A contractor carried out some work where they had listed installing structural props as a stand alone activity. We know they never used the props as they found an alternative method, they have applied for the full activity in their payment application. We view this as a disallowed cost under Cl.11.2 (25) (resources not used to provide the works). If the activity were part of a listed bigger activity then it’s a gain share via value engineering. Logic would dictate that if we disallow this then the target should come down by the same value as the props in the activity schedule, why should the contractor potentially get a gain share for an activity they never carried out. There seems no clear mechanism for reducing the target down, other than the statement in Cl.53.4, where the assessment of the final of the Total of the Prices (the target) is assessed. Presumably this assessment by default takes into account disallowed costs to date?
I may be missing something, but the Activity Schedule isn’t used for payment assessment / application under an Option C. Therefore unless they can prove the costs have been incurred it’s a disallowed cost.
This would not result in a Target Reduction in of itself. There is no connection between disallowed cost and the target.
A PMI would be required to formally remove that element of scope in order to affect the ToTP.
You do use an activity schedule for certain payment conditions under an Option C (hence why it gets revised by CE’s and the measuring basis of the final pain/gain payment). You pay the Defined Cost + Fee of the activity (upon completion of the activity), the difference between the activity schedule price and Defined cost being the build up of the Contractors share. The sum of the activity schedule is the Target.
Therefore unless they can prove the costs have been incurred it’s a disallowed cost.
I don’t think either party is right here. If its a C the Contractor clearly can’t apply for a cost they never incurred. Also, the Client can’t reduce the target for a change of method.
Disallowed cost is Defined Cost that meets certain criteria; so there has to be a Defined Cost before the question of it being disallowed even arises. If they don’t do something (don’t use the props), there cant be a Defined Cost, so there also can’t be a question of disallowing it. Its just not cost.
I also see no reason why the target would change. It was anticipated that something would be done by a particular method, and a target was agreed on that basis. The method then changed, I assume to something cheaper overall.
That is what Option C is intended to promote - you got the thing you wanted more cheaply than you expected. Win-win. Each party walks away with their share in accordance with the Contract.
There is also mention of Value Engineering. That only comes into play where the change in method requires a change in the Scope, and was proposed by the Contractor. I’m not sure that is the case here, but even if it is, in an Option C the prices are not reduced, per 63.13, so the actual impact is the same as the paragraph above.