Finally, the general contractor bid on the project with the disincentive clause included as part of the bid documents, not as a negotiated term or condition. Further, because the Highway Department conceded that it arbitrarily set the dollar amount of the disincentive and the maximum time limit for the assessment in the disincentive clause, these arbitrary calculations had no correlation to the damages the Highway Department sustained and, thus, were unreasonable. The Alabama Supreme Court held the disincentive provision was an unenforceable penalty because the multiplicity of damage provisions led the Highway Department to receiving more than a double recovery for the same damage, which was out of proportion to the damages it incurred. After exceeding the target price, the general contractor challenged the enforceability of the disincentive portion of the target price provision. The contract included a target price provision, a liquidated damage provision, an actual damage provision, and provided that multiple damage provisions could apply to the same loss. 1990), the Alabama Highway Department entered into a contract with a general contractor for work on Interstate Highway 65. State Highway Department, 568 So.2d 784, 785 (Ala.

The Alabama Supreme Court has provided some guidance whether a target price provision should be unenforceable because it allows for double recovery. While published authority is scarce, whether a target price provision is an unenforceable penalty turns on whether it allows for double recovery or constitutes an impermissible liquidated damage. Application of these defenses are state-by-state, but in general terms neither argument should be likely to succeed. Is a Target Price Contract Enforceable?Ĭhallenges to the enforceability of target price contracts usually argue it is an unenforceable penalty and violates applicable anti-indemnity laws. Subcontractor share of any incentive or disincentive payment shall be 30% of the total incentive or disincentive assessed to Prime including any adjustments made by Owner. Subcontractor shall share in any incentive or disincentive payment. Below is an example of a common target price provision to include in a subcontract when the prime contract contains a target price provision. In the subcontracting context, target price language from the prime contract should be incorporated into, or duplicated in, the subcontract with an additional provision. For Totals of $100,001 or more, Owner will pay Prime 25% of such amount to compensate Owner for unanticipated costs.For Totals of $0 to $100,000, Owner will pay Prime 50% of such amounts to compensate Owner for unanticipated costs.

If the Total is negative by $100,000 or less, Owner will pay Prime 25% of such amount as a bonus.If Total is negative by over $100,000, Owner will pay Prime 50% of such amount as a bonus.Total = Total Invoice Amount – Target Price.The payment or discount will be calculated using the following formula:.For example, a prime contract sliding scale could provide: The pre-negotiated ratios can be fixed or a sliding scale. On the other hand, if the final invoice amount exceeds the target, only a partial payment is made according to a pre-negotiated ratio. If the final invoice amount is less than the target, the parties split the savings according to a pre-negotiated ratio. In a target price contract, the parties negotiate the target price, which is the amount expected to complete the scope of work. They can be used in both prime contracts and subcontracts, for design and construction. The purpose of a target price contract is to incentivize efficiency and cost-effectiveness, and to disincentivize the opposite.

Target pricewatcher