As a Contractor, on a project we have a good understanding of our estimated range of site costs (activity costs) and fixed back-office overhead costs that will go into the Fee, along with our target profit. In £ terms we understand what our Target Cost should be. This is a very basic question as we need some understanding on Option C contracts, how do we express the Fee is terms of % e.g. of Target Cost or Activity Cost?
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You get to claim one fee (well two really, as you have subcontract fee percentage for subcontracted elements and direct fee for everything else). To build up your target price that you are committing, it will be the actual cost you think you will incur plus the fee (which includes head office costs and profit). That will therefore be a percentage of the “activity cost” as you have called it.
This fee is then carried forward when it comes to assess compensation events. It will be forecast defined cost, plus the fixed fee. If the target cost is £10mil which is made up of £9mil cost + £1mil head office costs + profit then your fee is 10%. That fee needs to be enough to cover the same extra over costs for a CE that you can’t claim for within the schedule of cost component elements. You obviously don’t particularly need to justify what proportion of fee is within your target cost, but given that you complete within contract data part 2 what your direct fee percentage is they will obviously have a fair idea.
Before I answer your question I’d like to explain how payments are made under an NEC3 ECC Option C Contract.
This contract is a cost based contract and at each assessment period you’ll be paid “Defined Cost” plus Fee. The Schedule of Cost Components explains how the Defined Cost for People, Equipment, Materials and Charges is calculated. Clause 11.2(23) explains how the Defined Cost for Subcontractors is calculated. Clause 11.2(8) explains how the Fee is calculated. The contract also states “Any of your costs that are not included in Defined Cost are treated as included in the Fee”.
To make sure you are able to calculate the Fee percentage accurately it’s worth checking that your “activity costs” only include any items that are “Defined Cost”. Once you’ve done this you’ll know your costs for items that are Defined Cost. All your other costs (including profit, insurance, overheads) are in the Fee. The Fee percentage is the ratio of the Fee to the Defined Cost expressed as a percentage.
Relevant Clauses
Core Clauses: 11.2(8), 50.2, 52.1. Option C Clauses: 11.2(23), 11.2(29)
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Thank you for reply. In your example though, wouldn’t the fee be 11.1% (£1M/£9m) rather than 10% (£1M/1£10M)?
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Correct yes! Hopefully you get the idea.