NEC 4 - Option C (X11 - Termination)

NEC3 and NEC4 Contracts
1

NEC4 - Option c, with the inclusion of Secondary Option X11 (Termination). X11 allows the Client to terminate for a reason not stated in the main contract, it states the termination procedures are P1 & P2, the “amount due” must follow Cl.93.4 - A1, A2 & A4. Some guidance on the wording of A4 please.. “The fee percentage applied to any excess of the total of the Prices at the Contract Date over the Price of Work Done to Date”.

Is the intent of this to allow the Contractors fee percentage to be applied to the remainder of the value of work, on which they now miss out? i.e. Total of the Prices = £1,000 000, Defined Cost at Termination = £300,000, Fee Percentage = 20%, the “excess” being the £700,000 the Contractor is missing out on as the Client has now terminated for a reason not given in the main Contract, therefore the Contractor is entitled to £140,000, under Cl93.2 - A4 ? I appreciate this is likely to be a rare occurrence. I feel the NEC wording of A4 is not particularly clear, it should be “minus”, not “over” (divide).

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Clause 93.4 – The “amount due” if termination happens

  • A1 – The Price for Work Done to Date (i.e. Defined Cost plus Fee, subject to Option C rules, up to termination).

  • A2 – The Defined Cost of Plant and Materials ordered for the works which the Contractor has to pay (less amounts already paid or recoverable).

  • A4 – A deduction for the cost to the Client of completing the works and/or correcting Defects

Guidance on A4 wording

The standard NEC4 clause A4 is intentionally open, but its effect is:

“The amount due to the Contractor is reduced by the additional cost to the Client of completing the works and/or correcting Defects.”

This means:

  • If the Client terminates under X11, the Contractor does not automatically receive payment for unperformed work.

  • Instead, the Project Manager calculates the extra cost the Client incurs in bringing in others to finish or correct the works.

  • That “additional cost” is offset against the Contractor’s entitlement under A1 and A2.

  • If the Client spends more completing the works than what is left in the target, that excess can reduce the Contractor’s entitlement – in some cases to zero or even negative (repayable).

Because A4 is often disputed, its best to ask the PM to clarify its scope. For example, you want to know some of the following:

  • Define whether “cost to the Client” means actual cost incurred or reasonable cost assessed by the Project Manager (which could be adjusted in the final payment once actual costs are known).

  • State whether it includes indirect costs (management time, delay damages, procurement overheads) or just direct costs of a replacement contractor.

  • Clarify how A4 interacts with the target cost and pain/gain share under Option C (i.e. does the target mechanism stop on termination, and does A4 override the gain/pain calculation?).

  • Best to agree to a sum (or no sum) to close it out.

In short:

  • A4 is the “deduction for the Client’s additional completion/defects costs.”

  • It gives the Client protection if they terminate under X11.

  • If you’re negotiating, you’ll want to define clearly what counts as “cost to the Client” to avoid disputes.

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Apologies, the Clause is 93.2 - A4 “The fee percentage applied to the excess of the Total of the Prices at the Contract Date over the Price of Work Done to Date*”.* X11 clearly states the procedures to follow would be A1, A2 and A4. I do not believe A3 comes into this ? This is only if X11 is included in the contract and the termination is for a reason not stated in the termination table (as in this case)

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I found CECA Bulletin 54, which I believe confirms my view that a termination under X11, for a reason not stated in the termination table would entitle the Contractor to the fee percentage on the remaining works not yet carried out:

Secondary Option X11: If this secondary option has been listed in Contract Data, the Client may terminate for a reason not stated in the termination table. This then becomes one of the rarer situations where the Contractor WILL be entitled to fee percentage on the works that have been removed as the termination reason is not one the Contractor has contributed to or had any control over.

Procedures upon termination: Section 92 identifiesa choice of four procedures to follow (P1-P4). Procedure P1 will always be applicable for any termination reason, and then there is a choice of either one or two additional procedures (P2-P4) that will be applicable depending on the termination reasons:

  • P1: Client may complete the works and may use Plant and Materials to which it has title

  • P2: Client instructs Contractor to leave site, remove any Equipment, Plant and Materials from site and assign any benefit of any subcontract to the Client

  • P3: Client may use Contractor Equipment to complete works before the Contractor then promptly removes it

  • P4: Contractor leaves Working Areas and removes Equipment

Payment upon termination: Section 93 identifies a further four elements(A1-A4) to identify what the amount due upon termination to the Contractor would be:

  • A1: amount due assessed as for normal payments, Defined Cost for Plant and Materials within the Working Areas, other Defined Cost reasonably incurred, any amounts retained by Client, and a deduction of any un-paid balance of an advanced payment

  • A2: forecast Defined Cost of removing Equipment

  • A3: deduction of the forecast additional cost to the Client in completing the works

  • A4: fee percentage applied to remaining works

The only situations where the Contractor is paid fee percentage on the works that have been removed (A4) would be if the Client has gone bankrupt or insolvent (R1-10), Client has not paid an amount within 13 weeks of the date due (R16), default by the Client (R19) or Client terminating for any other reason (X11).

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For Clause 93.2

A4 = “The Contractor is paid the share of the difference between the Price for Work Done to Date and the total of the Prices at the Contract Date, as if the contract had not been terminated.”

In other words, the pain/gain share mechanism still applies on termination

The Contractor gets Defined Cost + Fee (A1) for work done up to termination.

They also get for any materials/plant liabilities under A2.

Then, under A4, the pain/gain share calculation is done at termination. The Project Manager compares:

The Price for Work Done to Date (i.e. the Contractor’s actual (no forecast) Defined Cost + Fee at termination), and

The pro rata target (Total of the Prices at Contract Date, adjusted for implemented CEs, up to the termination point).

If the Contractor’s cost is less than target, they share the saving (gain).

If it’s more than target, they share the overrun (pain)

Let’s assume:

Total of the Prices (target at Contract Date) = £10,000,000.

At termination, Price for Work Done to Date (Defined Cost + Fee) = £6,500,000.

The pro rata “target” for the work completed (say 65% of target) = £6,500,000 (coincidentally the same here).

Share ranges = 50/50 pain/gain.

Step A — A1

Defined Cost + Fee to date = £6,500,000.

Step B — A2

Say the Contractor has ordered materials worth £200,000 that they cannot return and must pay for. Add = £200,000.

Step C — A4 (pain/gain share)

Target for work done = £6,500,000.

Actual = £6,500,000.

Difference = 0 → no share adjustment.

If, for example, Defined Cost + Fee had been £6,700,000 (over target), the £200,000 overrun would be shared: £100,000 deducted from the Contractor under A4.

Summary

Option C termination (cl.93.2): Contractor is paid
A1 (Defined Cost + Fee to date) + A2 (unavoidable materials/plant) ± A4 (pain/gain share adjustment).

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I’m struggling to follow the questions and answers.

Regarding what I think is the original question, the excess is the positive difference between the contract awarded/original Total of the Prices and the Price for Work Done to Date at the date of termination. This is not necessarily the remaining value of work since compensation events may be included in the PWDD.

In your example the PWDD would include fee so would be £360,000. The excess would be £640,000 so the fee applied would be £128,000.

Regarding the thread, the payment on termination under X11, 93.2, 93.4 and 93.6, is A1 + A2 + A4 +/- share

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