One of our authors discusses the importance of Defined Cost in NEC.

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Five challenges in demonstrating Defined Cost claims
  • Updated: 10 Mar 2022
  • Author: Patrick Waterhouse

NEC contracts rely on Defined Cost to assess the financial impact of compensation events and, depending on the main option used, the final outturn costs. Defined Cost, particularly when assessed retrospectively, must satisfy several requirements which create challenges for the Contractor and the Project Manager.  

1 Accounts and records 
Disallowed Cost (in main options C, D, E and F) governs costs paid to the Contractor and ensures that these have been properly incurred. Failure to provide accounts and records is one element of Disallowed Cost. The Contractor may have costs disallowed where it is unable to provide accounts and records and may struggle to obtain payment. So good management and reporting of cost is vital for Contractors. 

2 Necessity 
Defined Cost mainly refers to one of the schedule of cost components which require costs to have been incurred in order to Provide the Works. Was the additional excavation to create extra working space for work necessary? Or, as suspected by the Project Manager, was this because the Contractor had ordered the wrong excavator for the works?  

Are all of the Contractor’s people based in the Working Areas necessary or are they working on other projects too, but being charged full time to the present project?

Project Managers are required to ask questions such as these and to receive answers, most probably supported by documents. 

3 Final assessments 
Final assessments enable both parties to draw a line under part or all of the project and gain certainty over payments.  
Final assessments work in two ways:

  1. For the assessment of the final amount due (clauses 53.1 to 53.4). The assessment occurs after the issue of the Defects Certificate. 
  2. Finalisation of Defined Cost for parts of the works only when using Main Options C, D, E and F (clause 50.9). 

In terms of the final assessment in clause 53:

  • Ensure that the Supervisor issues the Defects Certificate on time. 
  • The Contractor should issue its own final assessment if the Project Manager does not. 
  • The Client should remain alert to the timing of these actions, particularly where the Project Manager is remiss in undertaking the required duties. 
  • Close communication is needed with the volume of information that will be exchanged. 

4 Timely administration 
Almost every action in an NEC contract has a time limit and a sanction for failure to comply. When dealing with these actions, the relevant person should be aware of the time limit and either stick to it or agree an extension with the counterparty:

  • Notifying and assessing compensation events. 
  • Final assessments. 
  • Defined Cost finalisation under main options C, D, E and F. 
  • Dispute resolution. 
  • Programme submission & acceptance. 

5 Simultaneous assessment of time  
Compensation events provisions require the simultaneous assessment of cost and time. I often see Contractors claiming money to ‘get the cash in’ intending to deal with a time-related claim later.   

I have warned Contractors particularly that dealing with the time impact of compensation events is vital to protect themselves from the sanctions elsewhere in the contract. At implementation, the dates will change, and the revised dates will feed into other consequential matters such as;

  • Delay damages (clause X7). 
  • Key Dates costs (clause 25.3). 
  • Defects date. 
  • Retention (X16).  
  • Bonus for early completion (X6). 

The simple message of these challenges is the necessity to follow the contract and to understand what it requires. Experience of working with project teams and in dispute resolution suggests that this will create the best outcome for both parties. 

Patrick Waterhouse CEng FICE FCInstCES FCIArb MRICS is a construction adjudicator, accredited mediator and training consultant. He is the author of NEC4: Defined Cost and Compensation Events (available in print and as an eBook) and also a co-author (with Robert Gerrard) of NEC4: Resolving and Avoiding Disputes (available in print and as an eBook).