We have two separate contracts with our customer:
Fabrication contract (NEC3 Option A Subcontract)
Installation contract (NEC3 Option C Subcontract)
We are part way through both contracts and an item has been fabricated and installed at site by us but has subsequently been discovered to be defective.
We have requested a concession for the Defect to be accepted.
Our customer has requested a quotation from us for accepting the Defect, for consideration.
Should our quotation for Defects acceptance cover the impact both on the fabrication and installation contracts, or just the fabrication contract (the defect is in the component fabrication, rather than installation)?
I ask because under our installation contract (Option C), Defects before completion are paid for, therefore why should we offer a saving for the site removal and re-installation element?
Also, if the Installation contract had been with another company rather than us, would the customer have been able to back-charge us under our fabrication contract for the cost involved in the site removal/re-installation of the defective components?
Strange to have two separate contracts but I assume there must have been a reason for that at the time.
Yes I would say the saving for a defect should be assessed as part of the fabrication contract. I assume that the installation of the item will take the same time to install with or without the “defect”.
A point of note, whilst you get paid for correcting defects before Completion under an option C contract, don’t forget that it will eat in to your gain-share proportion so it is never good to do defects. It just means the cost is shared before Completion but not after.
A client never has to accept a defect, they have the option to make you correct it if they do not agree with the quotation for the saving.
I agree with Glenn’s answer as a sensible commercial way forward. However, contractually, the Project Manager could agree to a reduction in the Prices which varies from a slap on the wrists to an amount which is almost as much as it would cost to take out & replace - ultimately it is at his/her discretion - or as Glenn point out, not at all.
Gents thank you for your responses. For clarity, should our reduction quotation (given under the Fabrication contract), include an allowance for removing the defective item and installing the newly made/corrected component as well as an allowance for re-fabricating the component? And how would this work if the Fabrication and Installation contracts were with two different companies?
If that were two different companies and it needed to be removed and new item replaced then that would clearly be a compensation event to the company removing and installing as they have simply installed what they were told/given to install.
The remedy the client has against the original fabricator would not always cover the cost they have to outlay to the installation Contractor - there is no such thing as “contra-charge” under NEC like some people think seem to exist.