I have a contract on Term Service and the client has reduced the scope to fund some of the team. We put a CE in for redundancy and they seem to think they are not liable. Now on ECC under the schedule of cost components there is a clause for severance. On TSC there is no SCC however severance is defined cost. What is your opinion?
Good question. Here are my initial thoughts:-
I’d suggest you consider both what is due in respect of payment and also as a potential compensation events, as the methodology is slightly different.
Can you confirm which main option you are using?
I’d suggest that you don’t rely on the wording within the ECC, as this is not relevant.
The clauses that you need to consider are: 11.2.(5), 52.1 and 11.2(13). Reading these clauses, the wording in 11.2(13) would appear to be the key test as to whether this is a payable, whether you needed to pay these costs in order “To Provide the Service” i.e. “necessary”, “which the contract requires”, etc. Assuming that you have a contractual obligation to pay the redundancy payments, then this would seem to sit within this definition.
Its worth noting that where the redundancy costs/liability have been incurred over several years and not all in relation to the project, it might be argued that these costs should be pro rata-ed relative to the duration of the project. “Keating on NEC3” consider this point in his book (although under ECC), and although he doesn’t come to any conclusion on this point, it is to my mind a logical and sound argument.
A reduction in scope is a compensation event under clause 60.1(1) which is assessed based on Defined Cost plus Fee. The definition of Defined Cost in the NEC3 TSC gives no clarity as to the extent of the Employer’s liability to pay for “people who are employed by the Contractor” as there is in the ECC through the Schedule of Cost Components item 12(f). Hence why NEC4 TSC now includes a Schedule of Cost Components. My view would be that under the NEC3 TSC the Employer is liable to pay redundancy costs as there’s no limitation stated.