NEC4 Engineering and Construction Contract (ECC) Option C is a target contract with an activity schedule. The client and the contractor agree a target price at the start. The contractor is paid the cost it actually incurs, plus a fee, as the work goes on. At the end, any saving or overspend against the target is shared in proportions agreed in the contract. It is one of the most used main options on UK infrastructure, because it rewards both sides for keeping cost down.
The main options in one line each
| Option | Type | Who carries cost risk |
|---|---|---|
| A | Priced contract with activity schedule | Mostly the contractor |
| B | Priced contract with bill of quantities | Mostly the contractor, quantities with the client |
| C | Target contract with activity schedule | Shared, through the pain and gain share |
| D | Target contract with bill of quantities | Shared, with quantities re-measured |
| E | Cost reimbursable contract | Mostly the client |
| F | Management contract | Mostly the client |
The words that matter
The Prices and the target
Under Option C the contractor prices an activity schedule: a list of activities, each with a lump sum. The total of those lump sums is "the total of the Prices". At the start it is the target. The target moves when compensation events are implemented, so the target at the end is rarely the target at the start.
Defined Cost
Defined Cost is the cost the contractor is paid for. What counts is set out in the Schedule of Cost Components: people, equipment, plant and materials, subcontractors, charges, manufacture and fabrication, design, and insurance. Anything outside that schedule is not Defined Cost. That is why good cost coding matters so much on an Option C job: if a cost cannot be traced to a component, it may not be paid.
Disallowed Cost
Some costs are paid by the contractor even though it spent the money. The contract lists them. Examples include cost that is not justified by the accounts and records, cost of correcting defects after Completion, cost of plant and materials not used to provide the works, and cost incurred because the contractor did not give an early warning it should have given. The Project Manager decides what is disallowed.
The Fee
The Fee is the contractor's overheads and profit. It is worked out by applying the fee percentage, stated in the Contract Data, to Defined Cost. So the contractor earns the Fee on every pound of Defined Cost, and the fee percentage is fixed at tender.
Price for Work Done to Date
The Price for Work Done to Date (PWDD) is what drives each payment. Under Option C it is the total Defined Cost that the Project Manager forecasts will have been paid by the contractor before the next assessment date, plus the Fee. Each month the Project Manager assesses the amount due: broadly, the PWDD plus other amounts to be paid, less amounts to be paid by or retained from the contractor, less what has been paid before.
The Contractor's share: pain and gain
The Contract Data sets out share ranges and a share percentage for each range. For example:
| PWDD as a share of the total of the Prices | Contractor's share |
|---|---|
| Less than 90% | 40% |
| 90% to 110% | 50% |
| More than 110% | 70% |
These numbers are only an example. Each contract sets its own. If the final PWDD comes in below the total of the Prices, there is a saving, and the contractor is paid its share of it (gain). If the final PWDD is above the total of the Prices, there is an overspend, and the contractor pays its share of it (pain). The share is assessed at Completion and then corrected in the final assessment.
A worked example
Say the total of the Prices is £10.0m after all compensation events, and the final PWDD is £9.4m. The saving is £0.6m. With the share ranges above, the whole saving falls in the 90% to 110% band, so the contractor's share is 50%, or £0.3m, paid on top of what it has already received.
If instead the final PWDD were £11.5m, the overspend would be £1.5m. The first £1.0m (from 100% to 110% of the target) falls in the 50% band, so the contractor pays £0.5m of it. The last £0.5m (above 110%) falls in the 70% band, so the contractor pays £0.35m of it. In total the contractor bears £0.85m and the client £0.65m.
Compensation events
Compensation events are the events, listed in the contract, that change the Prices, the Completion Date or both. Examples are a change to the Scope instructed by the Project Manager, the client not providing access on time, or physical conditions an experienced contractor would not have allowed for.
- Notifying. The contractor must notify a compensation event within eight weeks of becoming aware of it, or it can lose the right to more time and money. This is the time bar.
- Quoting. Quotations show the change to the Prices and any delay to Completion, with a revised programme where the programme is affected.
- Assessing. Changes to the Prices are assessed as the effect on Defined Cost plus the Fee. Under Option C that change moves the target.
- The dividing date. NEC4 introduced the dividing date. For an event raised by a Project Manager's instruction or notification, it is the date of that communication; otherwise it is the date the event was notified. Defined Cost before the dividing date is assessed as actual cost, and after it as forecast cost.
Early warnings
Both sides must give an early warning as soon as they become aware of anything that could increase the Prices, delay Completion or a Key Date, or impair the performance of the works. Early warnings go on the Early Warning Register and are talked through at early warning meetings. If the contractor did not give an early warning it should have given, a later compensation event is assessed as if it had, which can reduce what it is paid.
What this means for project controls
- Code every cost to the Schedule of Cost Components, so Defined Cost can be shown and Disallowed Cost kept apart.
- Keep the activity schedule and the programme aligned, so the Prices and the dates tell the same story.
- Track the notice and reply periods for every compensation event, and link each one to its early warning and risk.
- Forecast the final PWDD against the moving target every month, so the pain or gain is never a surprise.
Primer's Commercial and NEC4 module puts these on the same links as the programme and the cost. See how it works.
This guide is general information, not legal, contractual or financial advice. Always check the source documents for your own contract or company.