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What are the implications of amending the contract to make payment on complete activities under ECC Option C?

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We are about to go out to tender on ECC Option C, Design & Build, and the project manager wants the core clauses amended to say the PWDD is the defined cost plus Fee for those activities (on the activity schedule) that have been completed .  What do you see as the implications of doing this, and would you advise against it?
asked Dec 3, 2013 in Payment by anonymous   7 46 64

2 Answers

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Best answer
The objective on an Option C contract is for the contractor and the employer to share the financial risk of project delivery.  The pain/gain mechanism then incentivises both parties to seek to reduce the Defined Cost such that both may benefit.  An option C contract therefore requires a willingness to work together and to share risk which I presume is what the Employer wants.   I presume the Employer has also chosen an Option C as there are potential construction risks that could be mitigated for mutual benefit through the delivery of the project.

An Option C contract does a number of things which will be impacted by the suggested changes.
1) it is designed to be cash flow neutral - see definition of Defined Cost - which provides for the contractor to apply for costs that he will pay in the next payment certificate.  
2) costs are paid as they are incurred (subject to Disallowed Costs) - linked to the above but
3) The Activity Schedule does not define the works (the WI does)
4) financial risks are shared

To make the changes you suggest I think will have the following impact:
1) You will increase signifiantly the allowance risk risk in the tender.  The question seems to imply that you will only pay for activities on the Activity Schedule.  
2) How do you differentiate between activities on the Activity Schedule and those activities not on the Activity Schedule.
3) Consider the implication for cash flow and the impact on the supply chain in particular - whilst the main contractor may not necessarily suffer, his supply chain certainly will with excessive payment terms.  Consider the impact on the works if subcontractors go into administration.
4) The administration of compensation events will be become an fraught with difficulties and almost certainly generate disputes through arguments as to what consitutes costs that should be in a CE and what were part of the works but were not fully defined in the Activity Schedule.
5) What happens if the Defined Cost is different from the value of the Activities, I think the focus will wrongly end up comparing the two rather than looking at the overall cost incurred.

If the Employer wishes to incentivise delivery - which the proposed changes seem to infer - then rather than change the fundamentals of an Option C, an Option A contract may be better suited to your particular circumstances.  Or alternatively introduce option X 20 (KPI's) and an incentive schedule.

I would advise against making the proposed changes;  you would have to make some substantial changes to an option C which in itself is fraught with difficulty  but mainly because it changes the fundamental objectives of an Option C.  

The proposed changes suggest that the project manager is not totally aligned with what an Option C contract is designed to achieve and for him/her an option A contract may be a better option.
answered Dec 3, 2013 by John Rayner (2,580 points)  
selected Mar 1, 2018 by Glenn Hide
0 votes
This is a significant change that would require the redrafting of several clauses with ECC, so is not something to be considered lightly. Changes of this sort also have a longer term costs associated with them when you need to train team on non-standard terms and provide guidance notes, templates, etc. Your question set out a hybrid of Option A and C, without setting out the objectives of what you hope to achieve. It might be more productive for you to set your desired outcomes and ask how best to get this from NEC3's existing provisions.

You can for example set share range under Option C to mirror in part an Option A contract and also modify or configure a number of secondary options to transfer the balance of risks between the parties. While these solutions might require a Z clause they are much easier to implement and maintain going forward, but it’s unclear if they would met your needs.
answered Dec 3, 2013 by Chris Corr (9,400 points)