As a Contractor on an Option E downstream, with a Subcontractor who has a supplier on an Option A downstream (far from ideal). The Subsubcontractor has submitted a series of Compensation Events to the Subcontractor, which have been implemented but when assessed by us (the Contractor) are clearly inflated rates, and not showing any form of defined cost process. As the Subcontractor has followed the NEC procedure of implementation, is the Contractor liable to pay the full amount of the Compensation Event, as it is strictly speaking, a Defined Cost to the Subcontractor.
Under option E, a Disallowed Cost (2nd bullet) is “should not have been paid to a Subsubcontractor or supplier in accordance with his contract” (NEC3 ECC option clause 11.2(25).
From what you say, the Subcontractor has not assessed the compensation events correctly in accordance with the subcontract and overpaid. The ‘overpaid’ amount can therefore be deducted from the Defined Cost as Disallowed Cost.
Assuming you’re using the NEC3 Engineering and Construction Subcontract this sort of cost would have to be classed as Disallowed Cost [see clause 11.2(25)] for the Contractor not to have a liability to pay it. Most likely you would be looking at “should not have been paid to a Subsubcontractor or supplier in accordance with his contract” as the test to apply however you would need to be able to demonstrate that this was indeed the case. What I’m saying is that your comment about “clearly inflated rates” would need substantiating.