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NEC ECC: Staff cost not allowed in CE assessment due to no change to completion being granted.
A quote for a CE has been produced by the Contractor under NEC3 Option A. Elements of the changed work require procurement of specialist subcontracts. Quote includes staff time for the procurement and administration of the subcontract.
The Client struck out all staff costs and stated that "there had been no extension of time/delay to the completion date therefore no increase to this resource."
My view is that the Contractor has made a reasonable and prospective assessment of the staff cost which it believes will be expended as a result of this event, as required by the contract at Clause 63.1, second bullet "the forecast Defined Cost of the work not yet done".
For a fuller description of the term Defined Cost, the Contractor refers to the Guidance Notes for Clause 11.2 (22) which states;
"The only use of Defined Cost in Option A is as the basis of the assessment of compensation events. Defined cost is the cost of the components listed in the Shorter Schedule of Cost Components for work done by the Contractor and his Subcontractors".
In this event, the work to be done is as forecasted by the Contractor for his staff who have had to be involved in inter alia, the procurement and supervision of the subcontracted works, the administration of the subcontractor's account including the final account process, the addition of the work into the Contractor's programme and progress updates and safety administration such as checking and processing risk assessments and method statements and carrying out safety inductions.
As this is an Option A contract, the decision as to the level of staffing is entirely at the discretion of the Contractor in order to fulfil his obligations. This also means that the Contractor is entitled through his own efficiencies to expend less staff cost and therefore increase his profitability. He also bears the risk of overspending. If the Contractor does operate efficiently and expends less staff time during the contract, this does not generate a spare pot of money which the Employer is entitled to utilise for the management of the Employers changes. Any benefit generated in this regard is for the Contractor to utilise these staff on improving his performance further on this project, or to utilise these staff in other parts of his business to the benefit of the Contractor.
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I agree with everything Andrew says below and add a comment on the tone of your last para.
You are right in what you say, but clause 63.1 allows for CHANGE in Defined Costs plus Fee as a result of the compensation event(s). So whether the Contractor has under or over-resourced for the original work is, in theory, irrelevant: it is the change due to the compensation event that changes the Prices.
In practice, if the Contractor has over-resourced, then the over-resource might be able to take up the slack in terms of the extra work generated due to the CE i.e. no change in Defined Cost. If they had under-resourced, then they would need additional resource and the issue might be what new resource is due to the CE and what is due to the under-resourcing of the original work.
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A compensation event is not something that is included in the Contractor's tendered price and if it occurs then they should be put back in the position they would have been had the event not occurred.
This means being sensibly compensated for the change to the Prices which are due to the compensation event, assessed in the form of Defined Cost. This would include any additional work but also the effect on existing work, often due to the 'disrupting effect' of the compensation event.
The evaluation of People cost under ANY main option is essentially a 'resource thickening' assessment, which accounts for additional work and / or the disrupting effect. Although the Contractor may have resources which are allocated 100% of their time to the project, the cumulative effect of numerous compensation events would eventually reach a 'saturation point' which would mean that additional People are necessarily required.
The cost of any additional People cannot reasonably be allocated to a single compensation event, so an 'increasing cost allowance' is included in individual quotations to account for this.
This principle is irrespective of whether there is any 'prolongation' to Completion, Sectional Completion, Key Dates or operations on the Accepted Programme, which would apply a different type of 'preliminaries thickening' calculation.
It is further noted that a forecast must include risk allowances that should be 'proportionate' to the effect of the compensation event, which could be an appropriate mechanism to include such costs.
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