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In NEC3 Option C; If Option X16 is not used, does the PM pay Subcontactor's retention amount each month, even though the Contractor will not actually pay these costs until the final account is settled for the subcontract?

+2 votes
asked Aug 10, 2015 in NEC3 Payment by Steve Honey (220 points)  

1 Answer

+2 votes
With options C, D and E, the Project Manager will generally be certifying the Defined Costs that the Contractor has incurred or will incur by the next assessment date. However, there are exceptions and the first sub-bullet point of the first bullet of clause 11.2 (23) is one of them. It states : "Defined Cost is - the amount of payments due to Subcontractors for work which is subcontracted WITHOUT taking account of amounts deducted for - retention". (my capitals)

So Subcontractors' retention are not deducted from Defined Cost i.e. they are paid by the Employer to the Contractor, even though the Contractor is not paying the Subcontractor at the time.

The next question is "are they a Disallowed Cost in accordance with clause 11.2 (25) ?" You could mount an argument that, as they have not been paid to the Subcontractor, it cannot be justified by the Contractor's accounts and records (see first bullet of clause 11.2 (25)). However,  my view is that, as this is a general statement and there is a specific statement in 11.2 (23) saying unpaid retentions are counted as a Defined Cost, this argument would not hold water. So, in my fairly strong view, I do not think amounts withheld as retentions under subcontracts are a Disallowed Cost under the main contract.

So the answer to your question, in brief is "Yes".
answered Aug 10, 2015 by Glenn Hide (30,630 points)  
edited Aug 12, 2015 by Jon Broome
It is probably me but I can't decipher the final 2 paragraphs.  Could you summaries again, please.
Steve, reading it again, it was not you, but me. I have amended the answer to be more clear (I hope). If it is not, do nag me to be clearer.
Thanks for the clarification and you have followed the same logic as I had, this is reassuring.

Many thanks
My view is that the PM certifies and paid the “Amount Due” and not the Defined Cost. As, stated in Clause 50.1 “The project Manager assesses the amount due...” And, clause 50.2 states that “The Amount Due is the Price Work Done to Date.....” And clause 11.2(29) states that “ The Price Work Done to Date is the total Defined Cost which the PM forecasts will have been Paid by the Contractor before the next assessment date plus the Fee. The key word is “PAID”.  In this note, my opinion is that the retention should not be included in the Contractors IPA until actual payments have been made clause 11.2(25) not justified by contractors account and records, clause 52.2 bullet 2 specify the records “ proof of payment”. There’s no question that the retention is part of defined cost, but it is also subject to disallowance, clause 11.2(25). The only reason why it is not deducted in the defined cost is to avoid the double deduction because retention will qualify as disallowed cost. In addition, bullet 2 of Clause 11.2(25) can be use also, because normally the contract between the Contractor & Sub-contractors includes provision deducting the retention in sub-contractor’s Interim Payment Application (IPA).
I note the last comment made in relation to the definition of PWDD and amounts PAID, although I believe that this is a PRINCIPLE whereby the PM assesses the likelihood of payment being made by the next payment assessment date, rather than the amount that is actually paid, which is calculated in accordance with the definition of Price for Work Done to Date and Defined Cost.  My assumption, therefore, is that the assessment of PWDD includes Subcontractor payments on a GROSS basis rather than net.