Contractors will be aware that Standards New Zealand has published the updated ‘Conditions of contract for building and civil engineering construction’, NZS 3910:2023, which revises the previous iteration NZS 3910:2013. 

Amongst others, the revisions introduce new clauses that were commonly inserted as Special Conditions into the previous iteration of NZS 3910. The proposed new clauses were put to the market for public consultation between 9 May 2023 – 30 June 2023 to ensure that their inclusion would both:

i clarify ambiguities that had become apparent within the 2013 text, and enable the standard contract to be fit for modern industry purposes; and

ii mitigate existing disparities in bargaining power between the Principal and the Contractor.

The amendments introduce the concept of a ‘Target Price’ in clause 2.5. This provision is effectively a gloss on the existing cost reimbursement Contract Price option that Contractors will already be familiar with and which is retained as clause 2.4 from NZS3910:2013.

In this article we address the intention behind the introduction of the provision and the general mechanics of the Target Price provision.

Target price – Concept

A Target Price mechanism is a new Contract Price type. The new Contract Price type allows for the Principal and Contractor to work together to allocate how both savings and overruns will be shared, in agreed proportions, between the parties. The Target Price mechanism is, at its heart, not dissimilar from other Contract Price Options. However, it manages to blunt the costs risks typical of the Cost Reimbursable model. 

In theory, Target Price provisions encourage cooperative collaboration between the Principal and the Contractor. Both parties are encouraged to realistically value the Target Price selected in order to minimise unnecessary cost and to incentivise savings. 

By way of example, where the Contract Price is targeted at $1 million but in reality the Contract costs $1.5 million to achieve practical completion, the Principal and Contractor share the pain in accordance with the percentages agreed in the Contract. However, if the Contract Price was targeted at $1.6 million, the parties would mutually benefit from the excess $100,000 and share the gain, again, in accordance with the percentages agreed in the Contract. 

Mechanics of the NZS3910:2023 provision

Valuation

A Target Price contract joins the existing three pricing mechanisms contemplated by the General Conditions of NZS 3910:2023 (lump sum, measure and value, and cost reimbursable). If electing to proceed, Contractors have the option to either solely pursue a Target Price, or they can combine aspects of the provision with other available price types. 

Target Price provisions are not a fresh concept. Under NZS3910:2013, it was not uncommon for a Principal, pursuing a Cost Reimbursable model to have introduced either a target cost or guaranteed maximum price provision to facilitate cost control. 

Where a Target Price is agreed to, the parties must first agree to the total target value and then iron out how future savings or overruns will be divided at the end of the project. The Specific Conditions contemplate how the division of future savings or costs will be shared by nominating percentages that mirror the more substantial wording of clauses 2.5.1(a) – (b). Effectively, the division of costs or savings are not uniform. They can be adjusted so that they are more appropriate for different projects. It is also important to note that the Specific Conditions allow for the Contractor’s share of overrun to be capped, which will enable for potentially more favourable overrun percentage division. 

After the project is finished, the difference in value between the Target Price and the Contract Price is established and the excess savings, or overruns, are allocated accordingly in the final Payment Schedule. However, Contractors should be aware that clause 2.5.4 allows for the Independent Certifier to provisionally forecast any share of savings or overrun in any progress Payment Schedule.  

Adjustments 

Unless agreed otherwise in the Specific Conditions, the Target Price may be adjusted, for example by way of Variations. While adjustments will affect the overall Target Price, they will not affect the pain/gain share percentages set out in the Specific Conditions.  

The Specific Conditions provide, at 2.5.2, an option for the parties to list clauses that provide for Variations or adjustments to the Contract Price, that they agree will not vary or adjust the Target Price. 

The General Conditions (at 2.5.4) clarify that while the parties may agree to exclude certain clauses from providing an entitlement to adjustment of the Target Price (e.g. certain deemed Variations) these shall still apply to any entitlement to adjustment for the Due Date for Completion.

Indicative estimates and progress payment

Where required by the Specific Conditions under a cost reimbursable format, the Contractor must submit an indicative estimate of the Contract Price before commencing works (2.4.4). 

Where a Target Price is agreed and an indicative estimate required, the Contractor’s payment claims must include “a forecasted share of the saving or overrun”. As identified above, while the final Contract Price shall be adjusted in the final Payment Schedule, the Independent Certifier may provisionally certify any forecast share of savings or overrun in any progress Payment Schedule.  

Key lessons

The new Target Cost option reflects the market in that Principals will typically seek some form of cost control when utilising cost reimbursable models. This incentivises collaboration and, with appropriate percentages, caps, and shared behaviours, can work well.

While the Target Price provisions are of benefit to Contractors, in that they explicitly spell out a new pricing mechanism, they are not without their deficiencies. Typically, Alliancing models contain more sophisticated Target Cost regimes where a Contractor’s painshare or gainshare is capped. The current Target Price provisions are, realistically, a rough starting point which the parties can build upon to establish a Target Price regime that best suits the structure of the relevant project.  

Therefore, Contractors should ensure that appropriate percentages and a cap are included when the terms of the contract are negotiated. In terms of the liability cap, Contractors should make sure that they are able to carry the requisite pain share in the event of a significant overrun.

This article was written by Brendan Cash (Partner) and Kate Henderson (Senior Associate) in Dentons’ Major Projects and Construction team in New Zealand, and was originally published by Contractor Mag.

Further reading

Fault based liability and limited liability for contractors a new standard in the NZ market

Changes to the role of the Engineer under NZS 3910 2023