NEC3 ECC Option D - Costs due to Correction of Defects

In our ongoing project, defective works were encountered due to Contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information.

My questions are as follows:

1.) It is clearly stated in the Contract that costs for correction of the above-mentioned Defects may be disallowed by the PM. How about additional costs incurred as a consequence of the performance of repair/replacement works, can they be disallowed as well? (for example, formworks has to be rented for a longer time and some equipment are on standby since succeeding activities cannot proceed until after repair works have been completed, additional testing has to be done, 3rd party consultants have to be hired to check the repair/replacement works)

2.) If the insurance / subcontractor was not able to fully or partially cover the costs of repair/replacement works, can the Contractor argue that the unrecovered costs should be part of the project’s defined cost, i.e. pain to be shared by Employer and Contractor? There is a provisional amount in the Target Cost that covers disputes with Subcontractors.

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The disallowance under Option D in these circumstances is for "the cost of correcting Defects caused by the contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information. What you are therefore looking at or for is a causation type test. Has this cost been incurred as part of or as the result of correcting a relevant defect. If the answer is yes then it can be disallowed. The usual test you would look to apply would be a “but for” type test. So “but for the need to correct this defect would this cost have been incurred”. Your examples all seem to me to fit within a causation type test and therefore all sound appropriate to disallow.

Your second question is more difficult without more detail. However, in general you seem to be mixing cost (cash position of the main contractor) and value (overall final account position after incentive share). Put simply, once you make the disallowance the PWDD will be supressed and therefore a gain share (or reduced pain share) is more likely.