Jacob Austin 00:00:00 Hi all. Jacob Austin here from QS.Zone and welcome to episode 111 of the Subcontractors Blueprint, or eleventy-one, as a certain Mr. Baggins would call it. This is the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. And today's episode is the first slice of a two part review of the JCT Target Cost Subcontractor 2024, which has just been released in June 2025. And for this week, we're going to look at some principles of what target costs contracts are about. How are the Jets new spin on a target cost contract stacks up, and some key features of these contracts that you need to know about as a subcontractor. And in next week's episode, we're going to follow on from that with some key risks and challenges that you ought to consider prior to starting a target cost contract, and follow on from that with some key information about pricing it right and protecting your margin. And as ever, if you're new to the show, then please do subscribe for more user friendly advice on all things subcontracting.
Jacob Austin 00:01:21 So let's dig in. As I said in June 2025, the JCT that's the Joint Contracts Tribunal, released a new form of subcontract the JCT target cost subcontract 2024. And yes, it's badged 2024 but released in 2025. There's an age related joke in there somewhere, but I've not been quick enough to figure it out today. This TCC sub is part of JCT's new target cost contract family, and it sits alongside the Target Cost contract, which is the main contract version. It's designed to speak to that main contract, albeit that when the main contractor is operating the target cost contract, they're not mandated to use the target cost subcontract with all their suppliers and its JCT spin on the risk sharing and collaborative approach that we've seen under the widely used any see main option. See now as it happens. Target cost contracts are my least favorite of any of the contracts. It's not the whole hog of cost reimbursement, but it asks the contractor to take a degree of risk in setting a lump sum price that they've then got to come in with a pretty narrow window of hitting in order to make any extra margin on it.
Jacob Austin 00:02:39 They tend to be seen as reasonably low risk, so they attract low margins, but the risk of the contractor getting the contract some absolutely spot on so that they can come in just below it and make that fabled slither of extra margin, I think is fairly slim. And depending on how the main contract is set up, the contractor can end up taking on a lot more pain if their original estimate fell short of the cost. With, as I say, only that limited opportunity to make any extra margin on the job. But for certain trades, particularly if you're involved in the bigger packages of a typical build, then you're likely to come up against this subcontract. So I'm not here to tell you to flat out avoid working under it. Instead, over the next couple of episodes, I'm going to try and tell you how to do it right and how to protect yourself whilst you're at it. So let's put some meat on the bones as to what target cost contracts are all about. So it's a form of cost reimbursable contract with a bit of a twist instead of a fixed price for the work.
Jacob Austin 00:03:44 The parties agree on a target cost upfront. The contractor or the subcontractor in our case gets paid the actual costs incurred for doing the work, plus an agreed fee, and that fee covers overheads and profit at the end of the job, and sometimes during the job itself. The actual cost is compared to the target cost, and at final account stage any difference is shared between the parties. Often during the job as it's unfolding, if your costs are less than the target, then you'll get paid the lesser of the two, so you'll get reimbursed what you spent plus your fee. But going back to that final account and the sharing of the differences, that works on the proviso that if the work is under the target cost, by the time the job is completed, then there are cost savings or gain. Those savings are split between the contractor and the client, or between the subcontractor and main contractor at our level. And often there's a pre-agreed proportion that's designed to give both parties a little bonus for being efficient.
Jacob Austin 00:04:48 If the work exceeds the target cost, then the overrun or the pain is also split, meaning that the contractor and the client each swallow a percentage of the extra cost. In other words, you don't get paid for all of the cost overrun. You have to stand some of it yourself, which can get painful that pain and gain share. Mechanism is a hallmark of target cost contracts. The idea is to get everybody aligned and pushing for the same outcome. Everybody benefits from finishing cheaper. Everybody suffers if it ends up pricier. Hopefully encouraging teamwork when it comes to cost control. But as I alluded to earlier, the pain and gain share mechanisms are often limited to within a few percent of the target cost. Let's say it's 5% either side, which in my experience is quite common. And that works on the proviso that say your costs come in at 95% of the total, then you'll get paid your full cost, your overhead and profit on that cost. And then the remaining 5% is shared between the parties.
Jacob Austin 00:05:50 So you've got a potential 2.5% extra to make. Often it works the same way on the pain or the lost share. So if you overspend up to 5%, then the client will give you half of that overspend back to you, but you'll have to stump up the rest yourself. But then the further question is what happens when you get to 6%? Or quite often, an overspend? Beyond the target range will mean you copping any additional percentage yourself. So in effect, you lose 1% of your contract sum for every percent you go over the target. And what happens if you save more money? Do you get to keep that? Well, that's often not the case. Quite often these arrangements are set up so that if you dipped below the 5% of your target price, the client will take any additional saving back off you. And this is what I mean by having a narrow window to work within to make any extra money. Now, these percentage margins will likely vary from job to job. You can't just pick up two target cost contracts and assume that they're the same.
Jacob Austin 00:06:54 Other common features of target cost contracts include an open book approach and pre-agreed definitions of allowable costs. Sometimes the open book approach applies to your build up as well as the costs. As the contract unfolds, that might mean that for any packages, you're not delivering yourself, that you have to tip up quotations to justify how much they're going to cost. And certainly when you get to evaluating the actual cost versus the target, you'll be expected to show the main contractor all of your receipts, timesheets, invoices, and so on to justify your cost for the work. And the contractor will have the opportunity to disallow some of your cost if they fall outside of an agreed list of cost categories. Sometimes that might be if the work is deemed inefficient. Some contracts will outlaw revisits to certain areas or rework altogether. And certainly anything that's outside of the project's scope is likely to not be paid. Those become disallowed costs and it comes out of your pocket. So to summarize what goes into a target cost contract in one list, we no longer have a fixed price lump sum.
Jacob Austin 00:08:06 Instead, we're fixing a target at the start of the contract. Payment is on the basis of cost plus fee, which is on an actual or allowable cost basis, plus a fee, which could either be a fixed amount or an agreed percentage, which represents your overhead and profit. We have open book accounting, so you must keep detailed records and allow for audit and inspection of your costs to verify that they're legitimate. There is the pain and gain share, which is the mechanism to split underspend or overspend between the parties as per agreed percentages. Then we have target adjustments so the target isn't set absolutely in stone. And in the same way that you would administer changes under a lump sum contract, you'll administer changes to the target cost. So if your contractor issues additional work instructions, then your target moves with those instructions, and the final assessment to determine pain and gain share is not from the original target, but that adjusted target. And it takes into account the difference between your finally adjusted target and your final cost.
Jacob Austin 00:09:16 Of course, if you've worked under NSC contracts, which would be option C or option D under either NSC three or NSC four, these kind of agreements will sound familiar. NSC has done these target cost options for years, so the concept isn't brand new. This is just JT's take on it. And as the JCT puts it itself, the ethos of a target cost contract is risk sharing in a way that both the employer and the contractor can benefit from their joint efforts for a successful outcome. Let's zoom in then on the JCT target cost subcontract and I'll refer to that as TCC sub. As I said earlier, it was released in June this year alongside the main target cast contract, and it's designed so that main contractors can have a matching target cost arrangement with their downstream subcontractors. But the JCT specifically acknowledges that using a target cost approach may not always be suitable when it gets to second tier, i.e. subcontractors, so the JCT gives flexibility. The TCC sub can be used with or without subcontractor design, and it can even be adapted more like a lump sum or a measurement subcontract if needed.
Jacob Austin 00:10:33 In clause 3.4 of the main contract TCC, it literally says to use the target cost subcontract where it's considered appropriate, implying it's not mandatory to cascade it down to every trade. And so for subcontractors, that means that the main contractor has got the option to either keep you on a traditional basis, which might be fixed price, or it might be re measure or to put you on a target cost basis. Under this new form of contract and some main contractors, to be honest, might stick with what they know. Fixed price subcontracts, but they might also get client requests to place orders of a particular size, or perhaps even certain orders that they've predetermined under a target cost contract, and managing these mechanisms for the main contract itself and for subcontracts will likely prove a bit of a headache for the contractor. So they're likely to limit them either in line with the contract or just to introduce it for key specialist packages, where the main contractor might think there's some opportunity for potential collaboration to result in cost savings. We're likely talking big ticket risk heavy work packages where the scope is undefined at tender stage or it's evolving, or an M&A package where a clever subcontractor could find more efficient ways to deliver, and any savings would be shared between the three parties being the client, the contractor and the subcontractor in that case.
Jacob Austin 00:12:03 So in some instances, a target cost subcontract could make sense to everybody if it's managed right. So if you're asked to sign a TCC sub, it means the main contractor is looking to share risk and reward with you on that package. It's not business as usual because your payment will follow the target cost model. You'll be reimbursed for your monthly allowable cost, plus your contract fee or a proportion of it, and then the final account will be settled up with that different share calculation, the pain and gain share for the variances between the target and your actual spend. It's important to note that the subcontractors pain and gain share feeds into the main contracts, so the main contractors allowable cost includes what's paid out to the subcontract supply chain. That means if you come in under your target. The main contractor also saves money in their deal to the client and depending on the position of that contract, may either be shared back to the client or it may just reduce the contractor's cost if they're overspending themselves. Conversely, if you overspend, then the main contractor's cost is higher too, which may contribute to their pain or erode their gain share.
Jacob Austin 00:13:16 So in effect, the contractor might share the benefits of any savings with you, and you might share any overspend and push the contractor's costs up. That alignment is probably good for Project Unity, but it does make the accounting and the cash flow interesting. One legal commentary noted that managing a target cost mechanism in both the main contract and the subcontractor at the same time, will require a lot of care. The impact on cash flow isn't straightforward, so if there is an overspend, the main contractor might hold back some payment for you for your share of the pain whilst they're simultaneously dealing with reduced payments from the client for their share. Then tracking. Who owes what. To who. At interim and final account stages can become a bit of a stumper. The TCC sub allows both parties to choose whether to apply the pain and gain share calculation at interim payments, or just at the final account stage, albeit that might be mandated by statements in the main contract. This is a critical point for you to check in your subcontract.
Jacob Austin 00:14:18 Will they calculate that pain and gain periodically so you're settling up as you go or just once after completion? There are pros and cons to each interim. Pain and gain means you never stray too far from the target financially. There's no big surprise at the end, but it also means if you're overspending, your payments get docked in real time, which can hurt your cash flow. On the other hand, the end of project pain gain means you get paid actual cost during the job, but if you overshoot the target, you might find yourself writing a big check to the contractor to settle up the final account for a heavily reduced final payment. There was a notable neck case between Doosan and Pure and Interserve, where the contractor had been paid all of its costs throughout the job, and it was only at the end that they calculated the overspend, leaving the client trying to recover money after completion. Not fun for the client and risky if the contractor had gone bust or disputed it. So the JCT lets the parties decide how to approach it on a job by job, contract by contract basis.
Jacob Austin 00:15:25 Moving on now to some of the key features of the TCC sub. Let's start with the most obvious the target cost. This is the agreed estimated cost of your scope, and it's set at the start. It's broken down into a target cost analysis. And this will take the place of your traditional bill of quantities or subcontract some analysis under the more traditional JCT contracts. JCT recommends making this as detailed and transparent as possible. The more the contractor understands your build up, the better the target cost is adjusted for delays that you're not responsible for and for variations via mechanisms set out in schedule one of the contract. You could think of it as like a flexible budget. It's not fixed forever, but only specific events can change it. Next, we have the allowable cost. This is the actual cost of you doing the work that you can get reimbursed. The contract spells out exactly what counts as allowable cost in schedule. Two common categories that you'll see in this section are your own labor as the subcontractor on site materials, plant payments to other subcontractors or sub subcontractors, and site overhead costs such as cabins, site managers and bits of attendant plant only costs fitting in those categories and that are reasonably and properly incurred in the completion of your work are going to be paid.
Jacob Austin 00:16:54 Anything outside of it will sit as a non recoverable cost and it comes out of your pocket. So let's say you bought some incorrect materials that didn't meet the specification and only after installing some of it did you realize the issue or the cost of buying those incorrect materials would sit outside of your recoverable cost. And it's likely as well that the rework involved in taking out what you did wrong and putting it back to the contract specification would also be excluded. Now, whilst the NEC specifically calls these disallowed costs, the JCT doesn't label them separately and instead it only specifies what your allowable cost is, and it does that narrowly and excluding certain items to recover your allowable cost, you'll need to substantiate everything you spend. So good record keeping here is an absolute must. The contractor or the SHS will likely and is entitled to audit your records. Picture an auditor combing through your materials, invoices and timesheets. That's the level of open book that we're talking. So you need to set out from the start to be able to provide that level of detail.
Jacob Austin 00:18:04 And it's important that you do, because any cost which cannot be reasonably substantiated is not payable. So potentially no receipt is no reimbursement. The contract fee. This is basically your overheads and profit margin for the job under the TCC sub. The fee can be either a fixed lump sum or a percentage of the allowable cost. If it's fixed, then that means it's essentially ring fenced, so you're guaranteed to take home that amount of fee whether your costs are up or down against the target. If it's a percentage, each payment you get includes that percentage on top of the base cost. If it's a fixed sum, then you typically get installments, or you can agree another mechanism for that to be paid to you. There are also provisions that can be introduced to adjust the fee if the target cost changes significantly. The contract fee is where your profit lives, so negotiating this well is the key. There'll be more on that next week. The pain and gain share or different share mechanism defines how any difference between the actual final cost, plus the fee is adjusted against the adjusted target cost.
Jacob Austin 00:19:16 The default mindset is a 5050 split, but the contract allows you to agree a different percentage for banded tiers. For example, the first 5% split 5050. Any further savings 3070 or overspend up to 10% 5050 and beyond 10% 0 to 100. This is where you'll see the cap that is set on the pain or gain. It's more than common to see the contractor's liability capped beyond a certain overspend, which is like what we just described beyond a 10% Percent overspend. The split changes to 0 to 100 and therefore it becomes effectively a guaranteed maximum price at that point. This limits the contractor and therefore the client's exposure, and it therefore puts you on the hook for everything above that threshold. And of course, the game share is often treated in the same fashion. The client doesn't want to hand out an unbound unlimited bonus, so it's likely if you save below a particular amount that you're handing the money back to them. Always check what those percentage splits are and any caps or bands in the contract particulars. This is where you're seeing how much risk you hold versus your likely payoff.
Jacob Austin 00:20:31 If you can make savings, as mentioned a moment ago, target cost contracting means open book accounting. The TCC sub requires you to keep comprehensive accounts of all your costs, and you'll likely need to submit regular cost reports, the main contractor or an auditor that they appoint has rights to inspect your books and verify your costs. This is nothing personal, it's just how the client and the contractor ensures they're only paying for true costs. As a subcontractor, you might be used to perhaps only giving lump sum quotes, so it might feel invasive and it means you might be sharing previously confidential information such as pay rates, supplier prices, maybe even internal overhead calculations. This could be a cultural shift for you, so you need to make sure that you and your team are ready for the level of transparency that you need to display. On the plus side, if you've been diligent and efficient about your approach to logging costs and justifying them, then the records are going to prove it and you'll be able to claim every penny you're due.
Jacob Austin 00:21:39 But sloppy accounting and missing paperwork can hit you directly in your wallet here. Just as a thought to us, we're talking open book. Open book shouldn't necessarily mean that your proprietary rates and confidential information becomes common knowledge on the marketplace. So you might consider negotiating a confidentiality agreement or an NDA so that sensitive cost data is seen only by the people that need to verify it and not shared to other suppliers, perhaps. Next we have adjustment events. Under TCC sub, there are clauses that allow for variations and delays that aren't your fault. For example, relevant matters that give iate entitlement with loss and expense. These are just the target cost and it's important that you use these mechanisms. So if the client piles on extra work, your target cost goes up in the same fashion and at the same time you'll adjust your fee. With these, you need to follow the prescribed contract procedures. That means notifying variations, submitting quotes or estimates for changes, documenting delays, and documenting the costs. If you don't adjust the target, then you could be losing out on gain share or potentially having to foot the cost for overspend, which you ought to have recovered.
Jacob Austin 00:22:59 And in reality, that means you've almost got two valuations in one to carry out, because all the while you're carrying out the traditional style valuation of adjusting the lump sum. And alongside that, you've got the actual cost valuation akin to your cost reimbursement contract, and you've got to run the two things in tandem and at the end, take one from the other to get the final result. And that means that a target cost subcontract can be a lot more work than a traditional subcontract. You're going to be admin heavy and you need to set up to deal with that from the start. Okay, so we're going to park it there for this week as we've got to about the end of the new mechanics involved in a TCC sub. But we'll pick up again next week to discuss risks and challenges and how you can approach a target cost contract to make it work for you. Hopefully you'll now have a good idea of what target car subcontracts are all about, and you can decide how to approach them from an informed position.
Jacob Austin 00:24:00 My mission with the podcast is to help the million SM contractors working out there in our industry. If you've taken some value away from today's episode, then I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at. For more information, or you can check us out on all your favourite Socials again at QS.Zone! Thanks all! I've been Jacob Austin and you've been awesome!
