It’s Disallowed, and I’ll tell you Why!
17/06/24
Newsletter #11:
This is the Instruct newsletter, bringing you NEC contract insights, like VAR in football...but with accuracy.
This week we’ve been going into the world of Disallowed Cost for NEC4 ECC, several questions flagged by our community who are Project Managers, the most common being (for an Option C contract):
“How do I assess the amount due at the assessment date if the Contractor won’t substantiate costs. Should I, and how do I, disallow them?”
The summary here, is that relations between the Project Manager and Contractor are poor and agreements can’t be reached.
Let’s break this down:
Application
Project Managers responsibilities
Contractor records
Disallowing Cost
1. Application
Clause 50.2, the Contractor submits an application for payment to the Project Manager before the assessment date, setting out the amount the Contractor considers due.
PLUS
Include details of how the amount has been assessed, and in the form stated in the Scope.
Clause 50.3 explains the amount due is the Price for Work Done to Date, plus other amounts and less amounts to be paid or retained from the Contractor.
AND, within Option C, the Price for Work Done to Date is the Defined Cost forecast to the next assessment date, plus fee.
AND, Defined Cost is the cost of the components in the Schedule of Cost Components less Disallowed Cost.
Disallowed Cost makes its appearance! 11.2(26)
Simply, Assessment = Defined Cost (Compiled from Cost Components) - Disallowed Cost (11.2(26))
So we know the Contractor needs to submit an application and detail everything required to evidence the costs, but that’s not always the case, so what does the Project Manager do?
2. Project Managers Responsibilities
With great power, comes great responsibility… and it sits with the Project Manager (PM from now on…).
From the very beginning, the PM must decide the first assessment date (50.1), and also make the assessment at each assessment date (also 50.1). The PM must do this until termination or the Defects Certificate.
50.2 - The PM then has to consider an application by the Contractor. This is the backbone of the assessment and will result in the PM assessing what the Contractor has submitted.
50.5 - The PM has to check the status of the programme, if no programme is submitted or in the Contract Data, then 25% is retained.
50.6 - The PM must also correct any incorrectly assessed amounts due.
Furthermore (51.1), the PM only has one week from the assessment date to certify payment.
By undertaking this process the PM should have a thorough understanding of the work the Contractor has done as well as the forecast to the next assessment date.
Like going through security with a bag of liquids…here’s the problem! In doing this thorough assessment the PM has identified costs which have no substantiation, there is no evidence to justify these costs (most of which are labour). What next?
3. Contractor records
During this process the Contractor and PM should be speaking regularly in an open dialogue to gain full appreciation of Defined Costs and acceptable assessments.
The contract makes it clear what the Contractor needs to do when justifying Defined Cost, Clause 52.2 explains:
“52.2 The Contractor keeps these records
accounts of payments of Defined Cost,
proof that the payments have been made,
communications about and assessments of compensation events for Subcontractors and
other records as stated in the Scope”
By default, the Contractor must keep all of the records to justify Defined Cost, and this is what the PM should fall back on when discussing the application and questioning the assessment. These records should include things like:
Timesheets
Invoices
Plant hire paperwork
Material deliveries
Bills, e.g. gas, electric, business rates
Without these, the PM is pushed down a route…
4. Disallowing Cost
Without records, the PM must fall back on what the contract say, neatly laid out in Clause 11.2(26), summarised as follows (read the full clause for details):
Disallowed Cost is cost which:
is not justified by the Contractor’s accounts and records (bingo!)
should not have been paid…
Incurred because of a Contractor failure…
Plus cost of correcting Defects after Completion, and labour/plant/materials not used to provide the works.
This then becomes a simple process of the PM administering the contract as it is written, in these steps:
First, always talk to the Contractor and try to reach agreement.
Assess the amount due as per 50.1.
50.3 The amount due is the Price for Work Done to Date
11.2(31) The Price for Work Done to Date is the total Defined Cost which the PM forecasts will have been paid by the next assessment date.
11.2(24) Defined Cost is the cost of the components in the Schedule of Cost Components less Disallowed Cost.
Disallowed Cost is….as above…
Clear, functional, and within the bounds of the contract.
The PM should make their assessment, certify it within one week.
To help with questions like this I would recommend (in addition to our Instruct AI product), the book NEC4: Defined Cost and Compensation Events
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