NEC3: Option B contract: We are commissioning new additional works, which are not listed in the existing BoQ. The Subcontractor has agreed to price the CE as lump sum items (Cl.63.13), the works will span the next year on site. The existing contract has price adjustment for inflation (X.1), we have been applying this to date. X1.3 talks about the price adjustment for Compensation Events which are **Defined Cost**, would it be fair to state to the Subcontractor that “rates & lump sums” have been agreed (Cl.63.13) and therefore this is **not Defined Cost** and does not qualify for price adjustment for inflation over the next year ?

Additional comment: The Subcontractor has priced the additional lump sums via a departure from the stated method of measurement. Our view is that they have factored in any increase/decrease in inflation over the next year, into the overall lump sum prices.

Any suggestions? much appreciated.

You are correct in that ‘rates and lump sums’ are not Defined Cost, although this would not mean that a ‘PAF’ allowance has automatically been included.

Notwithstanding the above, if the ‘rates and lump sums’ have been ‘incorporated’ into the BoQ, then each time an amount due is assessed a corresponding PAF calculation is made and this calculated amount paid. The PWDD amount the PAF calculation applies to would (progressively) include the ‘rates and lump sums’, regardless of what has been included.

If the CE has been implemented then there probably isn’t much you can do, but if it hasn’t then suggest ‘backdating’ the value by applying the calculation at the 1st bullet at clause X1.3.

Hello Andrew - The CE has not yet been implemented. Upon implementation Cl,63.13 would require us to include it in the BoQ, so would that therefore automatically attract the PAF as each quantity of the CE is completed, as it would form PWDD ? If this is the case then would you adjust to back date to the base date indices using the formular " CE amount due" / 1+PAF (for the last assessment)?

I’m still a bit stuck on this, as X1.3 keeps referring to “Defined Cost”, which this CE is not.

You are right that X1.3 states Defined Cost whereas ‘rates and lump sums’ are not Defined Cost.

As you would include an implemented CE assessment in a PAF calculation where an amount becomes due, then you would need to ensure that the assessment is effectively ‘backdated’ to the base date. Without any further information as to how the ‘rates and lump sums’ have been assessed it is difficult to know at what point in time the ‘rates and lump sums’ relate to. If the CE has not been implemented then you could instruct the submission of a revised quotation highlighting your concerns to explain the reasons for the revised quotation, possibly also referring to clause 13.4 in that more information is needed.

Hello Andrew - The Contract “Method of Measurement” states to use the contract schedule of rates, the Subcontractor has not used these for the “rates & lump sums”. The CE is 2 years into the contract programme and priced using current market rates. Would it be right to take the CE quote value and divide by 1 + current (Firm) PAFI? This would essentially reduce the quote by about 12%. Once implemented the CE moves into the BoQ, as the works are completed, we pay for the items + apply the PAFI at that point in time?

The difficulty is that there is no stated direction on how ‘rates and lump sums’ are assessed for a compensation event, with the only condition being that there must be agreement between the parties.

If current market rates have been used then it seems reasonable to ‘backdate’ the assessment with the ‘reverse PAF’ calculation, taking account of the fact, as you have said, that PAF will be applied to any amount assessed as due for payment.

You have highlighted an issue that is not expressly addressed by the contract, although the agreement to use ‘rates and lump sums’ should also extend to consequential issues, such as how the PAF calculation applies to an assessed amount.