NEC 4 Option B - CE Assessment and Defined Costs

NEC3 and NEC4 Contracts Compensation Events
1

Reach Back defined costs

Friday 22 January 2021
09:13

I would like to get clarification on the meaning and use of ‘define costs’ when calculating a quotation for a CE.

My understanding of clause 52 is that ‘defined costs’ = rates and fees that are stated in the CD. (Rates means SSCC rates.) Open market rates or Competitively tender rates inclusive of deduction etc.

To assess a CE we default to use the Define Costs procedure stated in the contract therefore the following can be used;

• BoQ rates (if both parties agree CE can be assessed using BoQ only) 
• SSCC Rates- to assess a CE inclusive of the fee
• Other amount at open market rates
• Competitively tendered price (BoQ rates?)
• Calculated using both SSCC and BoQ to calculate the costs impact of the CE's?

Scenario; NEC 4 opt B

Contractor has been issued a Scope change Cl 60.1 (1). This CE has changed an element of works that was previous included in the BoQ. The CE has changed the element where by the original BOQ rates are not applicable I.e. Installation has increased in depth and width from original design.

The Contractor calculated the CE using both the BoQ rates and SSCC rates. SSCC was used to calculated the new design in totality and the BoQ rate was used to calculate the omission or credit for the original works.

Note; The BoQ rate could not be pro-rata to allow for the new works due to the changes in design, the BoQ rate is reflective of the value of the omitted works.

The PM has decided to pro rata the BoQ rate in assessing the CE. The PM is stating because the contractor has included BoQ rates in the quotation for the omission- this is consider agreement to assess the CE using BoQ rates only.

The Contractor has disagreed with the PM assessment using BoQ rates only. (See Note above)

The PM has then advised that if SSCC rates are going to be used to assess the CE- SSCC rates are also used for the omitted works. (The omitted works is already defined in BoQ- ‘Competitively tendered price’)

I do not believe the PM is correct in the calculation method proposed to assess this CE?

In general, can SSCC rates be used to assess omitted works when there is a BoQ rate already provided and when the BoQ rate is reflective of the value of the works to be omitted?

Clause 52 Competitively tenders rates can they be considered as BoQ rates?

2

I will put down my thoughts:

  1. Core clause 52.1 refines what is Defined Cost and applies across all payment options. The definition of Defined Cost varies from option to option and therefore that is the first place to look.
  2. Option B clause 11.2(23) says that Defined Cost is “the cost of components in the Short Schedule of Cost Components”. BoQ rates are not in the SSoCC and therefore do not count as Defined Cost. Therefore clause 52.1 does not apply to the tendered BoQ rates for original work. This answers the last line of your question.
  3. How you have assessed means you are trying to have your cake and eat it: deduct your presumably tight tendered BoQ rates (thereby minimising the deduction) and add-in additional costs using the SSoCC (thereby maximising the addition). Unless the PM agrees to the deduction under clause 63.2, it is not in accordance with the contract.
  4. Rightly or wrongly you used BoQ in your original quotation. The PM, in making his or own assessment is fundamentally altering the basis of the assessment from how you did it. To say you therefore agree to use BoQs for the whole assessment is a warped view of agreement !
  5. However, without agreement to use rates as per 63.2 for whole or part of the assessment, the PM is correct in using the SSoCC for the whole assessment i.e. the omissions are assessed using it as are the additions to arrive at the change in Defined Costs to which the fee percentage is applied.
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3

Jon,

Thank you for your response.

On this occasion I am confident to say the item is not tendered tight. It is a complete change of equipment from what was tendered. See below more detail.

The issue we have with this specific event is trying to compare apples with apples from the tender requirements versus client construction requirements.

A contractor’s tender price for an item of work- reflects the installation of equipment that meets the project requirements and will fit within the proposed area identified on the tender drawings. The change of design (Issued For Construction) reduces the footprint and increase depth of the area where this equipment was to be installed.

Example;
Tendered Area denoted on drawings - 700m2 x1m depth- Tendered equipment will meet the project requirements and is suitable for this area.

IFC design change- Area 500m2 x 1.7m depth - Tender equipment will not be suitable. New product to be procured that is suitable for a reduced area and increased volume required. New equipment system is specialist sub contractor installed item- costs circa 45% more than tendered equipment.

The tender costs breakdown has been presented to the client to proved the costs tendered are reflective of the orginal bid item.

The client still wants to assess the event using the new equipment quotation to work out the ‘defined costs’. Using the quotation as tender price. Contractor is proposing to omit the original BoQ item and reprice based on a ‘defined cost’, which I would have thought is the most reasonable way to determine this type of CE?

Interestingly enough it’s not the first time I have encountered the PM view on agreement to use BoQ rates for CE’s due to a Contractor including a BoQ rate as part of his CE quotation.

Thank you.

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4

This is often a ‘problem’ under main option B, whereby a BoQ item is required to be assessed as forecast Defined Cost so that it can be included in a compensation event quotation as a corresponding omission. This is a particularly difficult assessment to make where the specified item (Plant or Material) is no longer available.

If you have a breakdown of the rate you could, of course, present this in the form of Defined Cost, which would at least ensure the assessment is compliant. You may also need to provide assurance, however, that the prices are on a ‘like for like’ basis, including relating to the same point in time.