NEC4 ECC pricing provisions – an introduction for new NEC users

Key Points 

• NEC contracts provide different pricing options to suit each client’s and project’s requirements.
• Three commonly used main options in NEC4 ECC are Option A (priced contract with activity schedule), Option C (target contract with activity schedule) and Option E (cost reimbursable).
• Each pricing option has a different approach to payment and risk.

One of the main features of the ECC is that it allows the parties to choose between six different main pricing options when agreeing the contract terms: Options A–F. The three most commonly used are  probably Option A (priced contract with activity schedule), Option C (target contract with activity schedule) and Option E (cost reimbursable contract). 

Option A

Option A is NEC’s version of a lump-sum contract. The contractor prices what it costs to carry out the works and, save where prices are adjusted through indexation or compensation events, these will be the prices paid by the client for the works. Named activities are priced in an activity schedule, which add up to the tendered total of the prices.

When it comes to regular interim payments, the contractor is paid what is referred to as the price for works done to date. In the case of Option A, this comprises the total of the prices (that is the lump sum prices in the activity schedule) for those activities or groups of activities that have been completed by the relevant assessment date. This means any work done that is not part of a completed activity does not get paid for in that payment cycle. 

In Option A, the items appearing in the contractor’s fee need to be taken into account in pricing the activities as there is no separate addition of the fee in calculating the price for work done to date. The fee is only used in some calculations of the impact of compensation events (Campbell, 2024), and in certain calculations following termination.

Option C

Option C also relies on an activity schedule, but instead of being paid the activity schedule prices for a completed activity, the contractor is paid a price for work done to date which comprises the defined cost of the works plus a fee element. This is calculated as follows:

• Project manager forecasts the amount of defined cost the contractor will have paid before the next assessment date (prospective in nature).
• Fee is added based on the fee percentage in the contract data applied to the total defined cost.

Defined cost is a version of the contractor’s actual costs in providing the works, but it is not all the contractor’s costs. The schedule of cost components identifies what costs the contractor is entitled to be paid, and the contractor will have to provide suitable evidence of such costs. In addition, the contract specifies for certain costs to be disallowed and these must be borne by the contractor. The contractor can only recover these costs if it has provided for them in its fee percentage.

Following completion, Option C provides for the project manager to compare the contractor’s tendered total of the prices with the total price for the works. This assessment is finalised for the final amount due. This results in the identification of ‘pain’ if the price for works done to date is greater or ‘gain’ if it falls under the tendered total of the prices. Option C then provides for how that gain or pain is allocated between the parties based on percentage shares (and ranges) set out in the contract data. This pain/gain mechanism is intended to incentivise the contractor to meet or better the target cost.

Option E

Option E is a cost reimbursable contract, which means the client pays the actual cost of the works, sometimes referred to as ‘cost plus’, but the contract goes some way to prescribe what those actual costs can be. Unlike Option C, there is no pain/gain mechanism to incentivise the contractor.

Pricing options and risk allocation 

A key point to consider is how the allocation of risk between the parties varies across the different pricing options. This mainly relates to who bears the risk of paying extra if the works turn out more expensive than originally estimated. 

Sometimes people think of the different ECC pricing options as a spectrum, running from contractor bearing all of this risk at one end to the client bearing it all at the other. Option A is seen as falling at the former end as the contractor has to price the activities accurately. If it does not, it will not be able to recover any further costs of doing the work, for  example if more labour was required than provided for, or a greater quantity of a material was needed. 

At the other end is Option E, where the contractor will generally be able to recover its actual costs even if greater than those the parties originally envisaged. Somewhere in between, depending on how successful the pain/gain mechanism proves to be, is Option C. This is helpful but it is not the full story. In reality, things are a bit more complicated, which makes choosing the pricing option a potentially difficult but important choice. 

While it is tempting as a client to think that Option A may be preferable as it provides the greatest cost certainty, this may in itself come at a cost, as the contractor may build extra contingency into its prices to guard against its risk exposure. In some cases, this may mean that Option A is not a practicable option, particularly if the works are not straightforward, are particularly risky or have other characteristics that  mean pricing an Option A contract is problematic. 

In such circumstances, it may be more probable that the parties opt for Option C or Option E, although in the case of Option C, these issues do not go away completely as the target price has to be identified through pricing an activity schedule. In conclusion, this choice is something the client will need to consider very carefully and take advice if needed.

Two other provisions in the ECC that mean the client might end up paying more are Option X1 and, of course, compensation events. Option X1 if incorporated provides for adjustment to pricing relative to identified indices to cater for inflation, and works slightly differently across the different pricing options. Compensation events were covered by my colleague Laura Campbell (2024).

Reference

Campbell L (2023) Compensation events – an introduction for new NEC users. NEC Newsletter 130 (March 2024): 10.