As part of CE on an NEC 4 Option A ECC contract, the Contractor has provided a quotation from their subcontractor to complete the works. As part of the quotation provided by the Contractor to us from the Subcontractor it has a 15% fee included for the total cost of their quotation. The agreed fee % between the Contractor and us (the client) is 6.5%. My understanding as NEC 4 is that there is no subcontractor fee % and it would be the 6.5%. My question is, as the client, would we be expected to incur the 15% included as part of the subcontractor quotation and then incur the 6.5%?
Under NEC3 ECC with main option A, the Subcontractorâs costs would be applied as cost components in the Shorter Schedule of Cost Components, with the subcontracted fee percentage applied to these. The Contractorâs costs would be applied as cost components in the Shorter Schedule of Cost Components, with the direct fee percentage applied to these.
Under NEC4 the Subcontractor cost is a separate cost component category, which is for âPayments to Subcontractors for work which is subcontractedâ. As a payment would include the Subcontractorâs fee percentage, this is the amount included in the CE assessment.
This means that you would include the Subcontractorâs cost, their fee percentage and then the Contractor would apply their fee percentage to both this and any other assessed costs in the quotation, so you would include both the 15% and 6.5%.
My only other question on this then is, what is the contractors motivation to agree a lower / competitive fee percentage with their subcontractor, if the client bares the cost of this anyway. In a way, the client looks to be at the mercy of the fee percentage agreed between the contractor and subcontractor. Are you able to clarify this for me?
The Contractor should have submitted the Subcontractor name and proposed subcontract documents to the Project Manager for acceptance, noting also any potential procurement procedures that may have been stated in the Scope. The applicable detail, including the Fee percentage in the subcontract, would have been submitted as part of the documentation, so would have been known at that stage.
Any Defined Cost is required to align with the principles stated at clause 52.1, relating to amounts at open market or competitively tendered prices etc.
As this matter also relates to a compensation event, then it is the Clientâs risk under the contract, noting that a âhighâ Fee percentage under a subcontract would not be unreasonable for particular âtypesâ of specialist work.
I would just add that in an Option A contract (lump sum) there is no pain/gain share. If the Main Contractor is working to a fixed price, he would have agreed that on the basis of a subcontractor price. There is little scope for the client to reject a subcontract in that circumstance unless it is wholly unreasonable or there are specific requirements in the main contract (which are unlikely).
The subcontractor (being a specialist) would have to do the bulk of the legwork to price the CE, cashflow the works etc. The Main contractor is simply applying a pass through CE, hence the 6.5% (very low) fee. 15% fee on a CE is not unreasonable and would not give the client grounds to reject the subcontract negotiated between subcontractor and main contractor, especially when the client didnt include any specific requirements on the matter in the Scope.
The Contractor should always be motivated to agree competitive fee percentages with their subcontractors.
The client only bares the cost of works they are liable for under the contract, there is a high liklihood on most substantive subcontracts that additional works will be claimed by subcontractors, but the Contractor is unable to pass these up the line as a client liability (e.g. engineering errors, BOQ errors, standing time etc.). Therefore, negotiating a competitive fee percentage aids the Contractor in mitigating these non-recoverable costs.
I would also add, that a lot of main contractors negotiate extremely competitive daywork rates, which are basically onsite cost. The are then usually happy enough to allow a fee like 15% on top of cost, to cover OH&P on the actual cost. That give the MC the assurance that any additional works for the subcontractor (dayworks to execute works no in the subcontract scope) are done at best value.
So, to give yourself peace of mind - check the rates in the subcontract and see if they are competitive. If they are 15% over the market rates and then have 15% fee added on, the subcontract isnât very competitive and you can raise this with your MC and try to agree a lower lump sum. I still dont think you can renegotiate the subcontract or dissallow costs under the Contract