Under a ECC NEC3 Option A contract, the Contractor has been asked to submit a quotation for a CE and has replied. In the cost breakdown there is an item for “insurance”. This was queried as insurance is believed to be included in the fee.
They have also been asked to confirm the nature of the “insurance” i.e. what is is for.
They replied saying that insurance for projects is charged internally to them at a percentage of the value of the works and not as part of overheads as these only apply to costs that are not project specific. So as the contract value rises so does the amount that the project is charged.
On this basis is this something they can include within their quote or what further questions are needed to be asked?
No, they can’t. The provisions related to payment of insurances are very similar in both the Shorter and normal Schedule of Cost Components (see section 7), but both start with “The following are deducted from cost …”
There is nothing in either SCC about paying the Contractor extra and core clause 52.1 states “All the Contractor’s costs which are not included in the Defined Cost are treated as included in the Fee.”
So the Contractor does get extra for insurance, but it is in the Fee, not as an identifiable Defined Cost.
I think there are a couple of ways this could arise, for example if specialist insurance is sought or new insurance which wasn’t previously required (that is probably a specialist service).
I think Jon’s reference to section 7 of the SCC is a red herring. Insurance premiums, save in very particular circumstances, are not a cost (section 7 is really aimed at preventing double recovery ie payment under the contract and by an insurer).
Going back to the question, yes an insurance contribution will increase based on the value of the work, but then that is also exactly how the fee works. So fee of 10% on a £1m cost is £100k. If a CE come along worth £100k then there is another £10k of fee part of which should go towards the original insurances at an increased value. So if the insurance recharge is 1% of project value that is 1% of the 10% fee leaving 9% for the rest of OH&P.
I agree with Rob’s comments.
The mechanism for recovery under NEC contracts via the compensation event procedure is pre-determined by the use of specified criteria, that is Defined Cost plus fee calculated using the SCC/SSCC. Although the relative actual cost of certain elements may vary, depending upon the circumstances, the principal recovery mechanism remains the same in all cases.
Project value is ONE of the factors used in the assessment of the cost of insurance premiums, although others, such as; change in risk profile, type of work undertaken, location, extending the time required, etc will all affect the premium cost.
The Contractor’s method of internal charging of premiums is an accounting allocation procedure only and does not necessarily reflect the actual cost of premiums and is not a project issue for the Client to consider. There may also be issues of ‘over recovery’ in the fee but that is the way the contract operates.