Frequently Asked Questions

We are the employer in an ECC option C (target contract with activity schedule) incorporating secondary option X1 price adjustment for inflation. The contractor has placed its subcontracts under its own bespoke form of subcontract, which does not flow down from the NEC contract we have with the contractor. All of the subcontracts let are fixed-price lump sum plus any variations, and there is no mention of any escalation applying. The contractor is not paying any escalation amounts within its interim or final payments to its subcontractors. The defined cost of subcontractors is therefore exclusive of any escalation amounts. The question is, when assessing the contractor’s price adjustment factor amounts under X1, should the amounts for these subcontractors not be included within the price for work done to date?

They should be included, because the price for work done to date includes the costs of these subcontractors – see clauses 11.2(29) and 11.2(23). Of course the answer you come up with for the price adjustment is not added to the price for work done to date, instead it is added to the total of the prices (i.e. the ‘target’) – see clause X1.5.

Option X1 is just a convenient way of calculating an assessment of what the inflation may be, but there are all sorts of ways that the actual inflation can vary from that assessment. However the risks, or rewards, of those variations are shared between the parties through the share mechanism.

In reality, just because there are no inflationary increases within a particular subcontract, it does not mean that the contractor will not be paying for inflation. In that case it could well be (and probably is) the case that there is an allowance for inflation within the subcontractor’s prices.

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