Risk apportionment in target cost contracts

Much of the current literature on target cost contracts is approached from the perspective of the client-contractor relationship. While the financial risk of a project is shared between the parties, the share formula is predominantly set by the client, which demonstrates little evidence of collaboration. The contractor's business risk is not explicitly taken into account outside of the fee percentage. However, from a contractor's perspective, the risk in a target cost contract has to be taken into account on two levels: first, the shared risk of the target cost contract (i.e. the financial risk apportioned through the share formula) and, second, the contractor's own risk in relation to their tender price (i.e. the business risk of the contractor that relates to their profit). The way that five NEC3 Engineering and Construction Contract option C target cost contracts in South Africa actually concluded in practice was examined as a means to develop a better understanding of how risk actually accrues to the parties. A decision-support framework that links project risk with contractor's risk is proposed. The framework presents nine risk/reward scenarios that contractors tendering for target cost contracts can use as a basis for risk-pricing decisions.