When it comes to construction projects, target cost contracts are becoming increasingly popular. This type of contract is a collaborative approach where the owner and contractor work together to establish a budget and a target cost for the project. The contractor then agrees to deliver the project within the target cost, and any savings are shared between the owner and the contractor.
Let`s take a look at a target cost contract example to better understand how this type of contract works.
Imagine a company wants to build a new office building. They hire a contractor who specializes in target cost contracts. The owner and contractor work together to establish a budget and a target cost for the project. In this example, the budget is set at $10 million, and the target cost is set at $9 million.
The contractor then works to deliver the project within the target cost. Throughout the project, the contractor keeps the owner informed of any changes or potential cost overruns, and they work together to find ways to stay within the target cost.
During the construction process, the contractor finds several ways to save money. For example, they negotiate lower prices with suppliers and find more efficient ways to complete certain aspects of the project. These savings total $500,000.
At the end of the project, the total cost comes in at $8.5 million, well under the target cost of $9 million. The owner and contractor then share the savings, with each party receiving $250,000.
Target cost contracts are beneficial for both owners and contractors. The owner has greater control over the budget and the project, and the contractor is incentivized to find ways to save money and complete the project efficiently.
In conclusion, target cost contracts are a collaborative approach to construction projects that can result in cost savings for both owners and contractors. By establishing a budget and a target cost and working together throughout the project, both parties can benefit from cost savings and a successful project outcome.
