The Employer has just entered into a contract with a Contractor which didn’t have an Equipment list included in Contract Data Part 2. The Contractor owns the majority of the Equipment to be used on the project so we now need to agree what rates will be paid as Defined Cost.
My reading of the Schedule of cost components is:
• Payments for the hire or rent of Equipment not owned by . . . the Contractor, at the hire or rental rate multiplied by the time for which the equipment is required (this would be demonstrated through purchase orders/ invoice).
• Payments for Equipment which is not listed in the Contract Data but is . . . owned by the Contractor, at open market rates, multiplied by the time for which the Equipment is required (this is what I believe we need to agree).
• Payments for the purchase price of Equipment which is consumed (I see fuel falling into this category demonstrated with delivery tickets and invoices)
The issue is that the Contractor is proposing rates that will be used for internal and external hire of Equipment and also include their assessment of fuel usage.
Had this been part of their tender submission there would arguably be no issue. However, post-contract I do not believe the ECC Project Manager has the authority to change the nature of Defined Cost, meaning that agreement of these composite rates would fall to the Employer and the Contractor.
The approach to be taken is becoming a bit of a sticking point and I’m wondering if I am overcomplicating things. Am I reading the Schedule of Cost Components correctly or is there a simpler viewpoint to take?
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Firstly, published lists for Equipment are only used in ECC Option A when the Shorter Schedule of Cost Components (SSoCC) applies, the SSoCC can only be used in ECC Option C by agreement and only then for assessing compensation events and not for assessing the Price for Work Done to Date (PWDD). Note in particular the requirement for agreement to use the SSoCC, if there is no agreement then assessment will be based on the full Schedule of Cost Components (SoCC).
Your general interpretation of the SoCC is correct, the Employer should pay no more for plant hired by the Contractor internally than they would pay for plant hired externally. In my experience it is normal for the Contractor to provide fuel for externally hired plant and yes this would be paid for as a consumable item and not included in the rate. You would also pay for the driver / operative as people under component 1 (see item 28) although given you are trying to establish rates under item 22 I can see that it is possible to agree an open market rate that includes the cost of people if that is preferred.
Remember that the Employer has few actions in the contract so any agreement or assessment is not done between them and the Contractor. The assessment of PWDD and compensation events is an action allocated to the PM, see clauses 50.1, 50.2 and 11.2(29) in relation to payment and clauses 62.3 and 64.1 in relation to compensation events.
You are not overcomplicating things, the SoCC is a complicated beast and often the subject of much discussion and debate!
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The approach to be taken needs to find a balance between excessive administration and value for the employer as the purposes of Option C is that both parties share risk and benefits.
One of the benefits of the employer choosing a contractor who owns it’s own plant is that he should be getting a lowered PFWDTD as internal plant use will be cheaper than external plant hire.
It is a good idea to agree rates, but they should be agreed to be near to cost so the contractor isn’t gaining at the employers expense.
I would recommend the following:
- Agree that external plant be paid based on invoiced true cost, including return of any rebates - this will include the operator in some cases
- Internal People cost should be based on actual payments for people
- Internal plant can be complex so it is best to agree a rate. To do that you need to do some research and calculate a fair estimation of true cost.
The true cost of an excavator is a derivative of the following:
- Cost of the machine the day it arrives onsite (based on the model and no of hours worked before arrival)
- Finance charges
- Duration on the project
- Hours expended on the project
- It’s value when it leaves the project
Eg. 8ton digger both new = £80k ex VAT
Based on the resourced programme, the machine will expend 40hrs per week for 20 weeks = 800 hours
The machine will then leave site after 20 weeks with 800hrs on it and has a resale value of £70k
The machine will cost £10k over the 20 weeks - so actual cost is £500 per week plus transport to and from site and finance cost contribution £2k +£2k - which is another £20 per week
So you can agree a rate of £520 per week for that machine.
It just takes a bit of homework but if done upfront - avoids a lot of administration costs
If your trying to role up a figure to include an all in rate, you will need to work out the following
- Cost of maintenance
- Cost of fuel
- Fuel usage per hour
- Estimate Cost of replacement parts
There are costs components for maintenance and consumables so I wouldn’t go bringing them in to a global calculation.
The contractor would like to get his own plant paid for at plant hire rates, but that would be him making money for him only and remove one of the employers opportunity to gain under the contract.