We have an NEC 3 Option F contract between an Employer and Contractor including X7 - Delay Damages. The Contractor in turn has an NEC Option A subcontract with a subcontractor - The query we have relates to Clauses 11.2(24) and 11.2(26)
In 11.2(24) Defined Costs - the deducted amounts that are referred to in the bullets points - do they relate to deductions by the Employer from the Contractor or the Contractor from the Subcontractor?
In 11.2(26) Disallowed Costs - If the subcontractor has caused the Contractor to be late and incur Delay Damages and in turn have themselves had to pay delay damages to the Contractor… Do those damages paid by the subcontractor to the Contractor pass through to the Employer as well as the Employer being paid delay damages by the Contractor?
If so that would seem to doubly penalise the Contractor which doesn’t seem appropriate.
My view is that the Delay Damages between the Contractor and Sub-Contractor are purely between them and as such stay within the subcontract…
However how does this work with 11.2(26) as the “records and accounts” will show the Contractor not having made full Defined Cost payments to the Subcontractor? - This is leading the Employers PM to disallow part of the Defined Cost Payment to the Contractor which relates to the Delay Damages “imposed” by the Contractor on the Subcontractor, as well as “imposing” X7 delay Damages on the Contractor. We believe this is wrong because Delay Damages are “paid” by the damaging party and not “claimed” by the damaged party and sit outside of the definition of Defined Cost by virtue of 11.2(24) being “without taking into account of amounts deducted for”
But again the accounts and records required to be provided will show the lower “net” amounts passing from the Contractor to the Subcontractor…
Hope that makes sense and it would be good if a worked example of how this should work in practice could be provided with an explanation
Hi Ken, my views as follows.
First of all, the 1st bullet point of cl. 11.2 (24) refers to sums that the Contractor deducts from the Subcontractor and are set out in the next 5 bullet points.
With regards to delay damages, the philosophy of this option (similar to Option C) is to reimburse the Contractor for its allowable costs (actual and forecasted); if the latter gets an X amount deducted by the Employer as delay damages, and then deducts an X1 amount from the Subcontractor (say the one who has caused or contributed to the delay), it gets paid the amount that it actually paid (or will pay) (clause 11.2 (24), 1st bullet point) regarding the subcontracted work. If, say, the Contractor has included delay damages in the Subcontract equivalent to the delay damages in the Contract, this would result in cost neutrality for that matter.
I hope the above clarifies.