Under an NEC 3 Option C Contract, parties agree to a 'Target Cost' for the works. There is then a mechanism where the cost saving or overrun is calculated and split between the parties according to an agreed formula - pain/gain share mechanism.

In a recent English case the court was asked to determine when the pain/gain share mechanism could be applied. Specifically, whether the 'pain' could be applied at interim payment stage, as opposed to on completion of the works.

In this case the contractor was a joint venture (JV). In accordance with the agreement between the joint venture parties (the JVA), monies paid under the Target Cost contract with their employer were held in a joint account, to be allocated between them as interim payments. The dispute was whether those interim payments under the JVA should be paid under deduction of the 'pain' the parties anticipated they would suffer on completion of the Target Cost contract with their employer.

The court held that the unamended NEC 3 standard form wording at clause 53.3 (clause 54.3 in NEC 4) was clear _ the pain/gain mechanism could only be applied at completion of the works.

The implication for employers is that if your contract is unamended and the Target Cost is exceeded before completion, the pain under the pain/gain mechanism will only come into force on completion.

The alternative is to amend the standard form to allow interim payments to be paid under deduction of any anticipated pain. However, the drawback is that such provisions can be complicated to administer.


Andrew Groom

Senior Associate

Louise Shiels

Head of Dispute Resolution and Risk & Partner