NEC 3 Option E Deduction of cost based upon initial budget

Currently working on an NEC3 Option E contract (slightly amended by client), a budget (£11m) was drafted based upon the initial Works Information (most of which was based upon assumption owing to lack of design).
We had gone through 15 monthly programme and payment cycles,where the budget has been updated in line with the additional works information (some quite significant so now £19.5m) that had been provided and a number of NCE’s (as yet unassessed by the client ) and the client had made some small deductions,but generally the relationship had remained cordial.
Owing to a change in commercial staff,and one month before completion, the client has become very commercially aggressive,and adopted the attitude that the any change to the initial budget, for materials in particular, now needs to justified or they will disallow the cost, using “*Plant and Materials not used to Provide the Subcontract Works (after allowing reasonable wastage) unless resulting from a change to Subcontract Works Information.” as the basis for the deduction.

Further to this since the start of contract we have also been submitting time sheets for acceptance by the client via an electronic portal, in line with the Works Information, again they had been quite happily paying these,with occasional requests for additional information that was provided swiftly.
The client now says as they are unsigned and “unagreed” (there is no mention of a requirement for a signature in the WI , only submittal for acceptance) and that they are not records in their opinion, and will use the site Gate Log (filled in by the security guard, but mainly used to monitor material deliveries rather than staff) as the basis for valuation and apply these retrospectively to the whole account? These gate logs have proven to be wholly inaccurate and were never intended to be used for cost verification purposes.
This is one or two of the a large number of instances where the client has changed previously paid items,a lot of them retrospectively,and this has had a devastating effect on cash flow and the relationship between us and the client.
So is my question is can payment of previously paid items be considered to be acceptance of these budgets,time sheets etc and what can be done to argue this?

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Whilst this sort of behaviour is not good practice and is possibly a breach of the mutual trust and co-operation obligation at clause 10.1 there is unfortunately nothing in the contract to stop this from happening. Interim payments in construction contracts are made to facilitate cashflow and whilst the Employer has an obligation to pay amounts certified by the Project Manager, these amounts are not final and binding on the Employer until the Parties enter into some sort of final account agreement which in any case is not a feature in NEC3 contracts.

One note is that the budget is entirely irrelevant to payment in Option E, a cost can neither be excluded from Defined Cost or included in Disallowed Cost merely on the basis that it means the budget will be exceeded (note Option E uses the term forecast of total Defined Cost and not budget), unless of course you have Z clauses that state to the contrary.

Whether Plant and Materials are not used to Provide the Works is surely a matter of fact, are they there and form part of the works or not?

You don’t state whether the timesheets were accepted or not however I still go back to my previous point that even if they had accepted them it doesn’t mean that they now can’t challenge them. Gate logs are notoriously inaccurate and I would say that contemporaneous timesheet records which have been signed-off by you and submitted for acceptance are much more reliable. To fight back against the client try to find evidence that supports the fact that your timesheets records are correct and the gate log not. For example pick a few days where there was a meeting on site where the Employer’s representative, Project Manager and you attended - hopefully you’ll have a record of the meeting and who attended, then you can check this against the gate log and hopefully find a discrepancy to help prove the accuracy of the timesheets. Stand your ground on this one, if you are certain that your records are robust they’ll have to pay in accordance with the contract at some point, it just might take an adjudication to get you there if commercial discussions break down.

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Neil’s comments are entirely correct. I add that this is a contract under civil law so while the onus is on the Contractor to “justify” - as per the first bullet of the definition of Disallowed Cost - that Defined Costs have been incurred on this contract, it is not to “prove beyond all reasonable doubt” as per criminal law.

We all know that actual costs change from budgets especially when the Works Information is relatively undefined … hence the reason I assume for using a cost reimbursable contract. So seems ridiculous to disallow these costs unless they have evidence that the materials were either not used to Provide the Works or there was unreasonable wastage i.e. what it says in the contract. The fact that they have not given these as a reason and hence provided any evidence strongly suggests that a deduction under this bullet is not sustainable.

The fact that they have been paying against your timesheets is indicative (only) that they were happy with them. You have prevented evidence which, on the balance of probability, indicates that these people were used to Provide the Works on this contract for the number of hours claimed and you have done it in accordance with the contract i.e. loaded to a portal. The security guard’s evidence does not seem strong enough to swing the balance of probability back to you not using them i.e. fraudulently claiming additional hours. I would ask the security guard how precisely they have been recording individuals in and out of the WAs and I bet it is not as conscientiously as you have been with your records.

Finally, you might wish to remind the person representing the PM that, under Costain v. Bechtel, they are an “impartial administrator in matter of assessment” (of CEs which does not apply here) “and payment”.

As Neil alludes to, it seems that the new person is setting the Employer up for a failed adjudication.