Under NEC4 ECC Options C, D and E, questions about Defined Cost should be resolved through the contract and the supporting records. Disallowance calls for a specific explanation, not a broad objection to the Contractor’s expenditure.
Identify the contractual basis
A cost that appears high, inconvenient or poorly managed is not automatically Disallowed Cost. The assessment needs to identify the applicable contractual provision and explain why the particular cost falls within it.
This article concerns the NEC4 Engineering and Construction Contract under Options C, D and E. Defined Cost and Disallowed Cost are contractual terms with specific functions. The relevant cost components must first be considered; Disallowed Cost is not a general description for every amount excluded from payment.
The useful starting question is therefore precise: what cost is being assessed, under which provision, and on what evidence? A general complaint about the contractor’s commercial performance does not answer it. The separate question of actual and forecast cost in a compensation event is examined in Forecast Assessment of Compensation Events.
Connect the accounts to the work
The Disallowed Cost provisions include cost not justified by accounts and records. The contractor needs to be able to explain the expenditure and connect it to the work. An invoice total alone may leave that connection unclear.
For example, a plant invoice may show a hire period covering several weeks. The supporting records should allow the team to understand where the plant was used, what work it supported and how the charged period has been treated. If the assessment concerns only part of that period, identify that part.
Agree workable record arrangements early. Cost codes, access to subcontract information and a routine for resolving queries should support the contract’s requirements. An administrative preference for a particular spreadsheet does not, by itself, establish a new contractual ground for disallowance.
Explain the connection between a failure and the cost
Some grounds concern cost arising from specified failures, including particular procurement or acceptance procedures and the giving of required early warnings. Applying those grounds requires attention to their wording and to the cost connected with the failure.
Consider a late warning about a temporary access problem. A cost review should establish when the problem became apparent, what action could have been taken at that point and which expenditure might have been avoided. It should distinguish that expenditure from costs that would still have arisen.
A conclusion that the warning was late does not explain the amount proposed for disallowance. The assessment needs a reasoned account of the consequences, supported by the programme, site information and the relevant decisions.
Do not use disallowance to rewrite the bargain
A target overrun and an assessment of Disallowed Cost are separate matters. The fact that the forecast is above the target does not establish that a particular item is disallowed. The contract’s treatment of cost and the target arrangement must be applied as agreed.
Nor is comparison with a tender allowance enough on its own. If an activity was expected to take five days and took eight, the difference prompts questions. It does not answer them. The team needs to examine the work, the circumstances and the relevant contractual ground.
This discipline matters to both parties. The contractor must explain its costs, and the Project Manager must explain an assessment that excludes them. Neither task is completed by asserting that the other party should simply accept the figure.
Make cost queries specific
A useful query identifies the transaction, the amount in question, the information missing and the reason that information matters. It also distinguishes a request for clarification from a concluded assessment.
Keep a record of the contractor’s response and what remains unresolved. If the explanation satisfies part of the query, record that progress. Reopening the whole item at each assessment creates avoidable work and makes it difficult to establish the actual disagreement.
The scale of the enquiry should be sensible. A recurring issue across a work package may justify reviewing the underlying system. An isolated coding error may need a corrected allocation and a short explanation. The response should address the problem found.
Resolve the assessment while the facts are available
Use regular cost reviews to address uncertainty before it becomes an accumulated final account issue. Include the people who understand the work and the people who understand the accounts; they will often hold different parts of the explanation.
Where disagreement remains, state the contractual and factual issue plainly and follow the applicable process. Keep the evidence and calculation together so another reviewer can understand how the amount was reached.
Disallowed Cost should be administered with the same care as any other assessment under NEC4. The result needs to follow from the agreed contract and the evidence, with enough reasoning for the parties to understand it.
