If a DAB decides that a Contractor is entitled to have a variation valued and paid on a cost basis, then how far can the Engineer investigate the 'cost' to determine if the cost is fair and reasonable?

DAB decided that as the tender breakdown was insufficient to value variations from a MEP subcontractor. The subcontractor provides an invoice to the Main Contractor for work relating to each variation, the Engineer wants further substantiation such as time sheets, suppliers invoiced etc. the Contractor argues that ‘cost’ is cost to him.

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I am assuming that this is an NEC question despite your terminology. I assume DAB is design and build, and assume by Engineer you mean the Project Manager, or someone who has been delegated powers by the Project Manager. It also very much depends on which ECC contract option you are working under.

Variations under NEC3 contracts are called compensation events. It is the principle of the contract that (unless by agreement) you do not use existing activity schedule or bill of quantity rates to value compensation events. The are assessed using the schedule of cost components (or shorter schedule of cost components for options A/B) which considers the elements of people, equipment, plant and materials, charges, manufacture and fabrication, design and insurance that you forecast that you will incur. It also allows you to add risk which has a significant chance of occurring.

Under options A&B this will be a forecast of what you will spend and you never have to prove actual. Under options C&D the target cost will be increased by the forecast and you will get paid the actual value you spent, and share any difference in the overall target with the Employer. For options E&F you would just get paid actual cost you can prove you have spent.