Civil Engineering Project Management (4th Edition)

32 Civil Engineering Project Management
definition of which costs will be reimbursed and which will not. Examples
of possible wording to achieve this are given in the IChemE ‘Green Book’ conditions
(see Section 4.5), and in the Schedule of Cost Components included
in the ICE ‘Engineering and Construction Contract’ (see Section 4.2(f)). Care
must be taken to ensure the wording adopted is clear. For complex works it
may be necessary to carry out a risk assessment to identify potential problems
and allocate the risks to either party.
(e) Target contracts
These are usually cost reimbursement contracts as (d) above, but with an estimated
target cost set for the works cost, and a fixed or percentage fee for
the contractor’s head office overheads and profit. If the contractor’s expenditure
exceeds the target he has to bear a proportion of the excess; if his expenditure is
less than target he receives a proportion of the difference as a bonus. Thus
there is a financial incentive to the contractor to be efficient and save costs.
But setting a fair target price can be difficult, and impossible if the amount
of work to be done is unpredictable. If a target has to be revised, a dispute
may arise between employer and contractor as to what the new target should
be; this defeats the purpose of this type of contract. If the work is reasonably
well defined, then a measurement contract is usually suitable. Consequently a
target price contract is not appropriate for many jobs.
If the initial target is set as a result of competitive tendering, then the
employer may feel some assurance that he is obtaining ‘value for money’. But
if the target is negotiated or later has to be varied, then the employer may feel
that the contractor’s knowledge of his intended methods and costs may
enable him to add a margin in the target estimate to safeguard his position.
This means that it is improbable that the target cost will ever be lower than the
contractor’s privately estimated bottom line price.
(f) Payment under design, build and operate contracts
Arrangements for payment under design, build and operate (DBO) contracts
may be partly direct and partly by income derived from the project operation as
described in Section 2.6(b).
3.2 Other payment provisions
(a) Price variation provisions
In times of inflation it may be advisable to include clauses within the contract
which set out how the contractor is to be reimbursed his extra costs due to any