Target Price Contracts: A Smarter Way for Developers to Avoid Budget Blowouts

Most development projects begin with careful planning and a budget. However, once work begins, unforeseen site conditions like discovering rock, high water tables, or other hidden surprises can quickly unravel the financial model. Under a traditional Measure and Value contract, the contractor continues working, invoices rise, and the developer carries the full cost and absorbs the shrinking profit margin.

The new approach is the Target Price contract, introduced in the 2023 update to NZS3910, New Zealand’s most commonly used construction contract. It is designed to correct this imbalance of risk by fostering a collaborative framework between developer and contractor. At the start, both parties agree on a realistic target cost. Actual costs are reimbursed as they are incurred, and at the conclusion, any difference, overrun or a saving is shared in agreed proportions.

This subtle shift changes behaviour. Contractors are no longer incentivised to let costs climb; instead, they are invested in managing risk and delivering efficiencies. Developers are shielded from bearing the full weight of unforeseen conditions. The model encourages smarter planning, tighter controls, and a partnership approach.

Sharing the risk

Consider a $1 million earthworks project. If unforeseen conditions push the actual cost to $2 million, a Measure and Value contract leaves the developer with the entire bill. Under a Target Price arrangement with a 70/30 split, the developer’s liability is reduced to $1.7 million, while the contractor absorbs $300,000. The result is shared, creating a real reason for the contractor to avoid similar overruns in future.

Sharing the reward

Crucially, the Target Price contract also provides a clear upside for efficiency. If the contractor finds ways to innovate or execute the work for less than the agreed target cost (e.g., $900,000 on a $1 million target), the resulting savings are also shared. Using the same 70/30 split, the developer saves $70,000 while the contractor receives a bonus of $30,000. This mechanism directly rewards the contractor for their resourcefulness and planning.

For developers, this is more than a financial tool; it is about confidence. Banks and financiers value the predictability it brings, contractors are rewarded for efficiency, and developers protect their margins. In an industry where surprises are inevitable, a contract that shares both the risks and the rewards provides a stronger, fairer foundation. Target Price contracts are a significant step forward for land development projects in New Zealand. They create an environment where collaboration and accountability are built into the contract itself. For developers looking to manage uncertainty, protect investment, and maintain confidence with stakeholders, this model offers a smarter way forward.