On an option E contract our client has a clause that entitles them to audit the agreed rates, if the effect of the audit results in the rates being reduced this would then reduce the company turnover, would we then be justified in altering the agreed fee % as this % is partly based on the turnover?
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On the face of it, no. There is no mechanism within the contract to change the Fee percentage, albeit if the Parties both agree to a change, then the contract can be amended.
You would need to look at the mechanism by which the agreed rates are adjusted. If it is by a bespoke method (rather than by adjusting Defined Cost in accordance with the unamended contract process) then you might be able to argue that the proposed reduction should be reduced to account for the disproportionally higher overhead percentage on the lower turnover.
If the Client has the right to audit any rates and they are found to not be compliant with the contract, presumably the Schedule of Cost Components, then they may also have the right to ‘change’ them, depending on what the contract says.
If the rates were stated in Contract Data Part 2, some information can be changed under the contract and some can’t, except by deed of variation. Assuming they do have the right, then the risk lies with the Contractor to ensure that the rates are compliant with the requirements of the SCC and so any required changes, consequent to an audit, would be an allowable adjustment,
The fee percentage is not changed unless there is a mechanism in the contract to provide for this, which is common in relation to target cost contracts where the PWDD exceeds the total of the Prices. Otherwise the fee percentage does not change.