Target Cost Contract Definition: Everything You Need to Know
A target cost contract (TCC) is a type of contract used in construction projects, where the total cost of the project is shared between the client and the contractor. This means that the client and the contractor work together to set a target cost for the project based on the estimated cost of materials, labor, and other expenses. The final cost of the project is then determined by the actual cost of these expenses plus a predetermined amount of profit for the contractor.
The target cost contract is a popular choice for construction projects because it offers several benefits. With a TCC, the client and the contractor share the risks and rewards of the project, which encourages collaboration and transparency. It also allows for more flexibility in the budget, as any cost savings can be shared between both parties.
There are two types of target cost contracts: fixed price and formulaic. A fixed price target cost contract sets a fixed price for the project, while a formulaic target cost contract allows for adjustments to the target cost based on a formula that takes into account the actual cost of the project and other factors.
In a target cost contract, the contractor is responsible for managing the project costs and ensuring that the project stays within the target cost. This requires careful planning and budgeting, as any cost overruns will result in a reduction in the contractor`s profit.
To ensure that a target cost contract is successful, it is important for both the client and the contractor to have a clear understanding of the project goals and budget. Communication and collaboration are key, and any changes to the project scope or budget should be discussed and agreed upon by both parties.
In conclusion, a target cost contract is a beneficial option for construction projects where a shared goal is to keep costs under control. By encouraging collaboration and transparency between the client and contractor, a TCC can result in a successful project that meets both budget and quality goals.