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The Target Cost Contracting - Essay Example

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This essay analyzes that the Target Cost contracting or also known as a Stipulated Sum contract is the type of contact where the contractor would come up with a fixed price or total cost of the work that he is going to perform. The second type of agreement is known as a Guaranteed Maximum price…
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Download file to see previous pages Use of a target cost contract places all of the financial risks of construction on the contractor. The target cost contracts are relatively straightforward agreements in which the contract value is fixed, and the owner/developer knows what his cost will be. ( Haug 2002)
The second type of agreement is known as a Guaranteed Maximum price or GMP contract. This agreement should not be confused with “cost plus”, another contract type where the contractor includes charges to the owner/developer in labor (charging should only include field personnel, while home office personnel should not be reimbursable cost and should be covered by the contractor’s fee), materials ( evidence that a competitive bid process was followed on major material purchases), subcontractor costs ( work subcontracted to others should be covered by subcontracts), equipment rental (a lucrative sideline too many contractors where equipment purchased long ago and carried on the books at zero cost are being rented out at new equipment rates).
The GMP contract is offered or bided exactly the same as target contract; it is in this sense that the contractor assumes the same risk because he has to put on certain expense and risk that he cannot charge to the project; but a split risk in a sense that in case total budget exceeds, funding the difference incurred without the overcharge in labor, materials, etc. will not come out from the contractors own pocket, though from the perspective of the owner/developer, whatever saving is earned, less cost, will also go to him. Under this form of contract, the contractor is reimbursed its actual cost of the work plus a preset, guaranteed fee/profit up to an agreed guaranteed maximum price. If the actual cost exceeds, the owner/developer pays the contractor the same fee agreed upon and nothing more.  ...Download file to see next pagesRead More
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