Construction firms, developers, and investors have been urged to fully understand the major mindset shift needed to make the new Joint Contracts Tribunal (JCT) Target Cost Contract work effectively.

The new Target Cost Contract builds on the familiar structure of the JCT Design and Build Contract — one of the UK’s most widely used forms — but fundamentally changes the way contractors get paid. Instead of a fixed price, the new form uses a cost reimbursable model where the contractor is paid for actual costs plus a fixed overhead and profit.

What sets it apart is the target cost mechanism, which shares the pricing risk between client and contractor. If final costs come in under the target, both share the savings — known as “gain”. If they go over, the contractor can face a “pain” share. The goal, according to JCT, is to align incentives and encourage collaboration — something the industry has long called for.

Anne-Marie Friel, collaborative contracting and construction expert at Pinsent Masons, said:

“For users who are ready to make the mindset shift needed to work in a different way, the JCT target cost contract has great potential to drive better project outcomes and to encourage collaborative working. However, introducing a target cost contract will not be a 'magic bullet' and needs to be approached in full awareness of the other features of successful collaborative contracting. If this is not possible to achieve, this could result in risk for both parties."

In recent years, JCT has acknowledged the need for greater industry collaboration. The 2024 updates to its suite of contracts reflect this new commitment. However, real change depends on whether employers and contractors are genuinely ready to share information openly — something that traditional fixed price contracts rarely promote.

Fixed price design and build contracts work best when the scope is crystal clear upfront. But modern projects — particularly in fast-evolving sectors like data centres, life sciences, or complex regeneration — often don’t have perfect designs locked in at tender stage.

“In fast moving sectors, we are seeing a trend whereby fixed prices are being provided on a largely provisional basis, based on the finalisation of design, which undermines pricing certainty. At the same time, it is increasingly difficult to find contractors who are prepared to price the risk of uncertainty," Friel said.

Many contractors have become wary of carrying significant risk on fixed price contracts — especially as designs change or new regulations emerge mid-project.

"We are in a very busy construction market, with increasing pressure on finite resources, at a time when construction projects are becoming ever more complex and dynamic. Many contractors - and their shareholders - have become averse to fixed price contracting, and are increasingly reluctant to see businesses committing precious resources towards delivering projects which run the risk of generating significant losses against a fixed price," Friel said.

Cost reimbursable contracts — like the new JCT Target Cost model — could help balance that risk. But Friel stressed that success depends on real cultural change.

“Cost reimbursable contracts can offer an attractive potential solution. However, moving from a fixed price contracting mindset to a cost reimbursable approach requires a mindset shift by all parties to be successful as it’s a fundamental change of approach and requires more collaborative working models to be successful”.

That means clients and contractors must invest in people, training, and robust governance to manage the “open book” approach. Clear, real-time reporting, good faith negotiation, and trust are vital.

"The JCT 2024 amendments are a helpful start towards achieving some of these but may need to be taken further still to really ensure that the benefits can be felt. It is important for employers and contractors to understand that this is a wholly different commercial approach and requires much more transparency,” Friel said.

Using a target cost contract also affects other commercial issues — like liability. Contractors need to understand which costs are recoverable and which are not — a shift that demands rigorous contract administration and proactive cost control.

Despite the push for collaborative working, some in the market remain cautious. Mike Allan, a development construction expert at Pinsent Masons, said:

“JCT has said that there is a market demand for this. That remains to be seen. Many commercial real estate funders and developers are wedded to lump sum, design and build with full risk transfer. A move to a more collaborative model of contracting with shared risks may not be a road they are willing to travel unless demand/supply for contractor resource forces their hand,” he said.

But he added that the broader market trend is clear:

"Regardless of the scepticism, though, the publication of the Target Cost Contract is indicative of a trend towards collaborative contracting, supported by extensive data, that can no longer be ignored by the market."

This shift echoes findings in the Construction Leadership Council’s Private Sector Construction Playbook, ‘Trust and Productivity’, which criticised the traditional fixed price design and build model for driving adversarial behaviours, stifling innovation, and piling risk onto contractors. The playbook instead champions collaborative procurement, early contractor involvement, and shared risk and reward — all principles at the heart of the new Target Cost Contract.

For construction clients, developers, and funders, the message is clear: understand the commercial impact of the Target Cost Contract, invest in people and processes that enable collaboration, and recognise that success depends as much on behaviour as on contract wording.

As the market adjusts to new economic realities and supply chain pressures, experts say the industry’s willingness to embrace this shift could help unlock better project outcomes, healthier margins for contractors, and long-term productivity gains for the UK construction sector.

Originally reported by Pinsent Masons.