NEC ECC: How do you deal with increase in subcontract rate due to termination of the subcontractor

We are operating under NEC 3 Option D Contract.

The Contractor’s subcontractor will be terminated to due to substantial defects in the subcontract works. Under the subcontract agreement, the contractor should have issued a notice to repair the defective works within 60 days upon receipt of the notice. However, no such notice was issued by the contractor to its subcontractor but instead repair the defective works itself with little assistance from the subcontractor but only for a short period of time. The subcontractor’s team was instructed by the contractor to demobilized due non-availability of work areas. Meantime, the liability for the repair and consequential loss is now the subject of a dispute between the Contractor and its subcontractor.

The Contractor intends to hire a replacement subcontractor to complete the remaining works. However, the increase in the subcontract price from former subcontractor’s price to the prospective subcontractor is substantial.

Inasmuch as the subcontractor is treated as the contractor for the works under NEC, the default of its original subcontractor is considered by the Project Manager the default of the Contractor.

Can the Project Manager, disallow the increase in costs of the subcontract works and the cost of repairs of the defective works?

If this corrective work is being done after Completion the answer is a definitive ‘Yes’ - see 4th main bullet of clause 11.2(25). Otherwise I am struggling to find a reason unless something was written into the Works Information.

However, the extra cost will be split by the pain / gain share of the target cost mechanism and that is part & parcel of using such a contract strategy - you share the a gains and the pain.

I think there could be another view here.
If the contractor has incurred additional costs due to the subcontractor’s non-performance, that has led to termination of the subcontractor, then arguable the contractor should be pursuing the additional cost from the subcontractor and it is not therefore an amount due (from the contractor) under the subcontract and therefore not Defined Cost.

Good point, nicely argued !