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NEC ECS: Deduction of Delay Damages from Sub-contractor (Option A) and potential loss of same due to Employer paying only the net sub-contract cost to Contractor under Option E

+1 vote
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I am looking to seek some advice (as the Contractor) on a situation where the Employer is benefiting twice from the application of Delay Damages, under an Option E Contract. To give some background to this, the Employer requested the Contractor to procure the Subcontractor in question, on an Option A basis, to ensure more financial control over the Subcontractor, as opposed to procuring the Subcontractor on an Option E basis. The Contractor is now in a position where Delay Damages are being applied by the Employer, which are then being passed down to the Subcontractor. My question is, under the contract, is the Employer entitled to benefit from the deduction of Delay Damages from Sub-contractor (Option A) and potential loss of same due to Employer paying only the net sub-contract cost to Contractor under Option E?

Please see some notes on this matter below.


Under Option E (Employer / Contractor):

Clause 11.2 (23)                

The Price for the Work Done to Date is the total Defined Cost which the PM forecasts will have been paid before the next assessment date plus the Fee

The Defined Cost is defined under clause 11.2 (21) as

                Defined Cost is

a.    The amount of payments due to the Subcontractors for work which is subcontracted without taking account for deductions for

1.    Retention
2.    Payment to the Employer as a result of the Subcontractor failing to meet a Key Date
3.    The correction of defects after completion
4.    Payments to Others, and
5.    The supply of equipment, supplies and services  including in the charge for overhead cost within the Working Areas in the Contract

and

b.    The cost of components in the Schedules of Cost Components for other work,

less Disallowed Cost.

There is no reference to delay damages in the deductions.

Option A (Contractor / Subcontractor)

Note that the clause refers to amount of payments due to the Subcontractors for work and deductions. Neither of these references are helpful to us as 50.2 of Option A for the Subcontractor’s payments states

                The amount due is:

a.    The Price for the Work Done to Date – (PWDD under Option A is amounts for completed activities or groups of activities on the activity schedule)
b.    Plus other amounts to be paid to the (sub)Contractor,
c.    Less amounts to be paid by or retained from the (sub)Contractor

And Clause 51.1 states that

                The first payment is the amount due. Other payments are the change in the amount due since the last payment certificate.

This seems to result in a situation where the Contractor is unable to recover the cost of delay damages imposed by the Employer but caused by the Subcontractor, as delay damages to be paid to the Contractor by the Subcontractor fall into item c.

Delay damages are chargeable to the Subcontractor under clause X7.1 as follows

                The (Sub)Contractor shall pay delay damages at the rate stated in the Contract Data from the Completion Date for each day until the earlier of

a.     Completion; and
b.    The Date on which the Employer (Contractor) takes over the works
 
Text on the matter

The items listed in the sub-bullet are all items that are (normally) deducted from or not paid to the Contractor under other clauses. These items are therefore ignored in the calculation of Defined Cost, because otherwise the same amounts would be deducted from the Contractor twice.

And

The reason for the exclusions is that these amounts are normally deducted from, or not paid to, the Contractor by other provisions of the contract. In turn, the Contractor may wish to deduct them from his subcontractors. If they were deducted again when calculating the Defined Cost, they would be deducted twice from the Contractor.
asked Jun 5 in NEC3 General by BenM (180 points)  

1 Answer

+1 vote
 
Best answer
Thank you for such a detailed question! t is actually something I have looked at in the past (under Option C which gives the same result) and is an area where the drafting could be better to get to the obviously right conclusion that the contractor doesn't pay double for delays.

The simple solution is that when the subcontractor claims you pass that on, in whole, ie you say he is not in delay you just value the work. There is no obligation to take delay damages only a right. The Employer then says yes but I will deduct delay damages and pays a net amount to the contractor who passes on the net amount (after taking his fee) to the subcontractor. Soo the SC claims £1,000 to which the MC adds 10% fee charging E £1,100. E deducts £500 delays damages and pays £600 to MC who (because he was smart and had proper back to back risk) takes his £100 fee and passes on the remaining £500. This leaves everyone where they should be. A slight ***** but it works under the contract and, I believe in law.

A PM/E could try to argue that MC must take the deduction before passing up the payment and then they get to deduct. However, the result is so obviously wrong, inequitable and not what the parties intended it may well fall into one of those rare times the court will imply a requirement much as I have outlined above.

Obviously gets much more complicated where there is more than one SC or the MC is contributing delay or the risks are not back to back.
answered Jul 5 by Rob Horne (18,680 points)  
selected Jul 5 by Neil Earnshaw