NEC3 ECC: Is the Contractor's overall margin (profit) 'ringfenced'?

I work as a Cost Manager for a Client and therefore administer the main contract. I am pretty sure the answer is ‘no’ but in the space of the last 12 months, to my disbelief, I have had the same argument with two different main Contractors. Is the main contractor’s margin ‘ringfenced’ (protected) under NEC 3 contracts?

To give an easy and extreme example to aid illustration; a warehouse is to be constructed for £1 million. In the £1 million is 10% fee (£100,000) for the main Contractor. The Client has a massive change of heart and decides a nice, timber shed will suffice, costing £500 + 10% direct fee = £550. Consequently the Client changes the Works Information under clause 60.1(1) as well as issuing a negative CE for £999,450. To my astonishment, if we were to apply the principles that the two different main contractors believe is the case, the revised contract value for the timber shed should be £500 + the original fee of £100,000 = £100,500. The main Contractors would not see this as an absurd figure for a timber shed as they believe they are entitled and have every right for the £100,000 that they were originally expecting from the contract. Please can you advise?

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Tim - Fee (which is made up in part of profit margin but includes other costs as well such as off site overhead) is not “ring fenced”. Under Options A and B (lump sum contracts) payment is made against completed activities which would includes Fee. Under Options C, D and E the Contractor is paid his Defined Cost plus Fee (basically the cost incurred plus a fee) subject to the operation of the incentive share.

However, that said, using you example you would not simply apply the original fee to a vastly reduced scope. There may well be other costs that the contractor has incurred and therefore can recover fee against, the risk profile for the project will also have dramatically changed as will the contractors marginal cost (mobilising for a £500 shed is nothing like mobilising for a £1,000,000 warehouse). There is some balance in there that needs to be struck based on what realistically, and complying with 63.7 the true reduction in the Prices is going to be and a sensible discussion around inclusion of risk (perhaps for reassigning staff) or adjusting the fee percentage (as an amendment to the contract) to properly reflect the new project.

The assessment of compensation events for additions or omissions is exactly the same both attract Fee. It would be interesting to know your thoughts Rob on the issue of large omissions to a contract?

Barry - My thoughts would be don’t do it!

If you have to however, a large omissions is no different to a large addition it changes the scale and nature of the project and that really needs to be factored in. I am sure every Employer would expect some sort of “bulk” discount for a large addition because that is the way the economics will work. That being the case it is wholly unrealistic to think an omission should be calculated differently.

Major omissions, like major additions, can significantly change the dynamics and risk profile of a project for the contractor. They need to be approached with some care, an open mind…dare I say mutual trust and cooperation?

Rob totally agree with your comments and points very well worth making.