Although several procurement strategies have regressed due to the current economic situation, NEC Option C, or contract option c target with activity schedule, is still one of the most often used types of engineering and construction contracts (ECC). Objective cost contracts are straightforward in theory: a reasonable objective is established, a fair share method is decided upon, and the parties collaborate to divide the risk and profit. If the Contractor does better than the objective, he will split the savings; if he surpasses the target, he will pay his portion of the surplus.
Introduction to NEC3 Option C
NEC3 Option C is a type of target cost contract that is widely utilized in the construction industry due to its balanced approach to risk and reward. This contract involves an activity schedule that meticulously outlines the scope of work and project timelines. One of the defining features of Option C is the sharing of out-turn financial risks between the client and the contractor in an agreed proportion. This means that both parties have a vested interest in the project’s financial performance.
The target cost contract is designed to incentivize the contractor to complete the project within a predetermined budget. If the contractor manages to keep costs under the target, they share in the savings, thus benefiting from their efficiency. Conversely, if the project exceeds the target cost, the contractor bears a portion of the overrun, which encourages careful cost management. This shared risk and reward mechanism makes Option C particularly suitable for projects where the scope is well-defined and the risks are relatively low.
Contract Structure
The structure of an NEC3 Option C contract is meticulously crafted to ensure clarity and comprehensive coverage of all project aspects. At its core is the main document, which outlines the primary terms and conditions governing the contract. This core document is supplemented by secondary option clauses, which provide additional specific terms and conditions tailored to the project’s unique requirements.
A critical component of the contract is the activity schedule. This schedule details the scope of work and sets out the timelines for the project’s various phases. It serves as a roadmap for both the client and the contractor, ensuring that all parties are aligned on the project’s deliverables and deadlines.
The contract data relevant to an Option C contract includes vital information such as the project scope, timelines, and budget. This data is essential for setting clear expectations and benchmarks for the project’s progress and financial performance.
Additionally, the schedules of cost components provide a detailed breakdown of the costs associated with the project. These schedules categorize costs into specific components, making it easier to track and manage expenses. This detailed cost breakdown is crucial for the accurate assessment of the Price for Work Done to Date (PWDD) and for ensuring that all parties have a clear understanding of the project’s financial status.
By incorporating these elements, the NEC3 Option C contract structure ensures a comprehensive and transparent framework for managing construction projects, promoting effective collaboration and financial accountability.
Issues with NEC3 Option C
In addition to Employers trying to have their cake and eat it by abusing the share mechanism, one of the most frequent issues with NEC option c is a lack of knowledge about how the amount owed to the Contractor is calculated. Contractors frequently discover that when their costs are reimbursed by the contract, it differs from what they had anticipated during the tender stage.
One common issue is the misunderstanding of disallowed costs, which are expenses that are not recognized as part of the agreed-upon project budget and can be rejected by the Project Manager.
To examine the provisions for determining the amount owed in more detail and make the following determinations.
How is Option C’s cost reimbursement explained to the industry?
• What makes them not understand? Are the users at blame or the contract?
• In what ways might comprehension be enhanced? Is the agreement unambiguous?
Regarding the NEC’s clarity and use of simple language, reputable legal authorities and commercial construction consultants have differing opinions on whether or not this “requires one to focus on what is truly intended and not on what is to be presumed.”
The NEC3’s primary goal of encouraging excellent management could not be accomplished, if it wasn’t written and organized in a way that was easy for users to comprehend. The programme must include all the information required under the contract to be deemed realistic and practical, ensuring that all parties have a clear understanding of the project’s scope and timelines. It is nearly impossible that, in its most basic form, it can be clearly and easily understood by everyone, including in all respects, given that it is also a contractual document meant to create legal obligations intended for different applications in the UK and internationally.
How does the contract handle expense reimbursement?
At each assessment date, the Project Manager is responsible for determining the amount owed, even if the Contractor may file a payment application.
The Price for Work Done to Date (PWDD) less any monies that must be paid to or withheld from the Contractor, is the amount owed, which includes the actual costs incurred by the contractor. The Project Manager’s forecasted total defined cost (PWDD) is the total defined cost plus the fee that must be paid by the next assessment date. The sum of payments made to subcontractors for work completed under the subcontract, less any allowable costs; the defined cost is the cost of the components listed in the Schedule of Cost Components for other work, less any deductions.
The Schedule of Cost Components (SCC) cost categories that contractors must comprehend to be compensated are unclear to them.
What ought to be changed?
The open book approach of Option C is supported by the SCC’s goals, which are in line with the contract and are extensively viewed as a good development over present practice. However, more work has to be done, including providing commercial construction training to ensure better awareness of how expenses are to be returned to the Contractor. Which has to change—the users or the contract—is the actual question.
The complexities of the NEC3 Option C contract require sophisticated management techniques to ensure that all parties can effectively manage and execute the contract.
In general, NEC3 calls for adjustments to working techniques, attitudes, systems, and processes in addition to training and education. The goal of clarity is defeated if users put in the effort to learn the material yet are unable to get the comprehension needed to utilize the contract efficiently. But it’s hard to say what needs to change unless we know for sure that they have.
The recent release of several new NEC3 reference books and manuals and NEC training may indicate that it is now more widely accepted that the issue is with how users interpret and implement the contract in real-world scenarios rather than with the contract itself.
The way forward
The contractual requirements for cost reimbursement under Option C are not well understood, which sometimes leads to an imprecise goal even before the commencement of work. The concept of “actual cost” was changed to “defined cost” in the most current version of the ECC to emphasize that the Contractor is not just compensated for amounts spent. However, this modification has not had the desired effect on the industry.
Understanding and managing compensation events is crucial for both the Employer and Contractor to ensure that the project stays on track and within budget.
It seems doubtful that significant revisions to the construction contract advice will be made, at least not very soon, notwithstanding these miscommunications. Perhaps, here is where the Employer and Contractor must cooperate and maximize the NEC3’s versatility.
