NEC3 ECC: Payment of risk under a target cost contract

If the risks occur are they treated as disallows costs?

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No - such risk would not generally be a disallowed cost under a target cost contract or cost reimbursable contract. As with anything that is questioned “should this be paid” the only elements that can be disallowed is if they fit within an element of the definition of a disallowed cost within clause 11.2. (but check your amended contract Z clauses to see this definition has not been changed to allow for any other costs)

The very nature of these contracts is that such a risk is worse than expected or much less than expected the Contractor under option C gets paid what they incur. Any benefits in risk that did not occur, or any extra payments for risk that had not been planned will be shared under the pain/gain mechanism.