NEC3 ECC: Option A - an auditor has suggested clause 52.1 defined cost “deductions for discounts, rebates and taxes which can be recovered” applies to the total of the Prices (not just compensation events), is this correct?

My understanding was that clause 52.1 applies to defined cost which is used for compensation events using the shorter schedule of cost components.The auditor has however explained to me that they would expect to have a right to audit and make such deductions under an Option A contract even if there were no compensation events. They have suggested the Contractor prices activities knowing these deductions will later be made.

Absolutely not!!!

What you need to ask them is that if they do an audit and find that you under priced things would they pay you the extra, and very quickly they will tell you no.

As you say, under option A that is only for compensation events where you should assess the cost including any discounts you would get - i.e. they are paying you your actual forecast cost plus a fee on top.

Option C they would be correct, as you would be paid actual cost for all Defined Cost, but not for option A. That would be called “having your cake and eat it”. What do they even have the right to audit under option A apart from elements of compensation events - as it is a lump sum price?

Some clients do insist on a right to audit in the option Z clauses, in which case they can audit in accordance with those terms. However, under option A, it absolutely does not give them the right to re-jig the Prices as a result.

Hi Glenn

Thanks for your response. Option A Clause 52.1 reads ‘All the Contractor’s costs which are not included in the Defined Cost are treated as included in the Fee. Defined Cost includes only amounts calculated using rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered’.

What is the intend of the above clause considering that it is an Option A contract?

For option A this is only in relationship to compensation events as that is the only time that Defined Cost is applied. If you are building up a quote in accordance with the shorter schedule of cost components then you are to include for example any discounted rates in your quotation that you make rather than keep them for yourself, but then on top you can apply your fee percentage.