NEC3 Option E: What to Know

NEC3 Option E is the April 2013 ECC's cost reimbursable contract: the Employer pays Defined Cost plus the Fee, with no target or share. The Project Manager decides what is Disallowed Cost, and the Employer's main protection is the forecasting, records and audit the contract provides for.

This page is for NEC3 jobs that are still live or being closed out. The main principles are in the guide to Option E, and the wider picture is in the main Options section.

Clause finder

Clause	What it does
11.2(8)	The Fee, using subcontracted and direct percentages
11.2(23)	Defined Cost: Subcontractor amounts, Schedule components for other work, less Disallowed Cost
11.2(25)	Disallowed Cost
11.2(29)	Price for Work Done to Date, a forecast plus the Fee
11.2(32)	The Prices: Defined Cost plus the Fee
20.3 and 20.4	Advice on the design and subcontracting; forecasts of total Defined Cost
26.4	Proposed contract data for an NEC subcontract, if instructed
52.2 and 52.3	Records and inspection
63.14 and 63.15	Rates and lump sums, or the Shorter Schedule, by agreement
65.3	The implementing notification changes the forecast amount of the Prices and the dates

Who decides Disallowed Cost

NEC3's definition opens by making it the Project Manager's decision. Its main categories are:

Category	Example on a live job
Not justified by accounts and records	Timesheets missing for a gang of operatives
Wrongly paid to a Subcontractor or supplier under its contract	Paying a subcontractor's claim its subcontract doesn't support
Incurred only because of a missed procedure or early warning	A package let without the tender process the Works Information sets out
Correcting Defects after Completion	Remedial work during the defects period
Plant and Materials not used, beyond reasonable wastage	Over-ordered stone left at the end of the job
Resources not used	Equipment kept on hire after it was finished with

The examples are ours, and each case turns on its facts. Because this is a decision the Project Manager makes, it's worth recording the facts and the reasoning when you take a deduction, and doing so soon after the cost arises. For more on this list, see Disallowed Cost explained.

How the Fee affects the sums

NEC3 has two percentages, so an illustrative month on Option E might look like this: subcontracted cost £400,000 at 5% gives £20,000; direct cost £150,000 at 11% gives £16,500. Fee is £36,500, making the Price for Work Done to Date for that month's cost £586,500. A change in how the work is split between direct and subcontracted will change the Fee even if total cost stays the same. So it's reasonable for the Employer to ask how a change of approach affects the blend.

Compensation events under NEC3 Option E

Cost is already paid, so compensation events don't change monthly money. They do change the forecast of the Prices, as well as the Completion Date and any Key Dates (65.3). If both sides want a quicker assessment, they can agree to rates and lump sums (63.14) or use the Shorter Schedule (63.15). The latter is often a good choice for small events, as there is no target riding on the figure, and the assessment is mainly for forecasting and time. See compensation events under Option E.

Differences from NEC4 to remember

• Clause 50.9 and the finalising process don't exist in NEC3. Nor does the clause 53 final assessment.
• The Employer is not the Client, and Works Information is not the Scope.
• The NEC3 forecasts of the Prices aren't defined as "the Prices" in the way NEC4 now does.
• The NEC3 route for early contractor involvement isn't an Option X22. NEC's guidance note used tailored clauses and covers Options C and E.
• Options X1 and X3 are unavailable with Option E in both editions. X16 retention is available.

A close-out checklist

1. Are all Subcontractor final accounts settled? Their amounts feed Defined Cost.
2. Have you reviewed the accounts and records at 52.2 for the whole job, not just samples, or agreed what samples will count?
3. Have Disallowed Cost deductions been explained in writing, with reasons?
4. Have the direct and subcontracted amounts been checked, and is the Fee correct for each?
5. Has the final forecast been reconciled with the certified amount?

There is no contract route that closes Defined Cost in stages, so agree one at the start, if you can. The guide to auditing Defined Cost offers some practical approaches.

Related guides

• NEC Main Options: A to F Explained
• Option A vs Option C
• Option A vs Option B
• Option C vs Option E
• NEC3 Option A: What to Know
• NEC3 Option C: What to Know

This guide is general information in our own words, not legal advice. Your contract and its Contract Data always govern. NEC, NEC3 and NEC4 are trade marks of Thomas Telford Ltd; Contract Status is not affiliated with or endorsed by NEC.