When reviewing a cost return, the Project Manager needs to establish more than whether its total agrees with the Contractor's accounts. Some amounts must be allocated between projects, others use contractual or market rates, and a payment may include work claimed elsewhere. The cost schedule determines how each amount is treated and which records are needed to support it.
The records should support the calculation the contract requires. If a component uses a rate stated in Contract Data, the review needs to establish which rate applies and the relevant time or quantity. Reconstructing the Contractor's actual expenditure will not replace that calculation.
The fictional Ironbark Recycled Water Scheme uses Option C of the NEC4 Engineering and Construction Contract (ECC). A regional Australian water utility is procuring a pipeline, pumping station and balancing tank to supply an industrial estate from an existing treatment plant. The plant remains operational during construction and connection.
For one assessment period, the commercial team reviews ten entries from the cost return. These form an extract, not a complete payment application. The figures and additional Contract Data entries used in the example are illustrative, with amounts in Australian dollars excluding recoverable GST.
Applying the right cost schedule
Ironbark's Option C uses the Schedule of Cost Components (SCC). The contract structure and selected options determine which provisions apply, so the review starts with the signed contract. The example uses the June 2017 NEC4 ECC incorporating the January 2023 amendments, without project amendments affecting these cost rules.
Under Option C, Defined Cost is the cost of the components in the SCC less Disallowed Cost. The SCC must be read with Contract Data and Scope, including its requirements for records.
The SCC allows an amount to be included in only one component and only where it is incurred to Provide the Works. Some components use employment costs or payments, while others use contractual or market rates. Clause 52.1 requires the applicable rates and percentages stated in Contract Data to be used. Other amounts must be at open-market or competitively tendered prices, with recoverable discounts, rebates and taxes deducted. The description in the ledger does not establish which of these rules applies.
People costs and working arrangements
A site employee is normally based within Ironbark's Working Areas. Employment records show $7,000 in wages and $1,000 in qualifying employer contributions and levies. The time records show 120 hours on Ironbark and 40 on another project. In this example, those hours provide an appropriate basis for allocating the full $8,000. Ironbark's share is 75%, or $6,000.
The wages fall under component 11 and the relevant employer payments under component 13. The $1,000 comprises eligible amounts supported by payroll and the employment terms. A general payroll loading would not establish those amounts, and an internal charge-out rate containing overhead and profit would not replace the SCC calculation.
The time allocation needs to reconcile with payroll and payment records so that the Project Manager can establish both the employment cost and the work it relates to. The employee's normal place of work also matters. Someone normally working within the Working Areas can carry out project work elsewhere without automatically losing eligibility, but time spent on the other project remains outside Ironbark's cost.
An engineer normally based outside the Working Areas spends 40 hours within them on project engineering. The eligible employment cost for that time is $2,400 under components 11 to 13. The engineer also spends 20 hours at an office on design which the Contractor is required to undertake. For that category of design person, Contract Data states a component 71 rate of $120 per hour. The design work is therefore valued at $2,400, bringing the engineer's total to $4,800.
The office design hours use the contractual rate, even if their payroll cost differs. They must not also be included under people costs. The time and design records need to distinguish the office design work from the engineering carried out within the Working Areas, so that each is valued under the relevant provision.
A directly employed planner works off site. The records allocate 40 hours and $2,400 of qualifying employment costs to Ironbark, and Contract Data expressly lists the category of person and the planning work. The January 2023 amendments allow for listed people whose normal place of work is outside the Working Areas and who are working outside them. Manufacture, fabrication and design have separate provisions and are excluded from this category. The Project Manager can also agree to assess additional people as if listed, but allocating their time to the project does not establish that agreement.
Working Areas is a defined term. It includes the Site and qualifying parts of the identified working areas which are necessary for Providing the Works and used only for this contract. A shared office or home does not become a Working Area because someone works on Ironbark there. The provision for listed off-site people can apply without changing the status of the location.
The return also includes $1,400 for general head-office finance support. This person works entirely outside the Working Areas, is not covered by the relevant Contract Data entry or a Project Manager agreement, and does no qualifying manufacture, fabrication or design. The amount therefore falls outside Defined Cost and is treated as included in the Fee under clause 52.1. Eligibility depends on the person's work and the applicable people provisions, not on whether the accounts describe the cost as an overhead.
Equipment costs
An independent hire company supplies an excavator without an operator. Its $6,600 invoice comprises twelve days at $500 and $600 for delivery and collection. Component 21 uses the hire rate and the time for which the Equipment is required. The separately charged transport falls under component 26 because it is not included in the hire rate and is not transport for repair or maintenance.
The hire agreement, on-hire record and site returns support ten days, giving $5,000 plus $600 transport. The off-hire and site records do not agree on the remaining two days. The calculation includes $5,600 and excludes the unexplained $1,000 while the records are reconciled.
The Project Manager needs to establish when hire ended, why the machine remained required and what was payable under the hire terms. Utilisation records can help, but Equipment may be required without operating continuously. The Disallowed Cost test for unused resources allows for reasonable availability and utilisation. Each charged day needs support, without treating every idle period as Disallowed Cost.
The Contractor owns the roller and records an internal charge of $4,000 for ten days. In this example, the roller is not listed under the SCC provisions for Equipment assessed through change in value or special Equipment rates. Component 22 therefore uses an open-market rate for the time required. Comparable hire evidence supports $250 per day, giving $2,500.
That evidence needs to concern equivalent Equipment on comparable terms. A hire rate including an operator cannot be compared directly with a machine-only rate while the operator is charged separately. The roller records establish ten required days within the Working Areas, and the market evidence establishes the rate. The purchase price or internal depreciation allocation does not establish an open-market hire rate.
Plant and Materials costs
The materials invoice comprises $30,000 for pipe and fittings and $1,000 for delivery. Those payments fall under component 31, with delivery records identifying the quantities supplied and their intended use. The pipe and fittings are Plant and Materials because they will form part of the works. Pumps to be incorporated into the scheme have the same classification. The excavator and roller used to construct the works are Equipment.
The supplier account shows a $500 recoverable discount and a $1,000 refund for returned fittings. Clause 52.1 requires recoverable discounts, rebates and taxes to be deducted. Component 32 credits payments received for disposal of Plant and Materials unless their cost is disallowed. Here, the returned fittings have not already been disallowed or removed elsewhere. Deducting the $1,500 leaves $29,500 for these supplies.
The return note and supplier statement should connect the refund to the original supply. The refund must not be deducted twice because it appears as both a negative invoice and a separate cash receipt. Materials left unused also need to be considered under the relevant Disallowed Cost provision, including its allowance for reasonable wastage and exception for a change to Scope.
Subcontract payments
The pipeline Subcontractor applies for $55,000 under a fixed-price subcontract. Measured progress and agreed changes support $50,000. The remaining $5,000 is an application error and has not been paid. The subcontract terms and the work valued establish the amount due, rather than the figure on the application alone.
Component 41 deals with payments for subcontracted work. The supporting records need to establish what was due, how it was assessed and what was paid, including any adjustments. A fixed-price subcontract does not generally need to be rebuilt from the Subcontractor's payroll and supplier invoices. An open-book subcontract may require those records because its own payment entitlement is calculated differently.
The $50,000 valuation includes testing which the Contractor has arranged with a separate provider for $1,200. In this example, that service is subcontracted work under the ECC definition and is carried out within the Working Areas. The pipeline subcontract requires a dollar-for-dollar credit for the testing arranged directly by the Contractor. The pipeline payment is therefore $48,800, with the separate $1,200 testing payment included under component 41.
Together, the two payments total $50,000. The pipeline assessment needs to show the testing credit, supported by the separate testing order, service record, invoice and payment. Without the credit, the same testing would be paid for twice. Deducting its cost from both payments would understate Defined Cost.
Queries and Disallowed Cost
The finance-support allocation falls outside the relevant cost components, whereas the additional excavator hire is excluded because the records do not justify it. The reason for each exclusion should be recorded so that the Contractor knows whether it needs to correct the classification or provide further evidence.
Under Option C clause 11.2(26), cost not justified by the Contractor's accounts and records is Disallowed Cost. Describing an amount as 'under query' does not make it payable without evidence. The Contractor needs to provide the missing hire records, and the Project Manager must assess the cost under the contract. If those records justify the additional $1,000, its treatment can be reconsidered, subject to the provisions for finalising cost and assessments.
The definition also covers amounts which should not have been paid under a subcontract or supply contract. If the Contractor had paid the $5,000 application error, that exclusion would need to be applied. Cost incurred only because a procurement or acceptance procedure in Scope was not followed is also disallowed. The Project Manager needs to establish the cost caused by that failure, rather than automatically exclude the whole subcontract value.
The Contractor maintains the records and explains its calculation. Clause 52.2 requires accounts of Defined Cost payments, proof of payment, the relevant subcontract compensation event communications and assessments, and other records required by Scope. The Project Manager can inspect the required accounts and records under clause 52.4. A request for further evidence should identify what is missing and why it matters to the assessment. For the excavator, the unresolved hire period needs to be explained. Requesting every document held by the hire company would not necessarily resolve it.
Calculating Defined Cost and Fee
For the calculation, eligible external payments have been made at prices meeting clause 52.1, and no further grounds for Disallowed Cost have been identified.
| Record | Calculation and treatment | Defined Cost AUD |
|---|---|---|
| 1 Site employee | SCC 11 and 13 $8,000 × 120/160 hours | $6,000 |
| 2 Engineer | SCC 11–13 and 71 $2,400 within Working Areas + 20 design hours × $120 | $4,800 |
| 3 Off-site planner | SCC 1 and 11–13 $2,400 eligible allocated employment cost; listed category and work | $2,400 |
| 4 Finance support | No applicable cost component on stated facts $1,400 allocation treated as included in Fee | $0 |
| 5 Hired excavator | SCC 21 and 26 $6,600 less $1,000 awaiting hire-period evidence | $5,600 |
| 6 Owned roller | SCC 22 $4,000 internal charge replaced by 10 days × $250 | $2,500 |
| 7 Pipe and fittings | SCC 31 $30,000 supply + $1,000 delivery | $31,000 |
| 8 Supplier adjustments | Clause 52.1 and SCC 32 $500 discount + $1,000 return refund deducted | -$1,500 |
| 9 Pipeline subcontract | SCC 41 $55,000 less $5,000 error and $1,200 testing credit | $48,800 |
| 10 Testing service | SCC 41 $1,200 paid separately; matching credit in record 9 prevents duplication | $1,200 |
| Defined Cost | Total eligible costs | $100,800 |
Defined Cost is $100,800. Using an illustrative fee percentage of 10% gives a Fee of $10,080 and a total of $110,880. The percentage is applied once to Defined Cost, including the component 71 design amount and component 41 subcontract payments.
The unexplained $1,000 hire cost remains excluded. General finance support is treated as included in the Fee, with no separate addition for that cost or profit. An amount already valued within a component or contractual rate must not be claimed again under another heading.
The $110,880 is not the complete amount due. The payment provisions require a cumulative assessment, including the relevant forecast and other additions or deductions. Including eligible cost in payment under Option C does not itself change the target.
Other main options and compensation events
The same records may support a compensation event assessment, although spending the money does not establish that a compensation event has occurred. Clause 63.1 distinguishes actual Defined Cost for work done by the dividing date from forecast Defined Cost for work not done by then, with the resulting Fee. Invoices for work already done cannot determine the whole assessment where work remains to be carried out.
The calculation also changes with the main option. Options A and B use the Short Schedule of Cost Components, with People Rates for eligible people costs and specified rate provisions for Equipment, including any applicable published list and adjustment. The SCC provision for listed off-site people cannot simply be transferred to that schedule. Routine payment under A and B remains based on the priced work, not this cost return. Option F has its own definition of Defined Cost and does not use either schedule.
On Ironbark, the Contractor needs to reconcile the two excavator days with the hire company and site team. The Project Manager can then assess the $1,000 against the applicable components and Disallowed Cost provisions. The return should identify that unresolved amount separately, alongside the calculation and records supporting the other entries.
These cost reviews form part of NEC4 ECC Commercial Management training, using project records to work through the classifications and calculations.
