target cost contracts 2.docx

target cost contracts 2.docx

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targetcostcontracts2

CONTINUINGPROFESSIONALDEVELOPMENT

MaximumPeriod3Hours

TARGETCOSTCONTRACTS

By

RogerKnowles

CONTENTS

NewApproach

StandardTargetCostContracts

ReferencetoTargetCostintheContract

WhenShouldtheTargetBeFixed

CalculatingtheTargetCost

AdjustingtheTargetCost

Fee

GainShare/PainShare

TARGETCOSTCONTRACTS

NewApproach

Traditionallycontractsforconstructionworkhavebeenplacedonthebasisofalumpsumbeingpaidtothecontractorforcarryingoutthework.Thissumwillusuallybeadjustedforemployerchangesandallemployersriskitemsprovidedforinthecontractforsuchmattersasdesignerrors.Thecultureisfortheworktobeundertakenbythecontractorwhosubmitsthelowestprice.Inrecenttimesthismethodofprocurementhasfallenintodisreputeinrespectofpublicsectorworkwherebestvaluehasbeenthepreferredprocurementroutewithlowestpricefallingbythewayside.

Itisnowcommonplaceinthepublicsectorwherebestvalueappliesforprocurementsystemstoprovideforpaymenttothecontractorbaseduponitsrecordedcosts.Toensurethatcostsarenotallowedtogetoutofhandatargetforthesecostsisfixedattheoutset.Thetargetisadjustedtotakeaccountofanyemployerchangesandotherpricerisksallocatedtotheemployerunderthetermsofthecontract.Toensurethatthereareincentivesinplacesothatcostsarekepttoaminimumitisusualforthetargetcosttobelinkedtoagainshare/painsharemechanismwhichisfixedattheoutset.Therecordedcostsarecomparedwiththetargetcostandanysavingsharedbetweenthecontractorandemployerinapre-agreedmanner.Inlikemanneranyoverexpenditurecomparedwiththetargetisshared.

StandardTargetCostContracts

Thefollowingcontractsarestandardtargetcostcontracts:

1.PublicSectorPartneringContracts

∙Option2–TermMaintenance

∙Option5-AuthorityDesign

∙Option6-ContractorDesign

2.ICEConditionsofContractTargetCostVersion

3.PPC2000StandardFormforProjectPartnering

ThiscontractprovidesforaPriceFrameworkwhichleavesthepartiestodevisetheirownpaymentmechanism.Itiscommonplaceforacostreimbursablewithtargetcosttobeused.ThereisprovisionforincludinganAgreedMaximumPriceintheFormofCommencementAgreement.

4.NewEngineeringContract

∙OptionC-TargetContractWithActivitySchedule

∙OptionD-TargetContractWithBillofQuantitiescontract

Subcontracts

5.1PublicSectorPartneringContract

∙Option8–SubcontractTargetCostWithCostReimbursable

5.2SPC2000StandardFormofSpecialistContractforUsewithPPC2000

ReferencetoTargetCostintheContract

1.PublicSectorPartneringContract

Option2TermMaintenanceprovidesinclause23.1forthecalculationoftheTargetCostbymeasuringandvaluingtheworkinaccordancewiththeScheduleofRatesreferredtointheAppendix.

Options5AuthorityDesignandOption6ContractorDesign;inclause18.0itstatesthattheTargetCostisindicatedintheArticlesofAgreement.ThereisnomethodprovidedastohowtheTargetistobecalculated.

Option6Subcontract:

Inclause21.0itstipulatesthattheTargetCostisstatedintheArticlesofAgreement.ThereisnoindicationastohowtheTargetistobecalculated.

2.ICETargetCostVersion

TheTargetCostandtheFeearegivenintheAppendixPart2totheFormofTender.

3.ECCContract

TheTargetCostisreferredtoasthetotalofPriceswhichareincludedintheDatasubmittedbytheContractorwithhistender.

4.PPC2000

PartneringDocumentsreferredtointhecontractincludeaPriceFramework.TheGuidestatesinsection5.4thatatthedateoftheProjectPartneringAgreementthePriceFrameworkshouldincludetheagreedamountpayablefortheConstructor’sservices,agreedprofit,centralofficeoverheadsandsiteoverheads.Thisdocumentwhenagreedwillprovideamechanismwhichwillenablethesesumstobecalculated.ItisusualfortheConstructor’scoststoformthebasisforthesumstobepaid.InthedefinitionsectionreferenceismadetoanAgreedMaximumPricewhichisthepricepayabletotheConstructorpursuanttothePriceFramework.ThereisnospecificguidanceastohowitisintendedtooperateandhowtheAgreedMaximumPriceistobecalculated.Thiswillbeamatterforthepartiestoagreebeforethecontractisenteredinto.ItiscommonplacehoweverforthepartiestoagreeaTargetPricetobeincludedinthePriceFrameworkastheAgreedMaximumPrice.

TheAgreedMaximumPriceisstatedintheCommencementAgreement.

5.SPC2000StandardFormofSpecialistContractforUsewithPPC2000

PaymentwillbeinaccordancewiththeSpecialistPaymentTermstobeagreedbytheparties.ThepartiesmayagreethataTargetCostwillformthebasisoftheSpecialistPaymentTerms

WhenShouldtheTargetBeFixed

Thereisnohardandfastruleastowhenthetargetshouldbefixed.Thefollowingprovideexamples:

1.Someclientsopttointroduceanelementofcompetitionintotheprocess.ItisthereforecommonforcontractorstoberequestedtoindicatetheTargetCostaspartofthetendersubmission.Thisisregardedbymanyasbeingcontrarytothespiritofpartneringasitcanleadtoalowestpriceselectionpolicy.

2.AvariationonthismethodisforthecontractortoberequestedtosubmitwiththetendertheamounttobeincludedintheTargetCostforoverheadsandprofit.

3.OnmostpartneringcontractsitiscustomaryfortheTargetPricetobefixedaftertendershavebeenreceivedbutbeforethecontractissigned.SomecontractssuchasthePPC2000includeaprovisionfortheTargetCostreferredtoastheAgreedMaximumPricetobeincludedinthePrePossessionAgreement.

4.Onmostcontractsitisusualforavalueengineeringprocesstobeundertaken.Itcantaketheformofafairlymajorexerciseduringtheearlydesignstageandbeongoingduringtheremainderofthedesignandconstructionphase.IftheTargetCostisfixedbeforethefirstmajorvalueengineeringexercisehasbeenundertakenitislesschallengingforthecontractortoachieveacostfortheprojectwithintheTargetCost.ThereasonbeingthatduringthefirstmajorvalueengineeringphaseasignificantamountofcostmaybetakenoutwhichwouldbenefitthecontractoriftheTargetCosthasalreadybeenfixed.

CalculatingtheTargetCost

ThereareseveralmethodsofcalculatingtheTargetCostandincludethefollowing:

1.Measuredquantitiesmultipliedbyunitrates

2.Costperunitegbedspace

3.Employinganelementalcostanalysistechnique

4.Floorareamultipliedbycostpersquaremetre

Oftenabuildingblockapproachisemployedcomprising:

1.Unitcost

2.Sumincludedforrisk

3.Overheads

4.Profit

UnitCosts

Theunitcostsmaybecalculatedusingascheduleofratesforworkwhichisinclusiveoflabour,materialsandplant.Measuredquantitiesfortheworkarethenappliedtotheratestoarriveattheunitcosts.Wherethetargetisfixedatastagewhenlittledesignworkhasbeenundertakenamorebasicapproachisoftenusedbyemployingthefloorareaofthebuildingandapplyingaratepersquaremetreforthelabour,plantandmaterials.Itissometimesconvenienttocalculatetheareasofthevariouselementssuchascladdingandroofsofthebuildingandapplyaseparateratepersquaremetreforeachelementinrespectofthecostoflabour,plantandmaterialstoprovideatotalcostforeachelement.Thesecostsshouldalwaysbeinclusiveofwhatareoftenreferredtoassitepreliminariessuchasthecostofsiteaccommodation.

Wherealargepartoftheworkistobedesignedandconstructedbysubcontractorstheunitcostsareoftenbuiltupusingquotationsreceivedfromthesubcontractorswhowillbeundertakingthework.

RiskAllowance

Thecontractshouldbeveryclearastohowtherisksaretobesharedbetweentheparties.Thisisoftenachievedbyusingariskregister.Inbuildingupthetargetpriceasumshouldbeincludedinrespectoftheriskswhicharetobebornebythecontractor.Forexampleitisusualintimesofrelativelylowinflationforthetargetpricetoincludeforinflation.Onmanycontractsthecontractorisrequiredtoincludeinthetargetpricetheestimatedcostofanygroundconditionswhichmaybeencounteredwhethertheyareforeseeableorotherwise.Afinancialprovisionshouldbeincludedinthetargetpriceforthistypeofrisk.Wheretheextenttowhichgroundconditionsareanticipatedtobeunfavourableisunknownbeforeworkcommencesitisbetterforaprovisionalsumtobeincludedinthetargetpricewhichcanbeadjustedatalaterdatetotakeaccountofthecontractor’sactualcosts.Itshouldhoweveralwaysbemadeclearattheoutsetastowhichofthepartiesbearstherisk.

HeadOfficeOverheads

Theheadofficeoverheadsareusuallyprovidedforseparatelyinthebuild-upofthetargetprice.Itneedstobemadeclearattheoutsetwhichcostsareincludedunderthisheadingandwhicharesitecosts.Forexamplequantitysurveyorsmaybesitebasedandincludedintheunitcostswhereasthecommercialdirectorandchiefquantitysurveyormaybeheadofficebasedandformpartoftheheadofficeoverheads.Itisusualfortheheadofficeoverheadelementtobecalculatedbytheadditionofapercenttothetotaloftheunitcosts

Profit

Theprofitistherewardpaidtothecontractorforsatisfactorilycompletingthework.Itisusuallycalculatedbyaddingapercentagetothetotaloftheunitcosts,riskandoverheads.NormallyprofitisthemajorelementoftheFee.

AdjustingtheTargetCost

ThecontractwillusuallyprovidedetailsastohowtheTargetCostistobea