NEC4 Option C - X1 adjustments to the target

1

Under an unamended Option C (NEC4) with X1 included. Please confirm the following is correct:

The PAF is determined at each payment application (say 4 weekly, using: L-B/B), the adjustment is not applied to the payment application value, as the Defined Cost + Fee accounts for the inflation at that point in time naturally. The PAF adjustment is incrementally added to the Total of the Prices (moving the “target” up or down according to whether the PAF is +/-ve), under Cl.X1.5. Please confirm this is correct ? Compensation Event quotations being de-escalated back to base date before implementation, therefore additionally raising/lowering the target by the de-escalated CE value (and later the uplift/down lift adjusting the target accordingly when the CE value is included in an application).

This allows the Contractor to still have the opportunity to maximise their potential gain share in times of significant inflation/deflation. Whereas under an Option A/B the adjustment would be directly added to the payment applications (Cl X1.4 - Applied directly to the change in PWDD), accounting for changes to the Price of Work Done to Date at each assessment date (4 weekly) instead.

2

You are correct about the mechanism in both C and A.

I’m not sure I’d agree that it is anything to do with maximising gain though. The Client chooses whether to include X1. If they do, they choose the indices to be used. That can include a non-indexed portion, if a Client wants to share inflationary risk.

The clause doesn’t do anything to maximise gain, in my view. It just applies the risk allocation that the Client chose in a consistent way, irrespective of whether the work in question is a compensation event or not.

3

Thanks Andy, much appreciated. My comment relates to if X1 is not used on a Target (Option C), the Contractor prices in the risk of likely inflationary uplift over the contract duration, in the Total of the Prices (tender submission). If they price this risk wrongly and it goes against them then they are in effect losing out on some of the “maximum potential” recovery of the gain share.