Target cost is the agreed price ceiling against which a contractor's actual spending is measured on NEC4 Options C and D. It's not a fixed price. It's not a budget estimate. It's the number that determines whether you make money or lose it, because the pain/gain share mechanism kicks in based on how your actual Defined Cost compares to this figure. If you're running earned value management on an NEC4 target cost contract, this is your BAC.
Target cost is part of the earned value definitions glossary. For the bridge between EVM and NEC4 target cost mechanics, see the earned value NEC4 target cost page.
How Target Cost Is Built
The target is not a single lump sum plucked from a tender. It's assembled from components defined in the contract:
Target = Defined Cost + Fee
Where:
- Defined Cost = the forecast cost of delivering the works (people, plant, materials, subcontracts, plus other items in the Schedule of Cost Components)
- Fee = a tendered percentage applied to Defined Cost, covering head office overheads and profit
On a £30M NEC4 Option C highways package, the breakdown might look like this:
Target Cost Build-Up ==================== Defined Cost (forecast) £27,270,000 + Fee @ 10% £2,730,000 ──────────────────────────────── = Target Total of the Prices £30,000,000 ← This is your BAC Adjustment via Compensation Events =================================== Original Target £30,000,000 + CE-001: Utility diversion +£840,000 + CE-002: Ground contamination +£620,000 + CE-003: Design change +£640,000 ──────────────────────────────── = Revised Target £32,100,000 ← Updated BAC Actual Defined Cost to Date £18,400,000 Remaining work forecast £12,800,000 ──────────────────────────────── = Forecast Final Defined Cost £31,200,000 Pain/Gain Position: £32.1M - £31.2M = £900K GAIN Contractor's Share (e.g. 50%): £450,000
That diagram is the entire commercial story of a target cost contract in one view. The target sets the line. Defined Cost determines which side of the line you land on.
Why Target Cost Matters
Target cost contracts exist because clients wanted risk sharing. On a lump sum (Option A), the Contractor carries all the cost risk. On cost reimbursable (Option E), the Client carries it all. Options C and D sit in the middle. Both parties have skin in the game.
That's the theory. In practice, the target is the single most important number on the contract because it drives behaviour. If the target is realistic, both parties are incentivised to control costs. If it's too tight, the Contractor knows they'll never achieve gain share and stops trying to be efficient. If it's too generous, the Client is overpaying from day one.
I've seen both extremes. On one rail electrification package in the North West, the target was set 15% below what any reasonable estimate would produce. The contractor's commercial team spent the entire project chasing compensation events to inflate the target rather than managing costs. The pain/gain mechanism was supposed to incentivise efficiency. Instead it incentivised claims.
How Target Cost Adjusts
This is where most teams trip up. The target isn't static.
Every time a compensation event is implemented under clause 65, the target adjusts. The change to the Prices is added to the target. This is automatic under the contract. There's no negotiation about whether the target should move. If a CE is implemented, the target moves. Full stop.
| Event | CE Value | Revised Target |
|---|---|---|
| Original target | -- | £30,000,000 |
| CE-001: Utility diversion (clause 60.1(5)) | +£840,000 | £30,840,000 |
| CE-002: Contaminated ground (clause 60.1(12)) | +£620,000 | £31,460,000 |
| CE-003: Client design change (clause 60.1(1)) | +£640,000 | £32,100,000 |
The revised target of £32.1M is now the baseline for the pain/gain calculation at the end of the contract. And if you're running EVM, it's your updated BAC. Every CPI and EAC calculation should use £32.1M, not the original £30M.
Worked Example: Pain/Gain on a £30M Highway Package
Worked ExampleScenario: A £30M NEC4 Option C highway improvement scheme in South Yorkshire. The contract started in April 2024 with a 20-month programme. The pain/gain share is 50/50 for the first 10% of overrun/saving, then 90/10 (Client/Contractor) beyond that.
Over 14 months, three compensation events are implemented totalling £2.1M. Revised target: £32.1M.
At month 14, the commercial team forecasts:
- Forecast final Defined Cost + Fee = £31,200,000
- Revised target = £32,100,000
- Saving = £900,000 (Defined Cost came in below target)
Gain share calculation:
- 10% of target = £3,210,000. The saving of £900K is well within the first band.
- Contractor's share: 50% x £900,000 = £450,000 gain
Now imagine the same project but Defined Cost comes in at £33,600,000:
- Overrun = £1,500,000 (Defined Cost exceeded target)
- First 10% band (up to £3.21M overrun): Contractor absorbs 50%
- Contractor's pain: 50% x £1,500,000 = £750,000 loss
That £750K comes straight off the fee. If the fee was £2.73M, the contractor's effective fee drops to £1.98M. Still profitable, but the margin just went from 9.1% to 6.6%.
The pain/gain mechanism makes EVM directly relevant to the contractor's bottom line. Your CPI isn't an abstract metric. It's predicting whether you'll be on the gain side or the pain side.
Common Mistakes
- Not updating the target after CEs. I've lost count of how many CVRs I've reviewed where the team is measuring Defined Cost against the original target, ignoring £1M+ of implemented CEs. The target moves. Your tracker needs to move with it.
- Confusing target cost with contract price. There is no "contract price" on Option C. The Client pays Defined Cost plus fee regardless. The target only determines the share of any saving or overrun. This distinction trips up teams coming from lump sum backgrounds.
- Ignoring Disallowed Cost. Under clause 11.2(26), costs not justified by the Scope or not in accordance with the Works Information are Disallowed. They're deducted from Defined Cost for the pain/gain calculation but the Contractor still incurred them. Disallowed Cost comes off both sides. See the disallowed cost page for the full breakdown.
- Treating the target as a budget. The target is a commercial mechanism, not a project budget. You can (and should) have internal budgets tighter than the target if you want to maximise gain share.
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Frequently Asked Questions
What's the difference between target cost and BAC?
Functionally, they're the same thing. BAC is the EVM term for the total approved budget. On NEC4 Option C, that's the target total of the Prices. When a CE adjusts the target, your BAC adjusts too. Use whichever term your audience understands, but make sure the number is the same.
Does the target include risk allowances?
The tendered target should include the Contractor's pricing of risk within the Defined Cost forecast. There's no separate "risk pot" visible in the contract. However, internally, most contractors build a risk allowance into their forecast and manage it through a risk register. The Client may also hold a separate risk reserve that sits outside the target entirely.
Can the target decrease?
Yes. If a compensation event results in a reduction to the Prices (e.g., the Client removes scope), the target decreases. In practice, this is rare. Most CE implementations increase the target because they represent additional work or changed conditions.
How does target cost relate to the S-curve?
The target cost establishes the total value of your planned S-curve. Your planned value curve should sum to the current target (BAC) at completion. When CEs adjust the target, the S-curve baseline needs updating too. See the S-curve tracking page for how this works in practice.
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