I am on a contract using NEC4 Option A where I am required to present a quotation for a Contractor’s Proposal.
When valuing the change to the Prices, Clause 63.12 seems to suggest that when calculating the value, I should calculate it as if it is a CE, including the addition of the Fee Percentage. This approach doesn’t make much sense to me, to be honest, as it would disadvantage the contractor, especially where the value engineering percentage has been set at less than 50%.
I would suggest that a more sensible approach would be that I should calculate the change in the Defined Cost, and then apply the value engineering percentage instead of the fee percentage, thus sharing the change in the cost.
Which approach is correct?
The correct approach is as stated in clause 63.12.
Where the effect is a reduction in Defined Cost, the assessment of the CE (including Fee) is multiplied by the stated value engineering percentage and the Prices reduced by the resulting amount. For example if the CE was £100K and the % was 50% the Prices would be reduced by £50K, if the % was 25% the reduction would be £25K. The Contractor is not disadvantaged since it shares in the cost saving.
Hi David, I have maybe not made myself properly clear. It is fine if the value engineering percentage is set at a figure higher than the Fee Percentage, but I have (only once so far) seen the value engineering percentage, set by the Client at tender as being 10%, whereas the Fee Percentage (set by the Contractor) was at 15%. I understand that this would be unusual, but it’s within the realms of possibility.
So in this instance, if your assessed defined costs were £100k, plus fee = £115k, less value engineering percentage = £103.5k. So for any Contractor’s Proposal, the Contractor would lose. Where’s the incentive to the contractor?
Even assuming the value engineering percentage was set at 50%, defined costs of £100k plus fee = £115k, less VEP = £57.5k. So the Client benefits to the tune of £57.5k, whereas the Contractor only gains £42.5k. So not 50/50…
The scenarios above did lead me to thinking that it would be more equitable if the VEP replaced the FP in the valuation of any Contractor’s Proposals.
Hi Shaun, usually value engineering is for the contractor to save cost. In the example you have used
Defined Cost = 100 + 15% fee = 115 assessment of CE
Value engineering % = 10%
Reduction of Prices = 115 x 10% = 11.5
so the Contractor would have its Defined Cost reduced by 100 (excluding fee) and would be paid 115-11.5 = 103.5.
in the 50/50 scenario, contractor saves 100 and is paid 57.5. so assuming the Price was right to start with (it had the 100 + fee in) the contractor is better of.