NEC ECS: Option A - Add & Omit resulting Negative CE and Fee % is resulting in an overall loss

NEC3 and NEC4 Contracts Compensation Events
1

Can you give back something you never had in the first place?

Item 1 at £50k: Included in tender with agreed tender fee of 5%

Compensation Event:

Omit Item 1 at 50K using SSCC with Sub-subcon fee percentage of 12.5% (loss!)
Add Item 2 of 25k using SSCC with Direct fee percentage of 8%

Tender 50000 5% 2500
Omit -50000 12.5% -6250 (never had this to give back in the first place)
Add 25000 8% 2000

Nett -25000 17% -4250

Surely this isn’t right or fair…

My automatic assumption is that only the tender fee is omitted and the agreed fee percentage is added back.

Any comments would be useful.

Thanks,

2

I think - and I stress ‘think’ - your overall logic is correct and ‘Yes’ it is potentially unfair if the prices that you have out forward in your Activity Schedule at tender do not approximately equal your Defined Costs + relevant Fee.

Let me query two things though:

  • where does the “agreed tender fee” of 5% come from ? No idea as not in NEC and seems very low, probably not even or only just covering head office overheads with no profit … so why did you agree to it ?
  • by contrast direct fee percentage of 12.5% is on the high side wrt the average contractor’s overheads and profit. Presumably you are not complaining when compensation events occur which increase the Defined Costs on Sub-subcontracts ?

The difference between these two percentages creates an imbalance which is leads to the perceived unfairness.

3

Thanks for your comment,

I’m going to body swerve the question on the ‘tender fee’ origin and blame it on the infinite wisdom possessed by the commercial negotiators higher up the food chain.

This is the first significant CE on two identical scheme and will set the precedent for future CE’s so I want to get it right. If we are forced to stick with the principle demonstrated above, I’m just hoping the overall change to the cost is a positive one!

Ultimately my question is, is it unacceptable or wrong to mix and match these percentages? i.e. Omit at ‘tender fee’ of 5% and add back using agreed fee of 8% direct and 12.5% subcon.

Many thanks,

4

My answer is that, unless there is something in the option Z clauses, the 5% is not a contractual amount, so your fee percentages of 8% and 12.5% should be applied both to uplifts to the Prices and reduced Prices, if allowable under the contract i.e. changes to the Works Information and changed PM assumptions.