Are supporting/visiting roles defined cost or deemed to be covered in the overhead under the TSC?

There are certain visiting roles that we deem as being part of the overhead but the supplier views as roles that should be allowed as defined cost.

The roles are typically ‘checks and balances’ type where individuals visit site to ensure that the site team are undertaking the works in line with the suppliers processes and procedures, complete suppliers internal reporting requirements and occasionally undertake such things as tool box talks. These roles are normally business wide or regional roles.

To date our position has been that it will be defined cost when the individual starts to undertake works that are productive to the project, completion of documentation such as RAMS for example. The ‘checks and balances’ type role where they predominatally are undertaking the suppliers internal process requirements, we argue is overhead.

There is a bit of ambiguity in the SCC for this type of role but this ambiguity only increases and thus the problem Is more prevalent when utilising the TSC form and there is no SCC to try and use as a guide.

Is there any guidance/good practice as what is fair and reasonable to expect to be covered within the fee and what would be over and above this and so acceptable as defined cost?

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If we take the principle that cost can only be included in one component then it depends on what has been allowed for in the tender and it also relates to how an individual is budgeted for by a business.

An individual that visits sites and is generally costed to projects - say an area QS (in my experience anyway) - would be recoverable. To give myself comfort I would want to see how they have been allocated to the project within the Contractor’s tender (ask to see a copy of the GE Book!). I appreciate that to avoid argument during the project this requires some prior forethought at tender stage but as a rule of thumb it works for me. I would also need some assurance that there was no over-recovery taking place, so signed time sheets etc. are a must when they are on site.

If we then consider how people are budgeted for in a business plan then we have some further clues as to what is, or is not recoverable. When putting together an annual budget there will be people that are allocated to projects (like an Areas QS) and those that are part of the fixed overhead (i.e. directors and HR etc.). I would expect to see a director’s costs only in the Fee and therefore irrespective of whether they visited the site or not there would be no Defined Cost for this individual. Another way of looking at it is; who has to complete timesheets for the company they work for and are their costs allocated to specific projects to prepare the P&L account for the project? If they don’t have to do this then they are not directly recoverable and are not considered Defined Cost and thus in the Fee. (I find it’s better to ask the visiting person whether or not they fill in time sheets!)

Whilst a contractor may then re-budget to make all personnel project chargeable this would have a commensurate reduction in the level of Fee that would be charged. Generally speaking therefore I concur with your argument. People undertaking a supplier’s internal processes are considered overhead (i.e. in the Fee) whereas people who’s work only arises from directly from a project would be recoverable. A contractor has to justify from his accounts and records that the cost is valid so I see no harm in asking for the detailed costing breakdown.

There are a couple of tests that need to be consider when assessment Defined Cost under the TSC Contract. This may not give you a definitive answers but it will at least set a framework!

Starting with Cl. 11.2(5), you will need to establish if the “people are employed by the Contractor” which would appear to be the case and also whether these costs constitute payments by the Contractor “Providing the Service”. This second point may be more difficult to establish. Are the activities or requirements set out in the Service Information? Or are they requirements set by the Contractor’s policies and not essential to providing the services?

Next consider Cl. 52.1, which generally states that “all costs not included in Defined cost are treated as included in the Fee”. This statement in isolation isn’t very helpful. I suggest that you ask the Contractor to disclose how they built up their Fee . While contractually the open book provisions within NEC3 Contract don’t extend to a breakdown of the Fee. I’d suggest that this an obvious way to find an equitable solution. Ideally this should have been done pre contract to give both sides some comfort and avoid uncertainty like this.

Cl. 52.2 sets out records to be kept by the Contractor and while not directly related to your question. The Contractor and any assessment also need to meet this requirement.

I have in the past drafted a small Z clause to clarify what items you expressly exclude from Define Cost and therefore by default covered in the Fee.