NEC ECC: In a CE, is the full cost of the material recoverable or is the quantity above what is required a Disallowed Cost

NEC3 and NEC4 Contracts Compensation Events
1

We have a situation where a PMI has been issued changing the Scope to include new work. The work is completely new and different to everything else on the project and there is a very small quantity of it.

The product specified by the engineer (Option B contract and this element is not Contractor Design) is only available in certain quantities and we need 20% of the minimum order quantity to be able to complete these works.

The PM (well, the PQS but the PM is the one refusing it) is arguing that the amount over and above the quantity required for the works is a Disallowed Cost because he views that as an unreasonable amount of wastage. He is expecting to pay us only 20% of the value of the minimum order quantity, with us covering the cost of the rest. We would not be able to use this material on any other project as the work we’ve been instructed to carry-out is quite specialised.

Our argument is that it isn’t in the spirit of the contract it to ask us to carry out work that will cost us more than we will get paid for it, especially as this is a completely new item.

Is the PM correct? If not, how might we successfully argue our case?

2

Disallowed cost does not apply under Option B. It is more relevant to the definition of Defined Cost under target cost contracts.

Under Option B, Defined Cost is the cost of the components in the Shorter Schedule of Cost Components. In the SSCC, the Defined cost of materials is

Payments for

• purchasing Plant and Materials,
• delivery to and removal from the Working Areas,
• providing and removing packaging and
• samples and tests.

If you are therefore required to pay for a minimum order quantity that is the Defined Cost for inclusion within the quotation - it is the payment that you will be required/have to pay.