BACKGROUND
Defined Cost is a term used in both NEC3 and NEC4, and it plays a key role in assessing payment amounts under certain options, calculating changes to prices for compensation event quotations, and determining amounts due upon termination.
For the ‘priced’ Option A (activity schedule) and Option B (bill of quantities), Defined Cost is calculated using the ‘short schedule of cost components’. Interim valuations for monthly payments are based on completed activities or units of work.
For ‘reimbursable’ Option C (target contract with activity schedule), Option D (target contract with bill of quantities), Option E (cost reimbursable contract), and Option F (management contract), Defined Cost also calculates the ‘Price for Work Done to Date’ (PWDD).
The PWDD is used as the basis of interim payments. Defined Cost also plays a significant part in the assessment of compensation events and is based on the more detailed ‘schedule of cost components’.
Reimbursable Options C, D, E, and F include Disallowed Cost in the calculation of PWDD for interim payments. Under the standard forms, these options have similar definitions for Defined Cost and Disallowed Cost.
KEY CHANGES BETWEEN NEC3 & NEC4
Under the NEC4, options A and B now include the costs for preparing compensation event quotations, which were previously considered part of the contract price under NEC3.
Additionally, NEC4 simplifies Defined Cost by removing deductions related to subcontractor payments and key date failures.
Payments for missed key dates are now detailed in NEC4 clauses 25.2 and 25.3, with transactions handled under clause 50.3.
Another notable change under NEC4 is the removal of ‘working area overhead’. The costs that were previously part of the ‘working area overhead’ under NEC3 now need to be accounted for in the prices and are generally recoverable as equipment costs in the schedule of cost components.
In NEC4, options C, D, E, and F offer a broader definition of Disallowed Cost, which now includes the costs of preparing for and conducting an adjudication or tribunal between the contractor and a subcontractor or supplier, provided the contractor failed to notify the project manager.
Payments for dispute avoidance boards (Option W3) are also Disallowed Cost under NEC4.
The NEC also introduces Clause 50.9 in the main options C, D, E, and F which allows the contractor to notify the project manager when a part of the Defined Cost has been finalised, enabling the contractor to present this part for acceptance. The project manager may accept the part of the Defined Cost as correct, or notify the contractor if further information is required or if there are errors in the contractor’s assessment. If the project manager does not respond within the specified timeframe, the contractor’s assessment may be treated as correct.
INTENDED BENEFITS OF NEC4
The changes between NEC3 and NEC4 are intended to provide greater clarity in contract processes and reduce subjectivity. However, the use of NEC4 is still in its early stages, so whether the changes under NEC4 will reduce the number of disputes in projects delivered under NEC4 remains to be seen. However, this could be difficult to gauge, as it is rare for a standard form to be used without significant amendments.
Information Sheet Author – Liam Forry
Liam Forry is the owner and managing director of Forry Commercial. A member of the Chartered Institute of Arbitrators, a Quantity Survey, Construction Claims Specialist and Dispute Resolution Consultant with UK and international experience.