NEC3 ECC SOCC Treatment of companies within the same group of companies

Hypothetically, Company A is the main contractor and part of a multinational group of companies. The works require certain activities to be undertaken, which can be provided at a competitive price by one of its sister companies from within the same group of companies (albeit a separate legal entity). A purchase order is raised accordingly from Company A to the sister company.

How will the sister company be treated, as Direct Cost or as Sub contract

Is the answer different if a formal sub contract exists between Company A and its sister company?

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As you are mentioning the full Schedule of Cost Components, I will assume that you are working under one of the cost-based options i.e. main payment options C, D or E.

To see whether they are a Subcontractor, you have to look at the definition of a Subcontractor under clause 11.2 (17) and if they are, then the provisions of clause 26 apply including submitting the name of the proposed Subcontractor to Project Manager for acceptance (clause 26.2); being ‘encouraged’ (by the wording of the NEC) to use an NEC3 form (clause 26.3); and submitting the proposed Contract Data to the Project Manager for acceptance (option C, D & E clause 26.4).

So going back to clause 26.3, a purchase order is a contract, so those terms should be submitted to the PM for acceptance etc… A purchase order will typically by on Priced basis, so I will assume that whether it is a Purchase Order or an NEC3 contract, the sister company is paid for on the basis of prices tendered as opposed to open book Defined Cost. So for non-CE work in the subcontract, they will be paid for on that basis.

For compensation events, the main Contractor is still paid Defined Cost and the decision point you come to BEFORE you start looking at the SOCC is whether, under clause 11.2 23), they are Subcontractor or not. From what you have said, they are, so would be paid in accordance with that subcontract.

I have made a few assumptions based on what you said in this answer, so do not if they are wrong, then my conclusion might be wrong.

Thank you Jon

Your assumptions around ECC C, D or E are correct, apologies for not being clear.

If the purchase order or subcontract was for the supply of resource only stating applicable rates and expenses, then I assume that they would not be considered a Subcontractor under clause 11.2 (17) and treated as Direct cost?

Often on cost based contracts the Works Information will include additional requirements in relation to procurement of subcontractors and suppliers e.g. to get three competitive quotations, etc

Apologies for the delay in getting back.

Without getting into the fine detail of clause 11.2 (17), that is the most likely conclusion.

However, getting into the fine details of clause 11.2 (17) …
the second bullet point is the one which causes discussion. If the PM can argue that this resource is providing a “service NECESSARY to Provide the Works”, then they could argue that they are a Subcontractor. I have put ‘necessary’ in capitals as it is the key word and quite a strong word. So, for instance, if you could argue that there are alternatives to it being a service i.e. you let it as a lump sum, then there is a an alternative to it being a service, so this service is not necessary.