Target costing in public construction projects

Economic development is strongly dependent on the availability and quality of the public infrastructure. Limitations of public spending (scarcity of means, EU regulations) and need of using private sector financial capital, knowledge, entrepreneurship and innovation potential to the public benefit explain the growing popularity of procurement systems other than the traditional design-bid-build. One of the examples is public-private partnership (PPP). PPP projects are the field where advanced whole life costing techniques and the target costing approach can be applied in practice. The latter is a concept of managing a commercial enterprise in changeable market conditions. It assumes that the price of a product (or a service, in particular a public infrastructure-based service) is independent from the cost of providing it. To achieve commercial goals, the service providing organization is to calculate the target cost on the basis of the price and take actions to sink the actual cost of the product to this target level by continuous effort of the management, engineers, designers, marketing specialists etc. during the product planning process and production. From the viewpoint of a contractor, it is impossible to apply target costing to traditionally procured public projects as the product (a built facility) is unique and usually made to detailed specifications. However, there are benefits of applying target costing approach to PPP projects: The product sold by the contractor (the private partner) is not a building, but an infrastructure-based service that is in fact a mass product to be supplied for a long time. The paper analyses the potential of applying the target costing to planning infrastructure projects.