NEC ECC: Option C: Disallowed Cost regarding Subcontractor's works

According to Clause 11.2 (25) bullet point 2, Disallowed Cost is a cost that should not have been paid to Subcontractor in accordance with his contract.

Here comes the question, what if the cost is paid by the Contractor to the Subcontractor in accordance with their subcontract while on the other hand, the Project Manager found the cost is abnormal or he believe their is something wrong in the pricing / contract in the Subcontract?

For example, the WI requires the Contractor to construct 10 piles. The Contractor subcontracts the piling works. In the Subcontract, the Contractor asks the Subcontractor construct 15 piles. The Subcontractor eventually built 15 piles and the Contractor pays. The Project Manager would like to disallow the 5 additional piles. However, it seems that he cannot disallow it because the Contractor pays in accordance with the subcontract (Clause 11.2(25) bullet point 2)

Is there any solution for the Project Manager to deal with this issue?

Assuming this is NEC3, which is referenced below.

It doesn’t look as though the Disallowed Cost clause 11.2 (25) bullet point 2 is applicable as payment has been made in accordance with the Subcontract, as you state.

As the Works Information defines the scope of works then the Contractor is obliged to comply with this under clause 20.1. Where this isn’t the case, then the matter becomes a Defect under 11.2 (5). The provisions for dealing with such Defects is under clauses 43, 44 and 45. I suspect that the piles will be left insitu, therefore it should be dealt with under clause 44 as an accepted Defect, with the Contractor submitting a quotation for reduced Prices. If this is not accepted by the PM, then the Contractor has little choice other than to remedy the Defect themselves, or accept the cost of correcting this by other people.

Possibly an expensive oversight on the Contractor’s part !!

My comment was how come the Subcontractor constructed 15 piles ? If only 10 were specified, BUT - note the big letters - it was necessary to do 15 to Provide the Works why isn’t the Contractor notifying a compensation event ?

It is a mistake made by the Contractor when he is compiling the subcontract. In the WI, the Employer only needs 10 piles and nothing more. The Contractor accidentally writes 15 in the subcontract.

The problem here is that - the Contractor should still pay the Subcontractor for the 15 piles as this is made in accordance with their subcontract. The Project Manager finds this cost (the 5 additional piles) is not made in associated with the works. However, it seems that it cannot be disallowed as it does not fall within the definition of Disallowed Cost (Clause 11.2 (25) bullet point 2). The keyword I spot in Clause 11.2 (25) bullet point 2 is “in accordance with his contract”. Since the 15 pile pay by the Contractor to the Subcontractor is made in accordance with his contract, I am not sure if the Project Manager can disallow this 5 additional and unwanted piles.

I think this then falls into the unfortunate circumstances of Option C that many Employers fail to appreciate. Whilst Option C allows the Employer to share in the Contractor’s savings through value engineering, improved efficiency, buy-downs and discounts etc., it also means that the Employer shares in any inefficiencies or errors that the Contractor makes, beyond the few exceptions of disallowed cost.

Andrew, I think there may be an argument/discussion that the matter is not a Defect since the additional piles are not part of the works (lower case w) and presumable are outside the design envelope.

Dave, you raise a good point which would be an interesting discussion thread.

I am surprised that such a situation would not have been addressed sooner, what with acceptance of the Subcontract and consequent Method Statement etc, especially as it looks like the Employer has responsibility for design.