NEC4 engineering and construction contract – What is Defined Cost and how is it calculated?

Defined Cost is used for the assessment of compensation events under all the main Options: Option A – Priced contract with activity schedule; Option B – Priced contract with bill of quantities; 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 is also used to calculate the Price for Work Done to Date under Option C, D, E and F.

Defined Cost is calculated using the rates and percentages stated in the Contract Data which are fixed for the duration of the contract but may be adjusted for inflation if Option X1 is selected. Rates included in the Contract Data depend on the main Option selected and include people rates, Equipment and design, manufacture and fabrication outside the Working Areas. Other amounts are calculated at open market or competitively tendered prices with deductions for discounts, rebates and taxes which can be recovered.

The Schedule of Cost Components sets out the components which are included in the assessment of Defined Cost for Option C, D and E. The Short Schedule of Cost Components applies to Option A and B. Neither of the schedules apply to Option F where Defined Cost is restricted to payments due to Subcontractors and the prices for work done by the Contractor.

The components in each schedule include elements of people, Equipment, Plant and Materials, Subcontractors, charges, manufacture and fabrication, design and insurance. The schedules relate to the rates contained in the Contract Data. The rates for Option A and B are more comprehensive and include people rates, which results in the schedule being shorter than the schedule for Options C, D and E.

Disallowed Cost applies to the open book Options only (C, D, E and F) and is deducted from Defined Cost. Disallowed Cost includes costs; which are not justified by the Contractor’s accounts and records; should not have been paid to a Subcontractor or supplier; or was incurred because the Contractor did not follow an acceptance or procurement procedure, give an early warning, or give notice of the preparation for and conduct or an adjudication or tribunal with a Subcontractor; together with the cost of correcting Defects after Completion; resources, Plant and Materials not used to Provide the Works; and dispute resolution between the Parties.

In relation to Defined Cost, the open book Options (C, D, E and F) require the Contractor to keep records of accounts, payments made, compensation event assessments and communications and any other records stated in the Scope. The Project Manager may inspect the accounts and records at any time.

All costs which are not included in Defined Cost are included in the Fee. These costs include head office overheads and profit. The fee percentage is applied to the amount of Defined Cost.

Produced by Andrea Rae, Head of Legal & Commercial Services, Stradia in conjunction with Quantity Surveyors International E: W: