NEC Option A explained with numbers: the Contractor gets paid only for finished activities at their tendered lump sums, however much the work really cost. This example follows a fictional £1,200,000 school extension through three assessments under NEC4 ECC. All figures are illustrative.
For the rules behind it, see the guide to NEC Option A, or go back to the main Options overview.
The Activity Schedule at the start
| No. | Activity | Lump sum |
|---|---|---|
| 1 | Site set-up | £60,000 |
| 2 | Foundations and drainage | £210,000 |
| 3 | Frame | £280,000 |
| 4 | Roof and envelope | £270,000 |
| 5 | Services and fit-out | £310,000 |
| 6 | Commissioning and handover | £70,000 |
| Total of the Prices | £1,200,000 |
Three assessments
| Assessment | Finished | In progress | Price for Work Done to Date | Change from last time |
|---|---|---|---|---|
| Month 2 | 1 | 2 (about 80% done) | £60,000 | £60,000 |
| Month 3 | 1, 2 | 3 (about 30% done) | £270,000 | £210,000 |
| Month 4 | 1, 2 | 3 (about 75% done) | £270,000 | £0 |
Month 4 is the point worth noticing. The Contractor worked hard all month and earns nothing, because nothing new finished. That is the rule rather than a mistake. It is also why experienced contractors break long activities into smaller ones. Splitting the frame into "ground to first floor" and "first floor to roof" at tender would have produced a payment in month 4. The Activity Schedule guide covers how to do that sensibly.
In month 3 the Supervisor had notified a small Defect in the drainage: a chamber cover at the wrong level. Fixing it won't hold up following work, so under NEC4 activity 2 still counts as completed. Had it been a blocked run about to be buried under the slab, the answer would have been different.
What the Contractor spent doesn't matter
Suppose the frame actually costs the Contractor £310,000 because of poor productivity. It still gets £280,000 when the activity is complete. If it costs £255,000, it still gets £280,000. There is no cost check and no Disallowed Cost; that money is the Contractor's risk or reward.
A compensation event in month 5
The Project Manager instructs an additional plant room, a change to the Scope and therefore a compensation event. The Contractor's quotation is built from the forecast effect on Defined Cost using the Short Schedule of Cost Components and the People Rates, plus the Fee, plus risk allowances for matters with a significant chance of occurring. It doesn't use rates implied by the schedule.
| Item | Amount |
|---|---|
| People, at People Rates | £14,500 |
| Equipment, Plant and Materials, and subcontract | £27,000 |
| Risk allowance | £2,500 |
| Subtotal | £44,000 |
| Fee at an illustrative 10% | £4,400 |
| Increase to the Prices | £48,400 |
Under 63.14 the change appears on the Activity Schedule. Two options are sensible here. Add a new activity 5A, "Additional plant room", at £48,400, or split it across affected activities. A new activity is usually simpler, since it gets its own completion point. The total of the Prices becomes £1,248,400. More detail is on the page about compensation events under Option A.
A value engineering saving in month 6
The Contractor suggests a cheaper, equivalent cladding system. The Scope is the Client's, so the Project Manager has to accept the change. It is then a compensation event that reduces cost. The assessed effect is a £20,000 reduction in Defined Cost.
Under 63.12, the Prices drop by that figure multiplied by the value engineering percentage. The Contract Data doesn't state a different percentage, so the 50% default applies:
- Prices reduced by £10,000 (£20,000 x 50%), so the total becomes £1,238,400.
- The Contractor keeps the other £10,000 of expected saving, if the saving really materialises.
Under NEC3, A63.10 would reduce the Prices for a change to the Works Information like this, which gives the Contractor less reason to suggest it. That's one of the main differences covered in NEC4 Option A.
What to take from it
- Cash follows finishing, not effort. Draw the cash flow from the schedule before you tender.
- Actual cost matters only for compensation events, and then only through the Short Schedule.
- A saved pound can reward the Contractor, but only if the proposal is put to the Project Manager and accepted.
Related guides
- NEC Main Options: A to F Explained
- NEC Option C Worked Example
- NEC Option E Worked Example
- NEC4 Option A: What to Know
- NEC Option E: Cost Reimbursable Contract
- NEC Option F: Management Contract
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