We are currently engaged in an Option D Contract. Construction is ongoing and then Defects were found on constructed Bored Piles. The Bored Piling Works was Subcontracted. The Contractor says the cost of rectifying the defects will be covered by their Contractor’s All Risk Insurance. But the Contractor shall pay the Insurance provider USD250,000.00 as Deductible Cost for every event. Does this cost should be charge to the project cost or should be charged to the Subcontractor of the Bored Piling Works? Note that Defect was cause by the Contractor not following a constraint on hoe he is to Provide The Works stated in the Works Information. The cost of correcting the Defect is a Disallowed Cost in accordance with Sub-clause 11.2(25) main bullet 5. But Item 7.2 in the Schedule of Cost Components includes The cost to the Contractor of procuring and maintaining insurances and any deductible as a consequence of an event.
There are two parts to this question :
- is it an allowable as a Defined Cost in the first place; and
- if ‘Yes’, is it a Disallowed Cost.
Taking Defined Cost first : As the Contractor will be doing work to replace Defects before Completion, the costs of People, Equipment, Plant & Materials and any charges will initially be allowable as Defined Costs. However :
a. note that Defined Cost includes the amount payable to Subcontractors in accordance with their subcontract, so you need to look at the subcontract terms to see what they say.
b. as you alluded to, the Insurance provisions come into play here and are a bit of a weird one as they are really a deductible cost. I.e. 7 Insurance says “The following are deducted from cost - the cost of events for which this contract requires the Contractor to insure …”. So if the Contractor’s excess is say £250k, but the ‘deduction’ amount stated in the Contract Data is £100k, then the Defined Cost for which the Employer is liable is the £100k stated in the Contract Data + Fee, although this is ultimately then split by the pain /gain mechanism.
Having said all of this, as the Contractor did not follow a method in the Works Information and that is what resulted in a Defect, then it would be a Disallowed Cost under 5th main bullet of clause 11.2 (25) !