I am pricing a project where warranties are to be provided. The intention was to include a percentage on top of the fee to compensate for the costs of the warranties. I want to know if there are any other ways of dealing with the recovery of cost related warranties.
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The answer as to how you recover the cost of warranties rests in both the main option (A or C) and the definition of Defined Cost, which points to either the Shorter or (full) Schedule of Cost Components (SCC).
When you interrogate the SCC you will see that there is no explicit description that allows you to recover directly the cost of a warranty. Therefore by virtue of 52.1 anything that is not a Defined Cost is included in the Fee. You must therefore include the cost of warranties in your Fee (overheads)
Your proposed solution is in fact the correct one, but how you do it will depends upon the main option you have to use.
For Option A you must include the cost of the warranties in your lump sum price. However, if the cost of the warranty is not affected by any changes to the price caused by compensation events then you do not need to include it in your Fee. If however the cost of the warranty varies with the value of the works then you will need to include it in the calculations for your Fee.
For Option C, whilst the cost must be included in the Target, since you recover your Fee on Defined Cost the cost of a warranty must always be included in the Fee. This does mean that any compensation events will also include an element of the cost of the warranty whether or not the cost varies but I would hazard a guess that the sums are so small in comparison to the main works that they are negligible.
John has provided a comprehensive answer to this all to commom issue.