Under a ECC Option C contract, the PM decides with a PMI to de-scope part of the works that were priced at tender stage, which is essentially the Contractor’s budget to build for that work.
Under the ECC contract, the assessment of a CE has to be done based on the forecast defined cost which is now is substantially higher than the original budget to build. So when this negative CE is implemented, is it fine to have a “negative” budget for that scope of works? Is this correct?
Yes in theory(although not quite sure what a negative budget is). It is a fact that you do not use activity schedule rates to assess CE’s (positive or negative UNLESS by agreement on an individual basis. If the Contractor thinks they could now have done it cheaper than tendered, then the change to the Prices (the target) will be decreased by that lower amount. However - if it would have been more than tendered then that is what should be used as well (although you are not going to get a Contractor working too hard to build up a quote that will lower their target!)
If Target was £1million, and you are instructing removal of an activity, the target will decrease by the assessed amount. Don’t forget this should also include fee in the saving - Contractor does not keep fee on work that is de-scoped (sorry - that is what the contract says).
Thanks for your answer Glenn. The issue that I have I think is more related to Project Controls. To better explain the negative budget: Imagine that in my target I have a building in one of my WBS that at tender I priced £1m (value). Then after one year I receive an instruction to not to build it, and the assessment of the compensation event shows that with actual prices, the defined cost of building that building would be £2m, so after implementing that Compensation Event my budget in that WBS would be -£1m!. I just wanted to know how the Contract coped with a situation like this. Thank you!
The contract does not specifically deal with project controls specifically (although your own Works Information will be saying what Project Controls are expected). How to deal with this would be a more practical arrangement between Parties. Here I suggest there would need to be an agreed change in the baseline you are using to assess the project controls against (shock horror!)