Option C NEC is a target contract: the Contractor is paid its actual Defined Cost plus the Fee as work goes on, and the tendered price is used only as a target. At the end, the difference between the target and the final cost is shared at percentages set in the Contract Data.
The result is that both parties gain from a saving and both pay for an overrun. This is one of the six NEC main Options, described here for NEC4 ECC, with NEC3 differences noted.
Three sets of money to keep apart
| Term | What it is | What it is used for |
|---|---|---|
| The Prices (the target) | The lump sums on the Activity Schedule, as changed by compensation events | The comparison at the end. Not used for monthly payment |
| Defined Cost | Items in the Schedule of Cost Components, minus Disallowed Cost | The base for payment |
| Price for Work Done to Date | Defined Cost the Project Manager forecasts the Contractor will have paid by the next assessment date, plus the Fee | The amount due, and the other side of the share calculation |
Most confusion on Option C jobs comes from mixing these up. Finishing an activity earns no payment; the Activity Schedule only sets the target.
How the Contractor is paid
- The Contractor keeps records of Defined Cost and makes them available for inspection (52.2 and 52.3).
- At each assessment date, the Project Manager works out the Price for Work Done to Date. It is a forecast, so it runs ahead of what has actually been spent.
- The Project Manager removes anything that counts as Disallowed Cost, such as cost not supported by the Contractor's accounts.
- The Fee is added using the fee percentage in the Contract Data.
- The Contractor also prepares regular forecasts of total Defined Cost at the interval stated in the Contract Data, explaining changes since the last one.
How the share works
The share sits in clause 54 under NEC4 and clause 53 under NEC3. Nothing is shared during the work. There is a preliminary assessment when the whole of the works reaches Completion (54.3) and a final one in the final amount due (54.4). If the final cost is below the target, the Contractor gets its share of the saving. If it is above, the Contractor pays its share of the excess.
The percentages depend on share ranges, so the split can change as the outcome moves further from the target. Target cost and the Contractor's share covers the mechanism, and the Option C worked example runs it with numbers.
Compensation events move the target
A compensation event doesn't change what the Contractor is paid in the month, because cost is already being reimbursed. It raises or lowers the target, shown as changes to the Activity Schedule (63.14), and can move the Completion Date. Under a target contract this matters as much as under a priced one, because every pound added to the target can change the share. A Contractor that doesn't notify events on time is giving away target, and may also lose programme relief. For more, see compensation events under Option C.
One useful rule for encouraging ideas: under 63.13, where the Contractor proposes a change to the Client's Scope and the Project Manager accepts it, the Prices aren't reduced. The target stays where it is while cost falls, so the saving passes through the share.
When to use Option C
- The Scope is defined well enough to set a credible target, but real uncertainty remains.
- Both sides want to work on cost together, and the Contractor's early advice has value.
- The Client can resource cost review and accept some exposure to overrun.
- Early contractor involvement is planned. Option X22 can be used only with Options C and E.
A target set on a thin design tends to produce a stream of compensation events, and the arguments move to whether the target has been changed fairly. If the Scope really isn't ready, read Option C vs Option E.
What goes wrong
- Tender targets set too low to win. An underpriced target leads to overrun, and the shared pain can sour the relationship.
- Weak records. Uninspected Defined Cost tends to surface as a large dispute near the end. Agree early what evidence you will need.
- Ignoring NEC4's finalising process. Clause 50.9 lets parts of Defined Cost be finalised as work goes on. Used well, it avoids a huge audit at the end. Check the periods in your own contract.
- Using NEC3 assumptions. NEC3 has separate direct and subcontracted fee percentages, while NEC4 has one. See NEC4 Option C and NEC3 Option C.
Related guides
- NEC Main Options: A to F Explained
- NEC Option D: Target Contract With Bill of Quantities
- NEC Option E: Cost Reimbursable Contract
- NEC Option F: Management Contract
- NEC Option A: Priced Contract With Activity Schedule
- NEC Option B: Priced Contract With Bill of Quantities
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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.