On an Option C Target Cost contract, if a Compensation Event arises and the Contractor issues a quotation which is accepted then the Target Price is increased by that amount. In carrying out the additional work is the Contractor paid the cost of the accepted estimate or the actual cost - be that higher or lower than their estimate?
Yes that is correct! Under option C the cost of under-spend/overspend is shared and that is the same for implemented compensation events.
Response from question author:
So if the total of the prices is increased by the value of the accepted quotation for the CE, what is to stop the Contractor from quoting a very high CE. For example on an original 1m target cost contract, suppose a 20k quotation is accepted but the actual work only costs 10k. The target would move to 1.020 but the actual cost would be 1.010 - there is a ‘saving’ against the target of 10k and they would gain a share of this - say 5k on a 50/50. If the above is correct, is this a realistic strategy and how could it be controlled?
Nothing stops the Contractor from putting in a high quotation - but nothing then stops the Project Manager from making their own assessment to something more sensible/reasonable.