “Employer”, “Contractor”, and “Employer’s Agent”.

Other than in relation to the pricing model, the risk profile is very similar to the DB 2024. Indeed, in the same way as the DB 2024, the Contractor is responsible for completing the design of the Works in accordance with the Employer's Requirements. We anticipate that law firms will approach the risk profile in much the same way as the DB 2024, with schedule of amendments making the same fundamental changes to the allocation of risk.

How does the TCC 2024’s target cost mechanism work?

Under the TCC 2024 we have the following concepts:

• Target Cost – the agreed estimated cost of completing the Works, subject to adjustments to create the Adjusted Target Cost (see below);
• Allowable Costs – the categories of costs that the Contractor may incur in carrying out the Works (calculated as set out below);
• Contract Fee – a fixed sum or a percentage of the Allowable Cost, to cover the Contractor's overheads, profit, and other agreed costs that are not included in the Allowable Cost
• Difference Share – the “pain/gain share” mechanism allowing the parties to share the financial consequences of any difference between the actual cost of the Works and the Adjusted Target Cost.

Adjusting the Target Cost

It is crucial for Employers to understand that the Target Cost is not set in stone – this is not to be confused with a guaranteed maximum price. The Target Cost may be adjusted by specified grounds set out at Schedule 1. These include amounts agreed in respect of changes, agreed acceleration costs, any agreed fluctuation provisions, etc., as well as a list of “Relevant Events” as defined in the DB 2024. Care is needed when agreeing this grounds for adjustment, for it is the Adjusted Target Cost which is used for calculating the Difference Share.

Allowable Costs

Again, it is important to note that Contractors can only recover incurred costs if they fall within the Allowable Costs (which are set out in Schedule 2). Whilst the detail is to be agreed between the parties, the categories are:

• General Matters – costs directly related to the Works, such as labour, materials, and plant;
• Sub-Contracted Work – amounts due and payable to sub-contractors under their respective sub-contracts;
• Management and Design Staff – cost of the Contractor's management and design staff on-site;
• Direct Workforce – cost of the Contractor's directly employed workforce;
• Materials and Goods – cost of materials and goods used in the Works;
• Plant, Services, and Consumable Stores – cost of plant, services, and consumable stores provided by the Contractor; and
• Other Sundry Costs – includes charges for statutory providers, utilities, office furniture, and consumables.

Contract Fee

The Contract Fees is the Contractor’s overheads and profit amount. It may be stated as a fixed sum or a percentage of the Allowable Costs actually incurred. Employers should be aware, setting the Contract Fee as a lump sum does not fix it at that amount – the Contract Fee is capable of adjustment in line with the Adjusted Target Cost. A percentage Contract Fee follows the amount actually incurred. In addition, any agreed fluctuations provisions may also affect the Contract Fee.

Difference Share

This is the key pain/gain share mechanism allowing the sharing of the financial consequences of any difference between the actual cost of the Works and the Adjusted Target Cost.

Calculating the Difference Share involves a few steps:

1. Determine the Adjusted Target Cost
2. Compare the actual cost of the Works (Allowable Cost plus the Contract Fee) to the Adjusted Target Cost.
3. Calculate the difference – If the actual cost is less than the Adjusted Target Cost, there is a cost saving. If the actual cost is greater than the Adjusted Target Cost, there is a cost overrun.
4. Apply the Difference Share – The Employer and Contractor share the difference (whether positive or negative) in agreed proportions.

The parties can agree to pay the Difference Share either as part of Interim Payments or the Final Payment. Employers will need to take care here – whilst paying it as part of Interim Payments may seem beneficial in terms of cash flow, when the final account is calculated, it could feasibly work out that there is actually a negative payment due to the Contractor (ie that the Contractor has in effect been over-paid). Very few Employers will want to be in a situation where they then need to rely on clawing back sums from Contractors at the end of a project – and we expect Lenders and Funders would take a very dim view of this possibility as well.

There is also the extent of project monitoring that would be required to deal with the monthly adjustments to the Target Cost, as well as the uncertainty there may be around Contractors bringing late loss and expense claims.

Thinking of adopting the TCC 2024? Here’s what you need to consider

It is clear that the TCC 2024’s pricing model points to an open-book, transparent approach to pricing, with collaboration at its heart. Successful management of the Target Cost provisions will need proactivity and collaboration, along with the early identification – and addressing – of risks as/when they arise. In the context of an industry already familiar with the DB 2024 on which the TCC 2024 is based, this philosophy may make the TCC 2024 an interesting proposition. We especially think the TCC 2024 may be a good option where:

• Programme is key – the parties may be more willing to proceed on the basis of a Target Cost that is not as fully developed as a lump sum would need to be, on the basis of a fair and reasonable pain/gain share going forward (compare this with construction management, which is often suggested in time-sensitive projects, which offers far less cost certainty and removes the crucial single point of responsibility);
• Rescuing projects – where a project has stalled due to Contractor insolvency, offering a pain/gain share may be a strong incentive to an incoming Contractor being asked to take on an incomplete project;
• Employers are looking to create a pipeline of work and develop strong working relationships with a small number of Contractors – if Contractors know they are going to be paid a fair amount for a good job and have the opportunity of earning more on top, they are more likely to put better resources into that relationship as well as exploring innovative solutions.

But before the industry switches across from the omnipresent DB 2024, here are some points to consider:

• Lenders, Funders and other investor stakeholders often dictate procurement strategy, and are notoriously slow to change. Even when the developer and Contractor markets may be keen to try out the TCC 2024, their financial backers may not be. Certainly, Lenders and Funders may expect and pain share to come out of their Borrower’s own equity, which could have impacts on feasibility.
• Record keeping, financial verification and contract administration are crucial to the successful adoption of the Target Cost model – from the Developer’s own project team, the Contractor’s cost management teams, to a Funder’s project monitor – all stakeholders will need to actively manage and verify all pricing rigorously. This may necessitate upskilling of the usual intermediaries and more detailed financial due diligence on a regular basis.
• The pain/gain share provisions must be carefully considered. If the Target Cost is too high, the gain share will be too easy to achieve. Similarly, the share proportions need to be tested rigorously to ensure they do indeed incentivise the right behaviours. Should the pain share ratchet up the worse the Contractor performs? Other decisions include how to state the Contract Fee, and how the Difference Share is to be paid – whilst these decisions set the tone of the relationship from an early stage, there is potential for disagreement even before any contract is signed.

Will the TCC 2024 be popular?

JCT is fighting two fronts when it comes to the adoption of the TCC 2024:

Firstly, can the JCT’s ‘flavour’ of Target Cost pricing replace that of the NEC suite – especially when it comes to publicly procured projects? I think that it may well steal some market share here, not least because of the industry’s familiarity with the ubiquitous JCT DB 2024.

Secondly, will private sector Employers (and, more importantly their Lenders or Funders) consider adopting the TCC 2024 over the JCT DB 2024? This one is harder to predict, but I do think that the TCC 2024, if the thresholds are appropriately set, and the parties go into a project with the right mindset, could go a long way to foster collaboration and trust between the parties. That in turn creates relationships that lasts across a pipeline of projects, encourages an increase in R&D and the use of innovation (especially modern methods of construction), and should ultimately deliver more successful projects on a more regular basis with fewer Contractor insolvencies – whilst this will need a significant change in mindset in all stakeholders, it could just be exactly what the industry needs.

¹https://assets.publishing.service.gov.uk/media/6312222de90e075880923330/14.116_CO_Construction_Playbook_Web.pdf
²https://www.theconstructionindex.co.uk/market-data/top-100-construction-companies/2024
³https://corporate.jctltd.co.uk/wp-content/uploads/2025/06/JCT-Target-Cost-Contract-Introduction-Summary-Article.pdf