Frequently Asked Questions

We are the client on an NEC4 Professional Service Contract (PSC) option C (target contract with activity schedule). We understand that defined cost is the cost of components in the schedule of cost components less disallowed cost, and that the prices are the lump sum prices for each of the activities in the activity schedule. Is it correct to say that the prices mean the total tender fee of the consultant’s services, while the defined cost is devised to assess interim payments and compensation events only? As such, if the total defined cost of all interim payments plus fee exceeds the prices, then the consultant and the client share the pain, and vice versa?

The schedule of cost components also includes charges for support people and office overhead costs. Should the hourly rate in the cost component be calculated by reference to actual staff salaries and their hours of work? Further, clause 52.1 states that all the consultant’s costs not included in defined cost are treated as included in the fee. Does that mean the fee does not include head office overheads as these are covered under defined cost?

We understand the cost of people is calculated in accordance with item 1 of the schedule of cost components. With people cost, PSC states the figure should be arrived at by dividing the total payments listed in item 11 by the total time recorded, with the resulting amount multiplied by the time recorded for work on the contract. The second bullet of item 11 says this includes payments made to a person in accordance with their employment contract. Will we have to calculate and use the consultant’s staff’s hourly rates by reference to their employment contracts to calculate the cost of people?
Option C is a risk-sharing contract. The consultant is paid the price for service provided to date for the service it carries out. In option C this is based on the defined cost the consultant has expended plus the fee, see clauses 50.3 and 11.2(21). The prices are the lump sums in the activity schedule (see clause 11.2(22)). The values of compensation events are included in the activity schedule, either by changing the existing prices or by adding or subtracting new prices, see clause 63.12. Upon completion, the total of the prices in the activity schedule is compared with the price for service provided to date, and the consultant is paid or pays the difference.

Defined cost in option C is based upon the schedule of cost components, see clause 11.2(17). The cost of people is calculated in accordance with item 1 of the schedule of cost components. It is based upon what each person has cost, using the rules set out in items 11, 12 and 13. It is not based on any hourly rate, and none should be in the schedule of cost components. The people rates entry in the contract data part two is only used for option A; it is not filled in for options C or E.

With option C, the consultant is required to quote two percentages in the contract data: overhead and fee. The overhead percentage, as set out in item 31 of the schedule of cost components, is added to the cost of people in item 1 and forms part of the defined cost. It covers the costs of, ‘people, accommodation, equipment, supplies and services required to provide the office and to support people providing the service’. It is for the costs of the office that the people set out in part 1 are working in. That is why the consultant can set out different overhead percentages in contract data part two, depending upon where those people are located. The fee percentage is added to the defined cost and is meant to cover all costs that are not included in the defined cost. The term ‘head office overhead’ is deliberately not used in the contract because the way it is calculated is not standard in the industry, so it cannot be defined. It is therefore irrelevant when interpreting the contract. A small local consultant may only have one office, so all people will be working in the head office. The same could apply to a large consultant if it trades through local companies rather than one large company. It is up to the consultant to make a commercial decision as to what to allow for when filling in these percentages.

Schedule of cost components item 11 is about allocating the listed costs in a situation where the person may have worked on more than one contract in the period. If the person has spent the whole period providing the service, there is no need to make this calculation − all of the amounts listed are paid at what they have cost. You should divide the time worked providing the service by the total time recorded in the consultant’s time-recording system, and then apply that ratio to the total cost. It is not a case of coming to an hourly rate. That is because the amount paid (note not allowed for) will vary from period to period, the obvious example being the cost of a company car. In addition, the total amount of hours recorded may also vary from period to period. The reference to the employment contract is not about hours worked, it is about limiting the items paid to those required by that contract. If the consultant chooses to pay or provide something  to a person which is not required by their employment contract, it is not allowed. Therefore, the amounts paid will only be included if, and only to the extent they are part of the person’s employment contract.

Each month the consultant should provide your service manager with the figures calculated in accordance with items 11, 12 and 13 of the schedule of cost components. The service manager is entitled to see and audit these figures by reference to the consultant’s pay and other records, see clauses 52.3 and 52.4. When forecasting defined cost for assessment of compensation events, it is usual to use an average hourly rate based upon the records provided and apply that to the forecast of hours involved. But, for calculation of the price for service provided to date, the actual recorded costs should be used.

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