Tenanted Properties, Complex Programmes & Procurement - Why Governance Is Half the Project
Body corporates, commercial building owners, asset managers and property investors with sitting tenants face a unique issue when it comes to earthquake strengthening – or any work, really.
Managing commercial or private residential tenants means a live site, and often working around people. Depending on the scope, sometimes that means dealing with tenants possibly having to vacate, cataloguing their assets, moving them to temporary premises (and then back again), adding extra complexity to the construction programme.
On top of that - traditional contract models often struggle in refurbishment or strengthening projects where unknowns are significant, creating friction between designers, the Principal and Contractor.
For circumstances like this, Target Price models were introduced under NZS3910:2023 to allow flexibility, transparency, and a shared commitment to delivering value. In other words, shared risk, pain and gain.
And... not to toot our own horn, but it’s something we’ve got down to a fine art. In this month’s blog we’re giving you, dear reader, insight into how we get (good) sh*t done in environments with uncertain scope, complex refurbishments, or seismic strengthening works. Including, an example of utilising Target Price Contract models under NZS3910:2023 with key BTS from Dan.
So, what Is A Target Price Contract Model?
A Target Price contract under NZS3910:2023 is a hybrid procurement model that sits between a fixed lump sum and an open-ended cost reimbursement arrangement.
The contractor is paid actual costs throughout delivery - labour, subcontractors, materials, plant, and margin - but those costs are measured against an agreed Target Price at completion.
If the project comes in under target, the savings are shared between the client and contractor based on pre-agreed percentages. If it overruns, the additional cost is also shared, up to a cap.
Neither party carries all the risk, and neither party benefits alone from efficient delivery. That shared financial stake changes the dynamic, so instead of a client and contractor on opposite sides of a budget, both parties are oriented toward the same outcome. It's a model built for environments where the full scope isn't predictable from the outset. As you can imagine, this is pretty useful when it comes to seismic strengthening and complex refurbishment projects in New Zealand.
Want to learn more about the ins and outs of Target Price Contract Models? You’re in luck, because we’ve been building a library of free resources to help you out and one of our most popular, has been: Target Price Contracts Guide | NZS 3910:2023 … Thank us later 😉
Now we’ve covered what it is…
Why use a Target Price Contract for body corporates, commercial building owners, asset managers and property investors with sitting tenants?
In short, less risk, and more incentive to get it done, and done well because of the painshare/gainshare clause – which in turn means less disruption for the owner and the tenants.
For example, in a recent seismic strengthening job for an office in Porirua, there were two commercial tenants occupying a building that the owner had purchased believing it was already 100%NBS – so finding it out it was less than 34%NBS and required significant work was completely out of left field for the owner as it was.
To best manage the many unknowns in terms of what needed to be done to get it up to 100%NBS, BPM designed a hybrid commercial model by utilising a Target Price model under NZS3910:2023, that matched the level of cost certainty to the level of scope certainty. Where structural elements were clearly defined and well understood, works were priced on a fixed price basis - giving the client genuine cost certainty where it was achievable.
The project was completed six weeks ahead of schedule. The project closed under the target price. The contractor earned a performance bonus. The client retained their share of the savings. The contract structure did exactly what it was designed to do - align both parties' incentives toward efficient delivery, and reward genuine performance. And of course, significantly for the owner and the tenants, both tenants returned to operations earlier than planned, reducing the operational and financial impact of their temporary displacement.
Dan speaks to why this model was chosen and how the client responded…
“The Contract framework was chosen due to a lower level of detail being available and the project being time sensitive. We had a consented design for structural improvements but how and where those improvements would affect the existing fit-out was undefined. At its roots a Contract is an agreement of risk and who carries it.
With a fixed design and Contract the Contractor is taking on a greater level of risk and therefore prices as such, a fixed price tender is essentially a question of who is willing to take on the risk (or a greater level of risk) for what price. When there are undefined details that can come at a premium. With cost reimbursement, the client or Principal is taking on a greater portion of risk as the contractor gets paid for the work complete.
A target price contract when correctly executed balances the risk between. In this circumstance it enticed the contractor to work efficiently, rewarding them for working smartly. A frame of mind I always tell my PM’s is view the client’s budget as if it were your own money, not free money - this framework has the same effect, making the contractor take ownership of the budget.”
Why this matters for building owners requiring work with uncertain scope, complex refurbishments, or seismic strengthening works.
New Zealand has tens of thousands of earthquake-prone buildings, and the obligation to act sits with the owner. For those with sitting tenants, the scope is uncertain with many conditions being concealed, and the wrong contract structure can leave you exposed to cost blowout the moment something unexpected surfaces.
The Porirua project is a live example of what happens when the commercial structure is right from the start.
Painshare, gainshare, and why the incentive structure changes everything
The most common misconception about a Target Price contract is that the target functions like a fixed price ceiling - a number the contractor is obligated to hit, and it isn't. It's actually a shared reference point that both parties are commercially incentivised to beat, which in turn serves not only those completing the work but also for the client (and in the scenario of tenants, them too!), so if everyone’s doing their part, it’s motivationally mutually beneficial.
When the project closes under target, the savings are divided between the client and contractor according to pre-agreed percentages. When it overruns, the additional cost is shared in the same way - up to a cap that limits the contractor's maximum exposure.
Dan says:
”Traditional lump sum contracts create a financial tension that most building owners don't fully appreciate until it surfaces mid-project. The contractor has already priced some of the risk, but every unexpected condition, every variation, every concealed defect that was always going to be there - those become costly commercial events. The contractor's interest is in managing their exposure. The client's interest is in getting the work done. Those two things are not the same thing, and the contract doesn't make them the same thing.
A Target Price contract can, however… because the contractor is reimbursed actual costs throughout delivery - labour, subcontractors, materials, plant, and agreed margin - so there's no incentive to cut corners to protect a margin that's already been squeezed into a fixed price. Especially If competitively tendered. And because savings are shared, there's a genuine commercial reason to do well, and do it faster.”
The result is, by design, a project team that is financially oriented toward the same outcome as the client.
What this means in practice for building owners, body corps or landlords with sitting tenants…
For owners managing commercial or residential tenants through construction, there are additional financial consequences, like tenant displacement, temporary premises, lost rent, business interruption, relationship strain, and in some cases lease exposure if works run beyond agreed timelines. Every week saved is a week of disruption avoided because every week lost compounds and adds stress for everyone; it’s $$ down the drain.
A contractor working with limited incentive beyond what's required to meet their contractual obligations will do exactly that. A contractor operating under a gainshare structure has a direct financial stake in finishing early and finishing efficiently - because the savings flow back to both parties.
This is the dynamic that makes Target Price contracting particularly well-suited to seismic strengthening and complex refurbishments. These are environments where the scope is never fully known at the outset - where conditions that weren't able to be anticipated occur, the programme has to flex in response. In a lump sum model, every one of those surprises is a variation. In a Target Price model, they're project realities that both parties navigate together, with shared financial consequences and a shared interest in resolution. Teamwork making the dream work!
Scope uncertainty isn't a reason to delay – you just need to choose the right structure.
For building owners under obligation to act - particularly those with occupied buildings that require something like seismic strengthening - the temptation is to wait for more certainty before committing to a procurement model, but uncertainty isn’t an excuse to delay the work.
Where elements are clearly understood, they can be fixed-priced within the same contract, giving the client genuine cost certainty where it's achievable. Where conditions are concealed or contingent, the open-book cost reimbursement model keeps the client informed and in control without exposing them to the adversarial dynamics that fixed pricing creates the moment unknowns surface.
The commercial structure sets up the right incentives, but governance is what makes sure everyone actually follows through on them. Get that layer right, and the model does exactly what it's supposed to.
Regarding the governance layer, Dan comments:
“Good governance isn’t about applying a ‘one size fits all’ structure and wondering why it didn’t work, or worse, blaming others for why it didn’t work. Good governance is about understanding the projects unique risk profile, recommending/selecting the right framework, and ensuring accountability to ensure it does exactly what it’s supposed to do. Get that right, and it’s half the project!”
When that's in place, the model does what it's designed to do: it aligns incentives, distributes risk proportionally, rewards efficient delivery, and gives building owners with complex sites and occupied buildings the best realistic chance of a project that finishes well - for them, and for the people whose businesses or homes are caught up in the process.
Target Price Contracts: A Real World Guide
Target Price Contracts under NZS 3910:2023 are becoming the go-to procurement model for complex, uncertain, or high-value construction projects in New Zealand — but they only work when both parties understand the mechanics. This free guide breaks down how gainshare and painshare operate, what open-book cost reporting actually requires, how to manage Target Price adjustments, and what governance controls protect your interests. Useful for clients, asset owners, and project teams navigating refurbishments, seismic strengthening works, or brownfield developments. Read More
Earthquake Strengthening: An Asset Owners Guide
Earthquake-prone building regulations in New Zealand are changing — and the consequences of getting it wrong are significant. This free guide covers everything asset owners, investors, and developers need to know: how %NBS ratings work, what ISA and DSA seismic assessments involve, and what the 2025 EPB reforms mean for your compliance obligations, insurance position, and property value. Whether you're assessing a newly acquired building or planning a strengthening programme, this is a practical starting point. Read More