NEC ECS: Compensation Events - Recovery of Material Costs

As a company we install street lighting. We have a fee of 10% (which the Contractor insisted was the most their client would accept!!!) and we accepted as we thought there would be no additional works. We have now been instructed to supply some really expensive products and with 10% we wont even recover our overhead (15%) and profit (5%) which is around 20%. Is there any mechanism which will assist with this. This is a frequent problem where materials are by far the highest proportion of the BQ rate (70/30). For the future what would be the the way forward?

1 Like

Generally speaking once you’ve tendered a fee percentage and it’s included in a signed contract, you’re stuck with it just like you are with any rates and prices you tendered, otherwise what would be the point of having a contract?

This said take a close look at the definition of “subcontract works” (in italics) in Contract Data part one. Your obligation is to “Provide the Subcontract Works in accordance with the Subcontract Works Information” (clause 20.1), and in turn “Provide the Subcontract Works” is defined as “… do the work necessary to complete the subcontract works (in italics) in accordance with this subcontract …”. You may be able to argue that the instructed works do not fit within the definition of “subcontract works” (in italics) in Contract Data part one and therefore you have no obligation to complete them as you are only bound to “… obey an instruction which is in accordance with this sub-contract …”.

Be careful how you approach the situation as if you refuse to obey the instruction (and don’t have strong grounds to do so) you could trigger a termination - see clause 91, R1 or R14.

If all else fails speak to the Contractor and explain your commercial position, and seek a variation to your subcontract terms. The Contractor will be nervous that they may not be able to recover an increased fee from the Employer however you may be able to work through this. Try a good old fashioned early warning and risk reduction meeting, ideally with the Contractor and the Employer in attendance to see if you can find a solution that works for all.

Neil has given a very constructive answer.

Here is my simpler answer (although may be less helpful) and the way forward for future contracts.

Don’t sign up to a fee percentage that does not cover the cost that you need it to!

It is not what they will accept, it is what you agree to sign up to.

I believe the latin expression is caveat emptor!