NEC ECS: Disclosure requirement of subcontractor costs for compensation events under NEC3, Option A

NEC3 and NEC4 Contracts Compensation Events
1

We have a NEC3 ECC Option A contract (or a NEC3 based contract because of many amendments),

My question is: Are we obliged to show the employer our subcontractor offers (unit rates) in case the employer requests a change to the scope?

From my point of view, we are not obliged to show our subcontractors unit rates because we have a lump sum contract. This fact should also be applicable for compensation events (unless otherwise agreed). Furthermore, our subcontracts are not NEC subcontracts and we have also standard nondisclosure agreements with our subcontractors.
Nevertheless, all offers must be reasonable and in line with the market.

I assume the employer’s expectation will be that we have to show the subcontractor offer and we can only add the subcontractor fee.

Under Contract Data Part 2 the following is agreed:
The subcontracted fee percentage is the percentage to be added to the total cost, excluding tax, of any additional cost incurred by the Contractor from any subcontractor for additional items due to be paid for by the Employer. The subcontracted fee percentage is 12.5%.

-> The meaning of “from any subcontractor for additional items” is not clear for me (maybe only applicable for a specific CE - see below ***)

We have also to consider contract clause 63.7 and 63.14 (amended).
63.7 Assessments are based upon the assumptions that the Contractor reacts competently and promptly to the compensation event, that any Defined Cost and time due to the event are reasonably incurred and that the Accepted Programme can be changed.

-> costs must be reasonably, but no obligation to show the subcontractor offer

63.14 If the Project Manager and the Contractor agree, rates and lump sums may be used to assess a compensation event. If rates or lump sum fixed prices are used, then no fee, direct or subcontracted, applies to these rates or lump sum fixed prices.

-> What happens, if we cannot agree on lump sum for a compensation event? Do we have to show our subcontractor unit rates?

***Furthermore, under contract clause 61.1 (xx) we have one compensation event item (contractor encounters physical condition (e.g. buried foundations, hazardous substances, …)) where is clearly stated that the price has to be calculated by the provision of the subcontractor quotation plus the subcontractor fee. At all other compensation events there is no such agreement.

-> This means, that the disclosure of the subcontractor offer is not a general requirement. It is only applicable for a specific compensation event. Otherwise it has to be agreed in general.

I would appreciate you feedback very much.

With best regards,
Peter (from Germany)

2

Peter,

the simple answer is no, you are not obliged to show the Employer the subcontractors’ offers for the purpose of procurement. I have assumed that there is no requirement in the Works Information to do so.

I note that you are not using NEC subcontracts and presume you will be following the stipulations of clause 26.3 (unless it has been amended).

Regard the assessment of CEs, you have stated there is a note under Contract Data Part 2. Did you mean Part 1, or is it wording inserted by the Employer as part of the tender process, or was it inserted by the Contractor.

In either case, it does not replace the standard wording of the contract (since it is not a Z clause stating so) and at best just causes an ambiguity.

The default for assessment of CEs under Option A is the change in Defined Cost + Fee due to the event occurring. Defined Cost being based on the Shorter Schedule of Cost Components unless otherwise agreed. Under NEC3, the SSCC does not recognise subcontractor cost and therefore the assessment is as if the Contractor did the work albeit the Subcontract Fee is applied.

Regarding not being able to agree a lump sum then the default applies.

From your question it appears the assessment for a CE due to physical conditions is a specific clause just applicable to that event. So for the other CEs the default provisions would apply. You may want to simply use the change in subcontractor cost + 12.5% in which case you would have to demonstrate the change in cost and your NDAs would need to allow for this.

3

Dear Dave,

Thank you for your answer.

Unfortunately, I found the following in the Works Information:
Quotations for Compensation Events and Proposed PMI’s:
The Contractor operates an open book policy and allows free access to the Project Manager and his delegates to assess accounts and records of the Defined Cost associated with all quotations for compensation events or the schedule to be provided below.

This looks like it changes the situation. Is that correct?

Please note:
In addition to the Contractor’s Information (key people) in Contract Data Part 2 the subcontractor fee and the direct fee was inserted by the Employer as part of the tender process.

BR,
Peter

4

Peter

I don’t think it does change the situation. If the Employer has not amended the definition of Defined Cost then it remains as the SSCC. The open book policy would generally only be in respect of People (component 11), Equipment which is not in the published list or the Contract Date (component 27) or Materials (component 31).

You could therefore argue that that Defined Cost is as per the SSCC and not Subcontract cost. I don’t know what your preference is and if you need to advance an argument.

It is strange that the Employer has inserted the direct fee and subcontract fee %s however if that’s what you have signed up to then they are the %s that should be applied.

5

Hi Dave,

I checked a few things.
CC 52.1 Defined Cost was not amended
CC 11.2 (8) Definition of the Fee was not amended
CC 11.2 (22) Definition of the Defined Cost was not amended

BUT our SSCC is completely different than NEC3 Option A. In our SSCC are only hourly rates agreed:

  1. The hourly rates for Defined Cost of Contractor’s employees working within the Working Areas -> Site Manager / Senior Supervisor, … Fitter / Rigger / Crane Driver / Welder / Electrician
  2. The hourly rates for Defined Cost of Contractor’s employees working outside the Working Areas -> Lead Engineer, Project Engineer, …

Not more!!! No Equipment, Plant and Materials, Charges, Manufacture and
fabrication, …

Does this change your view?

BR,
Peter

6

Hi Peter it seems that they have created a bit of a mess. Would subcontractor cost + 12.5% be acceptable to you.

7

Dear Dave,

I was not involved during the negotiation phase :slight_smile:

Would subcontractor cost + 12.5% be acceptable to you. -> No, 12.5% is not very high but one main question is still, whether we have to show our subcontractor prices or not! Currently, my understanding is that we have not to show our subcontractor offers but your question irritates me a little bit. :slight_smile:

If so, the employer could draw its own conclusions to the lump sum contract price. This is from my point of view not the spirit of a lump sum price.

BR,
Peter