Presentation ─── September 2013. Disallowance Under the NEC. ICES Seminar. Section One. NEC and Disallowed Costs Overview. Contract Overview. The NEC is now in its 3 rd edition as has been with us for over 20 years
DC Review at Tender
Managing DC at Contract Commencement
Managing DC during the Contract
Cost risk under the Contract
Contractor Paid PWDD
PWDD = Defined Cost + Fee
Defined Cost = Actual Cost - DC
DC allowance in the Fee
DC allowance % in Fee?
DC Register – Unique Reference
PM / C Review Meeting
Agree / Disagree
AllowableCost / DC
Driven by Early Warnings
Add 3 columns with a tick mark (pencil)
Accounts & Records
Orders & Invoices Matching
Labour & Plant Allocation Sheets
Material Delivery Notes
Plant on / off Hire Notes
Major Material Reconciliations
Staff Timesheets & Expenses
CEs – The Works & Domestic Issues
DCs – Back to Back Provisions
Agreement if different Option
Raising and closing out NCRs (Before Completion)
Where Defects are DC – Timely and Proper Agreed Resource based records to be signed off by PM.
When should DC be crystallised?
When the cost is incurred?
Anytime before the final assessment of the Contractor’s Share?
Assessed monthly by PM?
Assessed Quarterly by external audit team?
If the DC is levied several months after incurred – what are the implications?
Subcontractor account settled
Cost could have been reduced
Has the Contractor’s position be prejudiced by the late DC?
If DC is levied several months after incurred – what does the contract say?
Can it be an allowable cost one month and then DC a later month?
Clause 50.5 allows the PM to correct any wrongly assessed amount due in a later payment certificate.
What is the Contractor’s Remedy?
The Party alleging the certificate is wrong bears the burden of proof.
Clause 51.3 allows interest to be paid on the correcting amount.
Persuade or adjudicate
Standard contract states P/G impacted on certificate at completion.
That could expose Employer to recover a debt.
Amended contracts impact P/G when PWDD exceeds the Prices
Experience / history has shown that interim assessments of DC higher when P/G assessed at completion to offset debt risk.
Impact on certificate is significantly different – with 50:50 P/G its 50p in the £1 but with DC £1 for £1.
PM must identify specific items of cost and identify how they fall within the definition of Disallowed Cost.
PM cannot take a view as to the overall level of Defined Cost or take a view as to the economy or efficiency that should have been achieved.
Matters of efficiency and economy are the subject of the pain/gain risk share.
Procurement losses are the subject of the pain/gain risk share.
Misunderstanding between lump sum fixed price contracts and pain/gain risk sharing contracts.
Contractor is paid Defined Cost regardless of the level of Defined Cost.
Exception is Disallowed Cost
These are specific items of cost defined in the Contract
They are not related to the level of Defined Cost
The PM decides disallowed cost in interim payments
Pain/Gain (Contractor’s Share) is a separate and distinct mechanism which is related to the level of PWDD (Defined Cost + Fee) compared to the Target (Prices).
The risk is shared
It is a calculation after Completion (Standard)