NEC3 ECC Subcontract - De-Scoping the Works Information (costs in relation to)

NEC3 and NEC4 Contracts Termination
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Hi,

I currently have a number of Subcontracts under NEC3 ECC (and SSC) where we have descoped large elements of the works, so for instance, a £4m subcontract has become a £1m subcontract.

In one instance the Subcontractor has came back to us claiming the full amount of the Subcontract because they have not got any more work and resourced up for this works which is now not going ahead.

How do I fairly assess their entitlement? Does the contractor pick up thing like redundancy costs?

Note- we gave them adequate notice of the de-scoping and effectively we are not ‘terminating’ the contract, just reducing the scope.

Any advice would be appreciated.

Kind Regards,

Gareth.

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Depriving the other party substantially of the benefit of the contract could be regarded as a repudiatory breach, a failure to hold up your end of the bargain which goes to the heart of the contract.

Whether or not you are permitted to do this is dependant on the exact drafting of the clauses regarding descoping.

Here is an article that you may find helpful; Negative variations in common law | International Bar Association

I would recommend you seek legal advice.

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Depending on the annual turnover of the subcontractor, dropping £3m off the contract value could cost him a lot of money.
A subcontractor may have forecast the workload and arranged himself to be able to execute it; incurring costs such as HR fees, agency fees, admin costs, insurance costs, directors/manager time arranging the work.
In addition, he may have turned down a lot of other work, losing the opportunity to make profit and incurring overhead costs which would have been recovered in executing the work but haven’t been.
A fair assessment, would accept that if the descope happened overnight - the subcontractor would be entitled to 20-25% of the descoped value (€600k). IT would then take into account the actual time period of notification and the measures undertaken by the subcontractor to mitigate that loss.
While you may have taken the view that you gave him adequate notice - unless that notice is over 6 months - you likely haven’t given enough notice for the subcontractor to fully mitigate the effect on his costs.

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The solution here is to descope under Clause 14.3 (change to WI/Scope), this will lead to a compensation event under Clause 60.1(1).

You’d assess the change to the Prices using Clause 63.1 (Actual Defined Cost + Forecast Defined Cost + Fee)

  • The omitted work leads to a reduction in Prices (63.4)

The Contractor’s entitlement is still subject to Defined Cost. Rates and Lump Sums can be used by AGREEMENT only (63.2). Without agreement, it’s back to Defined Cost.

What the Contractor can and cannot claim for will depend on either the SCC or SSCC.

  • Both options will include demobilisation or stand down costs.
  • Redundancy costs (only if genuinely incurred) will be payable only if you’re using the SCC.

However, the Contactor cannot claim for lost profit on the omitted work unless there is a specific Z Clause for this (which I doubt).

Just be careful — Van Oord v Dragados made it clear that work cannot be descoped if the intention is to give it to another Contractor. If this isn’t the case, you’ll be fine!