When drafting Contract Data part 1, what do I need to think about when deciding the pain/gain share bands and percentages in an Option C target cost contract? I am trying to understand how to work these out in a fair and sensible way.
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Unfortunately there is no black and white answer to this!
Typically speaking most Clients will want to have an “upper limit” beyond which the Contractor takes all of the pain. I think this is a reasonable thing to ask for, as it incentivises the Contractor to prepare an accurate initial target and to reduce costs were possible post-award. Typically I would see this upper limit set at 120% of the Prices.
The next big decision, is to what extent the Client wants to incentivise the Contractor to come in under the target. The bigger the share percentage, the more incentive the Contractor has. In my head, 50:50 is the obvious number. It is simple and effective.
The standard NEC Contract Data has space to enter a number of different share ranges e.g. between 100% and 110% of the Prices the Contractor takes 50% of the pain, between 110% and 120% they take 75% of the pain etc. In one sense, this approach should pique the Contractor’s attention in a developing pain share scenario. However, it is my personal opinion that having share ranges like this is over-complicated and cumbersome. If a Contractor is over the target, they will know it. Having a little more salt to rub in the wounds doesn’t really achieve anything.
The last decision is whether you want to have a “lower limit” i.e. a point beyond which the Client keeps all of the gain, or a larger portion of same. I have always struggled to see the logic of going down this route, because the likelihood of a construction project coming in massively under budget is alien to me. Even if this was the case, everybody would be a winner regardless, so why should the Client be entitled to all of the gain.
So to draw together the strands above, I would suggest keeping it simple. For example, if the Contractor goes over the target by 120%, it takes all of the pain. Everything below that should be 50:50.
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Thank-you William, for your reply – most helpful and informative!
Mark.
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