NEC3 - How to calculate cost saving proposal

This is an NEC3 ECC Option A. The Contractor proposed an alternative design to the conforming design (this is not the Contractor’s design) that will significantly result in cost saving (i.e. $200K).

The Contractor’s calculation is using total difference between value of relevant activities in Activity Schedule and their Defined Costs.

  1. Is it the appropriate way to calculate the cost saving?
  2. Should I treat it as a CE?
  3. Should add Activity in the Activity Schedule once it’s accepted ? i.e.
  • 50% sharing of the cost saving to Contractor, $100K
  • 50% sharing of the cost saving to Client, -$100K

Hi Jeffery,
Firstly, I am assuming it is an NEC3 ECC Option A but could you confirm, and it is important to know who is responsible for designing the works.

If the Contractor is responsible for the design to the Employer’s performance specifications, then it will only be a CE if the Employer’s Works Info is changed, if not, then it is not a CE and the Contractor benefits entirely from any saving that may be produced. The Activity Schedule is not changed.

If it is a CE, then the assessment would be the difference between the forecast Defined Cost of doing the original design compared to the alternative design – see clause 63.1.

If it is a CE the PM must give an instruction and change the WI and then follow the procedures in core clause 6 to the letter.

Having made the assessment, the Prices in the Activity Schedule must be changed – see clause 63.12, this can be done by simply reducing the Price of an activity or adding new activities, etc. Both Parties may benefit from the reduction in the Prices but this all depends upon the Price for the original work included in AS because the CE assessment looks at the difference in cost rather than Price.

If the forecast Defined Cost of doing the original work was less than the Price in the AS, which under normal circumstances hopefully it would be, then the Contractor would retain that difference through the CE assessment process. The Employer benefits if the difference between the two costs leads to a reduction in the AS Price, the Price only being reduced by the cost difference which maintains any commercial pricing advantage the Contractor had in the AS.

If it is NEC4 and the Client is responsible for the design, then the proposal must be made by the Contractor through clause 16.1 in order for both Parties to benefit from the saving through the subsequent CE and application of the value engineering percentage.

I hope I haven’t made it too complicated? Happy to discuss.

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Thank you very much Steve, have I caught your logic?

Given that :
AS - $3000
forecast Defined Cost (original design) - $2600
forecast Defined Cost (alternative design) - $2000

Contractor retains : $3000 - $2600 = $400
Employer benefits : $2600 - $2000 - $400 = $200

Hi Jeffery, not sure about the last part. If the CE assessment assesses the reduction in Defined Cost as -$600, the Price in the Activity Schedule is reduced by that amount, so the new Price becomes $2400, the cost to the Contractor being $2000 so that’s how they retain the commercial benefit from the original Price in the AS.

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Thank you again, Steve. You have provided good inspiration of “Contractor retains the commercial benefit from the original Price in the AS”

So I correct myself :

New Price becomes $2400.
The Employer also benefits from this alternative design $3000 - $2400 = $600