NEC ECC: Disallowed cost of Defects due to failure by Contractor to Comply with Specification

We are working as Supervisor with a lot of delegated PM duties on an NEC3 ECC Option C Contract. The Contractor has installed the gullies that do not comply with Specification or relevant British Standards and therefore are a Defect. The Sub-contractor who carried out the work is also on an Option C sub-contact.

We are advising the Employer that the Defined cost of the work and the work to rectify the Defect is not disallowed cost provided that it is undertaken before Completion. We also advised that had the gullies not been installed the cost of materials could have been disallowed as they would fall under Clause 11.2(25) bullet point six of “Plant and Materials not used to provide the works”, however once they have been incorporated into the road they have been used to provide the works.

The Employer believes that the cost should be disallowed under Clause 11.2(25) bullet point five “Correcting defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information”.

We contend that this is incorrect as Clause 11.2(19) and associated guidance notes clearly distinguishes the difference between Works Information is information which specifies and describes the works and that which states any constraints on how the Contractor Provides the Works. The additional Defined cost with simply affect the Contractor’s gain share.

Are we correct in stating that a Specification in the Works Information detailing standards to be compiled with is not a constraint on how the Contractor provides the works? Key word being how they provide the works rather than what they actually provide. i.e constraints are physical constraints, things such as minimum air temperatures when works can be carried out?

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Yes I would agree that you are correct. That is not what that bullet is intended to cover. Indeed if they were right then it would mean any defect not complying with Works Information would be disallowed - and you would not need the statement “correcting defects after Completion” as any defect would already be dis-allowable.

So yes I agree you are correct, and yet it will not stop an Employer/PM trying to shoe horn something that they do not want to pay for into a reason that they think allows them to disallow it. Remind them, that they share in the benefit from the good stuff you do (buying gains, efficiencies, value engineering) so should look to share the not so good stuff as well.

A Contractor is never incentivised to do defects as it is eating into “gain share” (or increasing “pain share”)

Hi Glenn,

Thank you for your input. I am also involved in the above, but have come at it with a different view on things from Mike – hence the query here. If you could help clarify a few further points for me to aid my understanding that would be very much appreciated.

Had the issue with the gullies been something like – they were incorrectly set, not flush with the surrounding surface, etc., then of course corrective works would not be disallowable. However, the WI sets out the specifications for the gullies, which places a constraint on how the works are to be carried out – i.e. don’t use gullies that do not meet the specifications. This constraint was not adhered to, resulting in the defect in question.

I would have argued that these are fundamentally different scenarios and should not be considered the same in principle. In the first case, the constraints in the WI were followed even if they did not succeed in meeting them, in the latter the constraints were just not followed.

Also, why is failing to follow a constraint that specifies which product is to be used considered different from a constraint on how to install it? E.g. (hypothetically) if the WI stated that the gully had to be installed with minimum air temperatures of 10 degrees but was not and this was the reason for the defect, then it sounds like in this situation it would be disallowable (based on the example in the NEC guidance notes). Why would these constraints be fundamentally different in outcome when both are from the WI specifications?

Additionally, is there not an argument that these gullies were not actually used for providing the works? The works stated product X was to be delivered, the subcontractor then delivers product Y – but product Y does not form part of the works.

If this line of reasoning doesn’t work, how far can it be taken? (Completely hypothetically again – to aid my understanding) In a situation where a contract required the installation of slot-drains, and the contractor instead initially installs filter-drains. If the client did not consider this acceptable, resulting in the contractor undoing their previous works, reinstating surfaces and installing the slot-drains – would the installation and removal of the filter-drain be allowable cost under NEC? This seems counterintuitive to me.

Thanks in advance for any comments.

Mark - I can understand your logic totally and you are not the first to question this. I don’t think the contract gives a clear boundary as to what is or is not included within this definition. What if the Works Information said the gullies have to be done a certain way so they are flush - then that would be disallowed too?

I think this question is even worse for option E - where if not disallowed then the Contractor is paid twice for doing the same thing and earns fee!

I think this is a good question/debate to have in our NEC People LinkedIn group where you will get more people’s viewpoints on this issue.

I repeat again the nature of option C is that it is shared risk. You benefit in the good work they do so why should any not so good work be solely Contractor risk? I think it is very difficult to get to a fair/equitable/contractual answer that everyone would be happy with.

It seems that the main point of contention is the definition of what is a ‘constraint’, which relates to ‘how’ (the Contractor) is to Provide the Works. It would seem, therefore, that the ‘constraint’; does not relate to ‘what’ the Contractor is to do but ‘how’ it is to do it.

If the Contractor installed an item which was not in accordance with the specification in the Scope, then this would relate to ‘what’ not ‘how’. Consequently this would constitute a Defect but not come under clause 11.2 (25) 5th bullet, unless the Contractor did not follow a specific procedure which constrained ‘how’ it was to be done.

All - I am the NEC Supervisor on this scheme. This is a disallowed cost for the following reasons. I will be very surprised if the Contractor does not accept this.

NEC 2013 11.2 Identified and defined terms
(25) Disallowed Cost is cost which the Project Manager decides was incurred only because the Contractor did not
follow an acceptance or procurement procedure stated in the Works Information.

NEC 2013 32.1
The Contractor shows on each revised programme how Contractor plans to deal with any delays and to correct notified defects.

WORKS INFORMATION: -

SHW 0100 Series
Clause 104.4
Standards, Quality Management and Acceptance
The Contractor shall institute a quality management system complying with BS EN ISO 9001 and shall prepare a Quality Plan.

Site Specific Series 0500
1.2 Schedule of Constraints
5) The Contractor shall give the Overseeing Organisation not less than 24 hours’ notice in writing of his intentions to commence any item of work to enable the Overseeing Organisation to make his arrangements for carrying out his supervision and inspections.
6) 4 working hours’ notice is required for each inspection request unless otherwise specified.

Summary: -

  • No Quality Plan for this site
  • No Inspection and Test Plan
  • No notice of intention to commence gullies to enable the OO to plan our inspections
  • No notice for the inspections on the gullies
  • Failing to identify on the Clause 32 the period required for rectifying the gully works. The Contractor is actually requesting additional time for disruption to the drainage for correcting his defects.

I understand your views but I remind you this is a shared risk contract being option C. You benefit from the good stuff they do and share some of the “bad” stuff - but it is NOT in their financial or political interest to do defects. Not everything fits in the "not following a constraint on how they are to provide the works as stated in the Works Information - otherwise you could just write in the Works Information “follow your QA plan to make sure you do nothing wrong” and everything would be a defect.

If this was going on for a prolonged period there should have been early warnings and risk reduction meetings to avoid this from repeating itself costing the project money.

Your last point is definitely not the case - they are entitled for NO prolongation for correcting defects - only compensation events can do this and these are certainly not compensation events!