NEC3 ECC: Are the increased costs incurred by a Contractor due to an insolvency of a Subcontractor a recoverable cost under NEC Option C contracts?

During the execution of a contract one of the Subcontractors engaged to carry out the works went into administration. As a consequence the Subcontractor engaged to complete the works costs was more expensive. Is the additional costs incurred a risk born by the Contractor solely as they should carry out financial checks of potential Subcontractors i.e. disallowed, or an actual cost recoverable through the contract and therefore the increased costs is shared between the Contractor and Employer.


As with any such consideration - it is only a disallowed cost if it fits one of the reasons within the contract to be a disallowed cost within 11.2(25)…

Assuming there are no amendments - I do not see this fitting within any of the reasons do disallow. The only one it could is "Contractor did not follow a procurement procedure stated in the Works Information, but even then only if such a check was specifically stated in the WI to be carried out and was not done by the Contractor.

This would therefore be a shared risk under option C which will fall out of the gain/pain share.

This is an area that comes up as a problem for Employer’s almost as often as paying the Defined Cost of a contractor correcting defects before Completion. Supply chain cost increases, however they arise, will be recoverable as Defined Cost unless one of the specific Disallowed Cost provisions apply. I believe a Court will take a pretty strict interpretation to this clause as the real saving mechanism is the incentive share.

Otherwise I agree completely with Glenn save that for the procurement disallowance the cost has to arise “only” as a result of the failure to follow the proper procurement process. In the context of an insolvency it is extremely unlikely that anyone would ever be able to be so definitive.

One point to bear in mind, this is all correct is there is a new subcontract but if the original is novated across then the second bullet of disallowance (should not have been paid under the subcontract) may well bite.