NEC ECC: Withheld Monies - Not Disallowed Cost - Option C

The PM has begun a cost audit and requested substantiation for several areas of Defined Cost. Under all categories of cost the requested information has been provided as far as possible to date. Some is still to be provided to the PM. The PM has decided under several categories that the value of the substantiation provided is X and the value claimed in Applications to date is Y. The difference between the total X and total Y is 20%. This is based on the small sample (5 from 50) selected to be audited in the category. The PM has decided that he presumes the 20% therefore applies to all in the category and has decided to “withhold” that 20% from payments for 100% of the items in the category. This is applied as a deduction from current Applications.

This does not appear to comply with the requirements of Option C in regard to Defined Cost and Disallowed Cost. The withheld monies are not Disallowed Costs. The PM has said he is doing the Contractor a “favour” by not classifying them as disallowed. Is the PM administering the Contract incorrectly and is this effectively putting the Employer in breach of contract?

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Firstly it’s the PM’s responsibility to assess the amount due (50.1) which is the Price for Work Done to Date, plus / less other amounts (50.2). In deciding to withhold 20% the PM has made an assessment based on the evidence available and at least it was based on some logic and rationale. However it sounds like you disagree and most likely have good grounds to do so. If you disagree with an amount certified by the PM then your recourse is to adjudication, and if successful you would be repaid the withheld amounts plus interest (51.3).

I’m struggling to agree with the PMs rationale, if he found problems with 5 / 50 costs amounting to 20% it would have been more prudent to extend the audit to investigate how extensive the problem is rather than make an assumption and apply it arbitrarily across all Defined Cost. The PM surely has only done this on an interim basis whilst a more in-depth audit establishes the true and accurate Defined Cost? I don’t agree with the PM’s view that he is somehow doing you a favour by not classifying them as Disallowed Costs? What’s the logic behind this? The difference between amounts paid by the Employer and amounts justified by the Contractor falls under the first bullet point in the definition of Disallowed Cost (11.2.25).

It should be a straightforward exercise for you to investigate the Defined Cost you have been paid and discover if it can be justified or not? Why not wave clause 10.1 at the PM and suggest that you do a joint audit?

Ultimately, as I said earlier if you know the PM is wrong, and you can’t persuade him of this then your only recourse is to adjudicate. Prior to doing so though you need to ensure you have justified to the PM the amounts included in your application. Unfortunately in your case it could involve providing a lot of substantiation i.e. more copy invoices as the PM’s confidence in the accuracy of your Defined Cost is low due to the errors found to date.

Just to add to Neil’s answer, the Project Manager has no right to withhold amounts due on the basis of a subjective opinion that something may or may not apply. The contract gives the Project Manager the right to inspect accounts and records, which could be undertaken periodically as the work proceeds. It sounds like this hasn’t occured and now an amount is being withheld to allow the PM an opportunity to inspect this information. As Neil has stated, you should be re-paid the amount plus interest, if not deducted correctly under the contract.

The opening sentence of the Disallowed Cost clause in NEC3 ‘cost which the Project Manager decides’ has been deleted in NEC4, which reinforces the requirement for any such assessment to be undertaken clinically and methodically. An incurred cost can only be treated as Disallowed Cost only when it can actually be determined to fall under one of the stated bullet points. A subjective and ‘global’ application is not a correct assessment of Disallowed Cost under the contract, even though the PM is stating that his assessment is not Disalowed Cost.

Although the contract doesn’t state a procedure, why not suggest to the PM that the review leads to an outcome; Defined Cost, Disallowed Cost or not proven, and you have timescales in which to address any concerns or queries before amounts are treated as Disallowed Cost. This is simlilar to the practicalities of accepting a programme, whereby minor issues are dealt with by giving the Contractor an opportunity to correct them (say 2 months), before the PM can not accept the programme. Neil has already suggested 10.1 and I think this is appropriate as the contract doesn’t cover every practicality so a little co-operation and common sense need to apply.