Although several procurement strategies have regressed due to the current economic situation, NEC Option C, or target contract with activity schedule, is still one of the most often used types of engineering and construction contracts (ECC). Objective cost contracts are straightforward in theory: a reasonable objective is established, a fair share method is decided upon, and the parties collaborate to divide the risk and profit. If the Contractor does better than the objective, he will split the savings; if he surpasses the target, he will pay his portion of the surplus.
Issues with NEC3 Option C
In addition to Employers trying to have their cake and eat it by abusing the share mechanism, one of the most frequent issues with NEC option c is a lack of knowledge about how the amount owed to the Contractor is calculated. Contractors frequently discover that when their costs are reimbursed by the contract, it differs from what they had anticipated during the tender stage.
To examine the provisions for determining the amount owed in more detail and make the following determinations.
How is Option C’s cost reimbursement explained to the industry?
• What makes them not understand? Are the users at blame or the contract?
• In what ways might comprehension be enhanced? Is the agreement unambiguous?
Regarding the NEC’s clarity and use of simple language, reputable legal authorities and commercial construction consultants have differing opinions on whether or not this “requires one to focus on what is truly intended and not on what is to be presumed.”
The NEC3’s primary goal of encouraging excellent management could not be accomplished, if it wasn’t written and organized in a way that was easy for users to comprehend. It is nearly impossible that, in its most basic form, it can be clearly and easily understood by everyone, including in all respects, given that it is also a contractual document meant to create legal obligations intended for different applications in the UK and internationally.
How does the contract handle expense reimbursement?
At each assessment date, the Project Manager is responsible for determining the amount owed, even if the Contractor may file a payment application.
The Price for Work Done to Date (PWDD) less any monies that must be paid to or withheld from the Contractor, is the amount owed. The Project Manager’s forecasted total defined cost (PWDD) is the total defined cost plus the fee that must be paid by the next assessment date. The sum of payments made to subcontractors for work completed under the subcontract, less any allowable costs; the defined cost is the cost of the components listed in the Schedule of Cost Components for other work, less any deductions.
The Schedule of Cost Components (SCC) cost categories that contractors must comprehend to be compensated are unclear to them.
What ought to be changed?
The open book approach of Option C is supported by the SCC’s goals, which are in line with the contract and are extensively viewed as a good development over present practice. However, more work has to be done, including providing commercial construction training to ensure better awareness of how expenses are to be returned to the Contractor. Which has to change—the users or the contract—is the actual question.
In general, NEC3 calls for adjustments to working techniques, attitudes, systems, and processes in addition to training and education. The goal of clarity is defeated if users put in the effort to learn the material yet are unable to get the comprehension needed to utilize the contract efficiently. But it’s hard to say what needs to change unless we know for sure that they have.
The recent release of several new NEC3 reference books and manuals and NEC training may indicate that it is now more widely accepted that the issue is with how users interpret and implement the contract in real-world scenarios rather than with the contract itself.
The way forward
The contractual requirements for cost reimbursement under Option C are not well understood, which sometimes leads to an imprecise goal even before the commencement of work. The concept of “actual cost” was changed to “defined cost” in the most current version of the ECC to emphasize that the Contractor is not just compensated for amounts spent. However, this modification has not had the desired effect on the industry.
It seems doubtful that significant revisions to the construction contract advice will be made, at least not very soon, notwithstanding these miscommunications. Perhaps, here is where the Employer and Contractor must cooperate and maximize the NEC3’s versatility.