We are the project manager on an NEC3 Engineering and Construction Contract (ECC) Option C (target contract with activity schedule) and are assessing a payment application submitted by the contractor. The contractor has applied for material supplied to the working areas under schedule of cost components item 31. This is for purchasing material on behalf of the subcontractor and there is a statement explicitly stated in the subcontract that the contractor shall purchase the material on behalf of the subcontractor and a deduction made from the subcontract account at an agreed rate. The contractor has gone through the procurement process and has awarded this to the cheapest material supplier. However, there is a difference between the contractor-applied rate and the rate agreed with the subcontractor. Should we assess the material cost under schedule of cost components item 31 or do something else?
With regards to payments made to the subcontractor, the contractor only gets paid what it actually pays the subcontractor, see the first bullet point of clause 11.2(23). Therefore, if the contractor deducts the higher figure, that will reduce the amount the contractor pays the subcontractor and that reduction is included in the price for work done to date that the contractor is paid with regards to subcontractor.
Therefore, effectively any additional ‘profit’ for buying these materials at a lower cost forms part of the share calculation in the share mechanism in clause 53. Option C is a risk and reward sharing contract. The main risk or reward that is shared is that costs incurred are higher or lower than originally allowed for. That is what the calculation of the share in clause 53 does.