Under the NEC3 Option D, the Contractor is not required to obtain PM’s approval with regard to all procurement for supply of materials and lease of equipment (heavy and minor).
Our accounting section is conducting post-audit of all defined costs, including incurred costs for the above.
In the process, we found out that the prices for certain materials procured were higher than prevailing market prices.
Can the PM disallow the cost difference between the current market price and the incurred cost?
In addition, it was also found out that the Contractor awarded to the highest bidder the supply of materials instead of giving it to the lowest bidder, despite both satisfying the test requirements of the Works Information. Can the PM also disallow the differential cost between the lowest and awarded bid?
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Option D Clause 11.2(25) defines what is Disallowed Cost under the contract. Only items that meet the criteria stated in clause 11.2(25) can be disallowed by the PM.
I don’t believe that there is any contractual mechanism to disallow cost because the Contractor had procured materials at prices higher than “market” or from “the highest bidder…”
In a Target Cost Contract such as Option D the Contractor is incentivised to control costs by the pain/gain mechanism.
How about clause 52.1 “Defined cost includes only amount at open market or competitively tendered prices” (with emphasize on the word INCLUDES ONLY AMOUNT) can we use this?
Yes, I think clause 52.1 is relevant, but I think the first thing you need to do is to find out why the Contractor chose to use “highest” bidder. It may be that there was a perfectly justifiable reason for using the highest bidder eg - reputation/lower risk/faster delivery etc.