Target Cost and the Contractor’s Share

NEC target cost is the mechanism behind Options C and D: the Contractor's tendered price becomes a target, and the final cost is compared with it. The Contractor's share is its portion of the difference, paid to it if there's a saving and paid by it if there's an excess.

The share isn't an add-on to monthly payment. It is worked out at set points, using figures that have moved a long way since tender. This guide covers NEC4 ECC, with NEC3 numbers noted, and belongs to the NEC main Options section.

The two figures being compared

	The target	The final cost
Contract term	The total of the Prices (Option C), or the Total of the Prices (Option D)	The Price for Work Done to Date
What it contains	Tendered lump sums or remeasured Bill, plus or minus compensation events	Defined Cost plus the Fee
What moves it	Compensation events; under Option D, measurement too	Actual cost, Disallowed Cost and the Fee

Both sides of the comparison include the Fee, so make sure you compare like with like. A common mistake when reporting is to compare Defined Cost alone against the target, which flatters the position by the size of the Fee.

How the target moves

The target is rarely the figure agreed at tender. It changes through:

• Compensation events. They are shown as changes to the Activity Schedule (63.14 for Option C) or the Bill (63.15 for Option D).
• Measurement, under Option D. The final target depends on completed quantities.
• Accepted Contractor proposals. These don't reduce the Prices under 63.13 where they change the Scope the Client provided, so the saving reaches the share.
• Other reductions. Client-instructed omissions can bring the target down, through the normal assessment.

Late notification therefore costs the Contractor target. It also costs the Client accurate reporting if the Project Manager's own events aren't processed. The guide to compensation events under Option C has more on this.

How the share is worked out

1. Calculate the final cost as a percentage of the final target. That shows which ranges the difference falls into.
2. Slice the difference into increments, one for each range it crosses.
3. Multiply each increment by the percentage for its range.
4. Add the results. That's the Contractor's share.
5. If cost is below target, the share is paid to the Contractor. If cost is above, the Contractor pays it.

For example, with illustrative figures: a target of £8,000,000, a final cost of £8,720,000 (109%), and ranges of 100% to 105% at 40% and 105% to 115% at 60%. The increments are £400,000 and £320,000. The share is £160,000 plus £192,000, a total of £352,000 payable by the Contractor. The Option C worked example follows this through a whole job.

When it is assessed

Point	What happens	NEC4 ECC (Option C)	NEC3 ECC (Option C)
Calculation rule	Share defined and paid or deducted	54.1 and 54.2	53.1 and 53.2
When the whole of the works reaches Completion	Preliminary share using forecasts, included in the following amount due	54.3	53.3
Final amount due	Final share, using final figures	54.4	53.4
On termination	Special calculation	93.4 and 93.6	93.4 and 93.6

For Option D the same rules are at 54.5 onward in NEC4 and at 53.5 to 53.8 in NEC3.

The timing has consequences for cash flow. A Contractor heading for a big excess has been paid at cost throughout, then sees a sharp adjustment at Completion. A prudent commercial team reports the expected share from early on, instead of being surprised. A Client should budget for it the same way.

Forecasting the share during the job

Add these to your monthly commercial report:

1. Latest total of the Prices, including implemented events.
2. Likely value of events notified but not yet implemented.
3. Forecast of final Defined Cost, using the Contractor's latest forecast.
4. Fee on that forecast.
5. Expected difference and share at the Contract Data percentages.

Run this with and without unimplemented events. The gap between the two shows how much commercial risk is tied up in the compensation event backlog.

What people get wrong

• Thinking a target caps the Client's cost. The Client still pays its portion of the excess. A target doesn't cap the Client's outlay unless the share ranges are set that way, and nothing in the standard contract requires it.
• Forgetting Disallowed Cost. It reduces the cost side, and the Contractor bears it in full. See Disallowed Cost explained.
• Calling it a "gainshare" and stopping there. A pain/gain arrangement has two sides, and the pain/gain share guide shows what the pain side can do to the Fee.
• Setting the percentages without thinking. See setting share ranges and percentages.

Related guides

• NEC Main Options: A to F Explained
• Pain/Gain Share Explained
• Setting Share Ranges and Percentages
• NEC Option G Term Contracts: What It Means
• The Activity Schedule
• The Bill of Quantities Under NEC

This guide is general information in our own words, not legal advice. Your contract and its Contract Data always govern. NEC, NEC3 and NEC4 are trade marks of Thomas Telford Ltd; Contract Status is not affiliated with or endorsed by NEC.