The defined cost has far exceeded the current target and the proven efficiency of the Contractors work force on site is 26% wherein the programme was resourced with assumption that the Contractor’s work force would acheive some 50% efficiency.
Firstly, just because the Defined Cost + Fee has exceeded the target Prices is not a reason to disallow cost : you have to have good reason under the contract ! As the Bechtel Project Manager found out in Costain vs Bechtel, the PM has a duty to be ‘impartial’ in matters of certification (of payment) and assessment (of compensation events).
Having said this, given the scenario you have painted, the most obvious clause to look at is clause 11.2 (25) and in particular the last but one bullet (although other bullets might be relevent). But notice the words “resources not used to Provide the Works” i.e. they were doing something different, not they were working inefficiently when they were working.
As with all the other bullet points, you have to have a specific situation to disallow and not just make a sweeping generalisation of (say 2nd bullet) “you’ve been too generous with Subcontractors”.
Echoing Jon’s answer but possibly slightly stronger. Contractor inefficiency is not of itself a ground for disallowance, period. That is one of the big reasons for using Option C&D (and E to an extent) in that the Employer and Contractor share in both addition efficiency and in any lack thereof. It is also something Employer’s should be made more aware of when procuring under these Options.
There could be a whole host of reasons for reduced efficiency, some of which may give rise to compensation events, others may not. As Jon says, what is clear is the definition of what is disallowable (having first considered whether it is Defined Cost). If the PM steps outside those or tries to use a broad brush to use disallowance as a balance on cash flow he will be acting outside the contact.
If efficiency is that poor what early warnings and risk reduction meetings have there been? These should certainly come before any disallowance.
Agree with both Jon’s and Rob’s comment - and difference between what the Contractor planned to do and what is actually achieved is effectively a shared risk under the contract either positive or negative. As Rob’s says you need to identify why the efficiency is lower than anticipated. If the Contractor simply over estimated the efficiency he could achieve then this is a shared risk.