NEC3 ECC: What if the Contractor did not follow a procurement procedure?

NEC3 and NEC4 Contracts Payment
1

Under ECC option D:

  1. What if the contractor did not follow procurement procedure;
    Clause 11.2 (25) “was incurred only because the contractor did not follow procurement procedure”.

Procurement procedure includes bidding, and the purpose of bidding is to get the most competitive price. Selecting the highest bidders should be justified.

SCENARIO:
The Contractor purchased 1,000 bags of cement 40kg per bag for usd15 per bag Total Usd15, 000.
The Employer’s cost verification team discovered that the Contractor conducted bidding for the purchase of the cement, the bidding documents shows that the lowest bid for the cement was Usd5 per bag (40kg per bag). No justification why the Contractor selected the highest bidder.
Had the Contractor selected the lowest bidder, the cost should have been Usd5, 000 only. Now the question is how do you treat the difference amounting to Usd10, 000?

  1. 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?
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It depends a little on the wording of the procurement procedure within the Works Information. If it was an express provision to follow a certain process then possibly, but it is unlikely to be so prescriptive. The very nature of option D is that the Contractor is incentivised to minimize their Defined Cost spend in order to lower their final costs and increase their “gainshare” at the end of the project. What would be in it for the Contractor to pay more for something that they needed to? They will have paid out that money and decreased their gainshare (or increased their painshare) so it should not be in their interest to do so.

The other key thing is we all realise now that cheapest is not always best. I do agree however that there should have been a justification from the Contractor as to why they did not go with the cheaper supplier.

I certainly do not sanction audits at the end of projects which I have seen where on reflection costs are disallowed as it was felt they could have been lower in the market place (not that you are suggesting that here).