Costs overruns in Target Costs contracts

Who is liable for costs overruns in a Target Cost contract, and to what extent? AMEC Group recently went to the TCC to appeal against an arbitration decision which found the Secretary of State for Defence ("the Authority") would only be liable for actual costs which were reasonably and properly incurred.

The Authority had entered into a bespoke Maximum Price Target Cost contract ("MPTC") with AMEC for the design and construction of a nuclear submarine jetty project in Scotland. The original maximum price had increased from £89m to £142m, and the project had overrun by £93.6m. The contract provided that AMEC was responsible for overrun costs up to £50m and that the Authority was liable for costs beyond the £50m cap. The dispute centred on whether AMEC was entitled to recover all of the remaining £43.6m from the Authority.

The TCC concluded that the arbitration panel had been correct in deciding that the Authority should not be liable for all costs however incurred, but just for costs which had been 'reasonably and properly incurred'.

AMEC expects further overruns of £235.7m and will now have to negotiate with the Authority over which costs have been 'reasonably and properly incurred'. It follows that AMEC will not be able to recover any costs caused by its own breach of contract.

The decision suggests that if negotiating a bespoke Target Cost contract, care should be taken over the apportionment of liability for costs overruns, and in particular, whether liability is subject to the costs being reasonably and properly incurred. Although the case relates to a bespoke contract, it may provide guidance for future disputes relating to standard form target costs contracts.

To view the Judgment, please click here.