Addleshaw Goddard

UK 200 2014 position: 22

Pain/gain share arrangements in target cost contracts

Earlier this year, in the case of AMEC Group Ltd v Secretary of State for Defence [2013] EWHC 110 (TCC), the Technology and Construction Court highlighted the importance of drafting target cost clauses with precision. The court found that the contractor could only recover costs incurred reasonably and properly beyond its cap on liability provided in a maximum price target cost contract.

The secretary of state for defence, as employer, had engaged AMEC Group, as contractor, under a design-and-build contract to provide a nuclear submarine facility on the Clyde.

The project had various issues that led to significant cost increases. Some of the issues encountered did increase the guaranteed maximum price, but many (by value) did not. The parties agreed a pain/gain mechanism, sharing any costs savings and cost overruns up to approximately £140m, after which a further £50m of cost overrun or other liabilities was to be borne by the contractor…

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