An interesting question was raised at a recent seminar, is an engineer or similar, engaged through an ‘agency’ and paid on an hourly basis, a Subcontractor or People (in the Schedule of Cost Components) for the purposes of calculating Defined Cost under NEC3 ECC Option C?
The difference, of course, is that if a Subcontractor, it attracts the subcontracted fee percentage and if People it attracts the Working Area Overheads percentage and the direct fee percentage.
Research into this suggests there are a number of interpretations; I have concluded, for the reasons set out below, that such engineer would probably be a Subcontractor. However, many would disagree!
- A Subcontractor is a defined term in the Contract and includes “a person or organisation who has a contract with the Contractor to provide a service necessary to Provide the Works”. That definition will ‘catch’ the hourly paid engineer mentioned above. On that basis, he (or more properly, the agency) is a Subcontractor.
- Paragraph 14 of the Schedule of Cost Components provides that “The following components of the cost of people who are not directly employed by the Contractor but are paid for by him according to the time worked while they are within the Working Areas. Amounts paid by the Contractor”. On that basis, the engineer mentioned above is also People.
- As the engineer falls under both categories, which is the correct category for the purposes of assessing Defined Cost and which of the Fees should be added?
- Defined Cost is defined at 11.2(23) as the amounts due to Subcontractors for work which is subcontracted without taking account of certain listed deductions, plus the cost of components in the Schedule of Cost Components for other work.
- It would seem from the definition that amounts due to Subcontractors are assessed first, and then anything that remains, i.e. “other work” is assessed using the Schedule of Cost Components.
- This is somewhat reinforced by the first paragraph of the Schedule which states “In this schedule the Contractor means the Contractor and not his Subcontractors”.
- The only consideration that remains is the definition of “work” as clause 11.2(23) expressly refers to payments “due to Subcontractors for work which is subcontracted”.
- The Contract fails to provide any definition of “work”; a dictionary definition is an “activity involving mental or physical effort done in order to achieve a result”. That would suggest that “work” is anything done so as to Provide the Works (the result); in this particular case, it would include the engineer.
- This is largely confirmed within the definition of Defined Cost which expressly deals with costs of “work which is subcontracted” and costs of “other work”. As Defined Cost is the only method by which the Contractor can recover costs, all such costs incurred in
- Providing the Works must therefore fall under either subcontracted work or other work. On that basis, work must mean anything done to Provide the Works.
- One further consideration is the definition of “subcontracted” as the work must be so subcontracted to fall under the first part of the definition of Defined Cost.
- Again, there is no definition in the Contract; a dictionary definition is “a person or business which has a contract (as an “independent contractor” and not an employee) with a contractor to provide some portion of the work or services on a project which the contractor has agreed to perform”. That definition would encompass the engineer mentioned above, but exclude employees who are directly employed (which otherwise may be argued as included in the definition of Subcontractors, as it refers only to a contract (which could be an employment contract) and not a subcontract).
- Accordingly, and in summary, it would seem that the engineer would therefore be deemed a Subcontractor for the purposes of Defined Cost and on that basis would not attract Working Area overheads and would be subject to the subcontracted fee percentage rather than the direct fee percentage.
- However, that does not appear to be the intention of the Contract. Working Area overheads exist as, for employees, it is expected their employer, i.e. the Contractor, will need to provide certain services and equipment that would not ordinarily be provided to subcontractors. Moreover, it is assumed that the Contractor’s management involvement and risk with regard to subcontracted works is lower than in regard to other works. On that basis, the subcontracted fee percentage is usually lower than the direct fee percentage.
- But, subcontracted engineers and the like are subcontractors in name only; often subject to the daily direction of the Contractor who also provides that person with services and equipment as he would his employees.
- On that basis, for a Project Manager to insist that such a person be classed as a Subcontractor to avoid paying the Working Area overhead and avoid the higher direct fee percentage would be a breach of the obligation to act in a spirit of mutual trust and cooperation. That breach may be a compensation event at 60.1(18).
- Whilst there is generally no concept of good faith in English Law, there is the case of Gold Group Properties Limited v BDW Trading Limited in which it was held that where there is an express duty of good faith spelt out in the contract the Court will apply and enforce it to the extent that the obligation has sufficient certainty. A good faith obligation does not modify the contractual terms where they confer a freely negotiated advantage on one party but subject to that it may modify a party’s behaviour ancillary to the performance of the contract so that if a party acts in a way that deprives the other party of the anticipated benefit of the contract, that might breach a good faith obligation.
- It could be argued that a Project Manager acting in such a way, contrary to the intention of the Contract and depriving the Contractor of the Working Area overhead and direct fee percentage in circumstances in which the Contract was designed to have them reimbursed, would be such a breach.
- An alternative to the above can be found in the definition of Defined Cost at clause 11.2(23). The amount ‘reimbursable’ is the amount of payments due to Subcontractor without taking account of certain deductions. One of those deductions is “the supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas in this Contract”.
- Accordingly, if a Contractor was to deduct some money from the Subcontractor for providing the type of things otherwise included within the Working Area overhead percentage, then that deduction is not taken into account when assessing the Defined Cost of the Subcontractor. The Contractor is reimbursed gross, not net.
- The agency engineer will probably decry that he has not included for those amounts within his price; accordingly, the Contractor will need to ensure that such sums are included before entering into a subcontract.
- For existing Subcontracts let without that allowance, it may be that the terms of the subcontract need to be renegotiated; it cannot simply be paid as it could be disallowed as a cost that “should not have been paid to a Subcontractor…in accordance with his contract”.
- The renegotiation of terms could include retrospective correction of previous payments. Moreover, there is no limit on the value of the amount agreed to be deducted for Working Area overhead type items (subject to clause 52.1 which requires the costs to be at open market or competitively tendered rates) and is, in fact, entirely unrelated to the percentage included for Working Area overheads in the Contract Data.
Written by Steven Evans who is a construction contract and commercial expert with particular specialism in NEC3, and a tutor for NEC Contracts and Thomas Telford Training.
This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.