New ‘Target Price’ provisions

This is the fourth article in our series taking a deeper look at the proposed revisions to NZS 3910:2013. Previous articles in the series are at the bottom of this page.

DZ3910 introduces a ‘Target price Contract Price’ option into Section 2 of the General Conditions. This new addition allows the parties to set an agreed ‘Target price’ and to allocate how savings or overruns against that Target price are to be addressed.

The new ‘Target Price’ is defined in 1.2 as:

“The sum stated in the Specific Conditions which shall be deemed inclusive of Preliminary & General and Margin subject to such adjustments as are provided for in the Contract.”

The updated section 2.1.1 provides that there may be ’any combination’ of Contract Price types, drawn from the list of:

1. lump sum;
2. measure and value;
3. cost reimbursement; and
4. target price.

This recognizes that the total Contract Price can be a combination of more than one of the above. The ‘Target Price’ Contract Price is largely an extension to the cost reimbursement contract price.

Operation generally – 2.5.1(a) & 2.5.1(b)

Should the parties opt for a Target Price under the new sections 2.5.1(a)&(b):

1. the Contract Price will be calculated as for a cost reimbursement contract under 2.4; however
2. the difference between that Contract Price and the Target Price will then be determined; and 
3. the benefit or burden of that difference (be that a cost saving, or cost overrun) will then be split between the parties; with
4. the percentage of that split being determined by the percentages set by the parties when negotiating the Specific Conditions.

Adjustments – 2.5.2

Unless altered by a relevant Specific Condition, the ‘Target Price’ is subject to the same adjustments as the other pricing models. This means it will be subject to adjustments for variations or extensions of time.

Whilst it will be possible to exclude (via Specific Condition(s)) adjustment clauses that would otherwise serve to alter the Target Price, such exclusion will not affect the entitlement to an adjustment to the Due Date for Completion.

Indicative Estimates – 2.5.3

If an indicative estimate is required under 2.4.4, the ‘updates’ required by 2.4.5 shall include a forecasted share of the savings or overrun (and therefore a forecast of the final Contract Price).

Matters for Independent Certifier – 2.5.4

Clause 2.5.4 provides that the Independent Certifier may provisionally certify the forecasted share of the saving or overrun within any Progress Payment Schedule. The final Contract Price (adjusted for saving / overrun via 2.5.1) must be certified in the Final Payment Schedule.

Accordingly:

1. The Independent Certifier may, but is not required to, certify the forecasted saving or overrun when dealing with progress payments, but
2. Must take into account the saving or overrun when certifying the final payment.

General comment

Through the use of the new Target Price provisions the contracting parties are free to allocate risk on the question of cost overrun vs cost saving, by assigning their desired percentage split while negotiating their Specific Conditions.

Further reading

• Proposed revisions to NZS 3910:2013 released for market consultation
• The Engineer to Contract role is no more under proposed changes to NZS 3910:2013
• Failure to notify costs now the responsibility of the insurance arranger under proposed changes to NZS 3910:2013
• New provisions for requesting time extensions under proposed changes to NZS 3910:2013