NEC ECC: Under Option B, how is Defined Cost applied to a compensation event?

We are currently engaged in an NEC3 ECC Option B Contract with our Employer and are the stage where 99% of the physical works are complete which has been spread across a two year installation programme.

For one reason or another, we find ourselves with an un-agreed variation account worth circa £1m with our assessments around £500k apart consisting of 88No. compensation events (ce’s).

Wherever possible, BoQ rates have been used to assess a compensation event however in many circumstances they have not been applicable and we have therefore reverted to the Shorter Schedule of Cost Components (SSOCC) to build up quotations with labour, plant, materials cost and their associated fee.

Within the Contract Data Part 2, the only data to be applied to the SSOCC is CECA’s published list of Equipment and the percentage for people overhead which has been adhered to. For labour rates, as a part of our tender submission we were required to populate an extensive sheet titled “Schedule of Labour Rates for Pricing Variations” which formed a part of our competitive submission and was scored as a part of the Employers tender evaluation. Naturally, these labour rates are what we have applied when pricing compensation events.

Last week, we received the Clients assessment on 15 of the largest value CE’s where they applied labour rates notably less than what were include within the aforementioned “Schedule of Labour Rates” based on commercially sensitive information disclosed from a separate Option E Contract we had ongoing at the same time as there was a crossover of the some of the personnel used.

Our stance is that the Employer is unable to use such information from a different Contract, where we are carrying out entirely different works on a different site to assess Defined Cost. In our view, Clause 52.1’s definition of Defined Cost is clear and our application of the “Schedule of Labour Rates” is not dismissible as they are “open market and competitively tendered prices”.

The net impact of applying this principal to all 88No. quotations has left us at a significant impasse and we are reluctant to concede and begin revisiting labour rates which have not previously been raised as being an issue until now.

Your view on our interpretation of Defined Cost in this circumstance and how it is applied would be much appreciated.

First of all, what is the ‘Client’ doing evaluating compensation events … it is the Employer under NEC3 and it is the Project Manager’s job tone the impartial administrator of the contract.

Putting this is aside, you are absolutely right in your conclusion, but for an additional reason:

  • clause 52.1, second sentence says “Defined Cost includes only amounts calculated using rates and percentages stated in the Contract Data and OTHER amounts at … …”. The reason I have put ‘other’ in capitals is because it strongly implies/has the meaning that if there isn’t a rate or percentage in the Contract Data, then you use OTHER amounts at …" Assuming the Schedule of Rates was referenced from your Contract Data, I would say this is your primary argument.

  • if they come up with a good counter-argument to this - which I have not yet heard one heard - then your fall back is the one you gave i.e. the rates in the Schedule of Rates were competitively tendered whereas the rates you want to use are built up from scratch using a a schedule - the full Schedule of Cost Components - which is not referenced in option B and is therefore not even part of the contract.