Under NEC3 To what extent is the Contractor permitted to request detailed audited cost information in the assessment of Compensation Events.under an Option A Subcontract

The attached agenda is being proposed by the Contractor for a Tier 3 audit of an Option A subcontract let under an Option C head contract.
Z Clauses in the head agreement require rthe subcontractor to co-operate with the Contractor in the Employer’s audit process
Outline Agenda for audit (taking the lead from Managing Reality Book Four ‘Managing Change’:
• Confirm reason for audit and set out expectations
• Target accepted CE’s
• People – Subcontractor to provide sample wage slips if able to ( proposal to visit Payroll Office at later date, but any sight of wage slips at this time would be beneficial)
• Equipment – Subcontractor to provide invoices and proof of payment specific to each CE for all associated equipment
• Materials – Subcontractor to provide invoices and proof of payment specific to each CE for all associated materials
• Charges – Documentary proof of any charges incurred and payable, specific to each CE
• Manufacture and fabrication outside Working Areas – documentary proof of any amounts paid by Subcontractor
• Design outside the Working Areas – documentary proof/payroll
• Insurance – documentary proof

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While what you have copied from ‘Managing Reality’ is a good guide, unless the Contractor has incorporated these words from their main contract agreement into the subcontract, then the only requirement that the Subcontractor has is to do what is in their NEC3 Engineering & Construction Subcontract option A.

The key clause here is clause 62.2 where “The Subcontractor submits details of his assessment with each quotation.” As, under option A, Defined Cost is built up using the Shorter Schedule of Cost Components (unless the parties agree to use rates and lump sums as per clause 63.14), then the strong implication should be that costs should be broken down to at least this level of detail.

Given this, when the Contractor receives a quotation off the Subcontractor, my comments on the what you have presented for justification he should ask for are :

  • None of what is asked for is justified IF the Subcontractor gave rates and percentages at tender and these were accepted, as part of their offer, by the Contractor (see clause 52.1)
    If this is not the case then
    People : agree plus justification for anything they they claim as being a People cost as per People 11.
    Equipment : only applies for those rates NOT in the referenced list or a tendered rate. I.e. Equipment 27.
    Plant and Materials : Agree.
    M&F outside Working Areas : Agree
    Design outside Working Areas : should be at tendered rates with percentage for design overheads added.
    Insurance : not relevant as this is for deductions only when an insurance event occurs.

However, notice what I said at the start of this list : it is for when receiving a quotation and wanting justification (although ideally it is built up together, so does not need to be attached i.e. the Contractor’s QS sees this information as it is being built up). If there are no requirements for subsequent AUDIT of these costs in the subcontract - end of ! Even if there are, if the quotation has been accepted by the Contractor, it is accepted - end of ! - but you could then apply the lessons learnt to future CE quotations.