Back to Basics #22 – 7 Key Considerations When Working Under NEC Option C and D
Pain/Gain mechanism are used on the NEC Target Cost Contracts (The Option C and D Contracts). These are useful on projects where the extent of the work is not fully defined.
The principle of the Target Cost Contracts is that a target cost or price is agreed between the Employer and Contractor. To incentivise the Contractor to achieve, or better, the target cost there is a pain/gain mechanism.
During the works the Contractor is reimbursed for the actual cost of carrying out the works. The Contractor’s records are subject to regular audits and the Contractor will need to justify its costs.
The key considerations when entering into these types of Contract are:
- Ensure that you understand what is included in the defined costs (as anything not included within defined costs will be deemed as included in the fee and will be termed “Disallowed Costs”).
- Ensure that the Fee you propose is sufficient to provide compensation for all of the disallowed costs you are likely to incur and to maintain your business aspirations in terms of contribution to overhead and profit.
- Ensure that all resources, and their location, are considered prior to formalising the Contract.
- As with all NEC Contracts ensure that you understand the mechanisms associated with time and compensation events as failure to comply can have serious implications on your entitlement.
- Maintain accurate records to justify the claimed Price of Work Done to Date (PWDD) which is the basis of your valuations.
- Ensure that any Subcontracts pass down appropriate and compatible obligations.
- Remember NEC Option C and D are not just “Cost Plus” contracts financial and project control are vital to ensure that the outcome of the project is commercially acceptable.
It’s important that the Project Team understands how the pain/gain mechanism works and it is absolutely crucial the Project Team understands what records need to be kept to justify its costs. Compensation Events need to be robustly assessed to enable the target cost and programme to be adjusted, otherwise the target cost can quickly become unachievable.
If you need assistance with a live or upcoming NEC projects, Ramskill Martin’s Team of Consultants have an experienced team which can help.
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