NEC 3 Option A - Compensation Event
A quotation provided by the Contractor (two weeks after an event) showed a cost of £5,000 + Main contractor fee, subsequently the PM has received a quote from the Sub-contractor who undertook the work and this quote was only £3,000. Surely the PM should be paying the £3,000 + Sub-contractor + Main Contractor fee. How can the PM stop these fraudulent claims coming in?
Is it fraudalent ? My answer is “not necessarily so”.
Firstly, your statement “Surely the PM should be paying the £3,000 + Sub-contractor + Main Contractor fee” is true under options C, D & E (subject to the caveats below), but not options A & B.
Under options A & B only, as far as the Employer / PM is concerned, rates and percentages tendered by the Contractor apply regardless of what the Contractor is charged. So if the main contractor has a rate for a labourer of say £15 per hour, but the subcontractor has tendered £12 per hour, the Contractor is fully entitled to charge the higher rate. Likewise, if it was the other way around, the PM would be fully entitled to inist on only paying the main Contractor £12 per hour when his costs are £15. The same thing applies with tendered percentages, such as the Contractor’s subcontract fee percentage vs. the Subcontractor’s direct fee percentage; the percentage adjustment for Equipment and percentage for people overheads. If you think you are not getting value from the rates and percentages tendered by the main Contractor, then I suggest you look at your tender evaluation procedures.
Secondly, NEC3 pushes the contracting Party to make forecasts when assessing compensation events. It may that the Contractor made and the PM accepted some fairly generous risk allowances within that quotation &/or whatever risks were within the quotation did not come to pass. The Subcontractor, on the other hand, put their quotation forward on the basis of actual costs incurred and the work went actually went smoother than everybody, including the PM, expected.
Thirdly, it may be that within the quote are some additional main Contractor costs, which could Contractor owned risks (see above), management costs, time related costs (which may or may not be on the critical path) etc…
These factors could mean it was quotation submitted fully in accordance with the criteria in clause 63 and elsewhere in the contract and hence not fraudalent.
How can the Employer stop this happening ?
- better evalaution of the rates and percentages submitted by the Contractor at tender.
- better understanding of the contract.
- better definition of the compensation event, so that the Contractor can give a quotation with the less risk in it and based on better programming
- more rigorous evaluation of the quotation in accordance with the contractual criteria with reference to the Accepted Programme etc.