NEC3 ECC Option A - PM/Contractor have different opinions in applying the Percentage for People Overheads & The Direct Fee in Assessment of a CE

NEC3 and NEC4 Contracts Compensation Events
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NEC3 ECC Option A: The Contractor has submitted a quotation for a CE. In determining the Defined Cost the Contractors has applied the rates for People in accordance with the rates in the SSCC, then applied the Percentage for People Overheads at 20% in accordance with the Contract Data in Part 2.

The Contractor has then summed the amounts for People, Equipment & Materials and applied the Direct Fee Percentage at 25% in accordance with the Contract Data.

The Subcontract Amounts of the CE are summed and the Subcontract Fee of 25% as per the Contract Data Part 2 are applied for those portions of the CE that are Subcontracted.

In the assessment of the CE, the Project Manager contends that only the Percentage for People Overheads is applicable and the Direct Fee must be removed from the summed value of the People.

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If we take the People element in isolation in the SSCC. The following applies assuming a standard nec ECC main option A contract.

The percentage for people overheads is applied to the 1. People cost component. The direct fee percentage is then applied.

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To analyse the logic behind this on Option A standard:

  1. [11.2(22)] “Defined Cost is the cost of components in the Shorter Schedule of Cost Components (SSCC) …”
  2. From this it follows that ALL components in the SSCC must first be calculated. In the SSCC under item 41 under “Charges” it clearly states that “A charge calculated by applying the percentage for people overheads stated in the Contract Data to people item 11 to cover the costs of…” In other words, the Contractor must follow these procedures to calculate the Defined Cost first.
  3. The other items in the SSCC are then calculated as per their prescribed methods.
  4. Once ALL the different components have been calculated, all these are added together. Now the Contractor has determined the “Defined Cost” of the event.
  5. [63.1] explains what the changes to the Prices due to the CE are:
    "* the actual Defined Cost of the work already done,
    • the forecast Defined Cost of the work not yet done and
    • the resulting Fee."
      From this it is clear that the Fee is added to the resultant Defined Cost as per the SSCC.
  6. [11.2(8)] “The Fee is the sum of the amounts calculated by applying the subcontracted fee percentage to the Defined Cost of subcontracted work and the direct fee percentage to the Defined Cost of other work”.
  7. It is therefore clear that the Defined Cost will include the percentage for people overheads. And after that is calculated, we apply the direct and subcontracted fee percentages as the case may be.