NEC Option E explained in numbers: each month the Project Manager forecasts Defined Cost to the next assessment date, adds the Fee, and that total sets what is due. This example follows two assessments on a fictional flood repair under NEC4 ECC, then shows a Disallowed Cost deduction and a compensation event. All figures are illustrative.
The rules themselves are on the Option E guide, and the main Options overview shows how it compares.
The job
A river embankment fails in a storm. A Client appoints a Contractor quickly, knowing the extent of the damage won't be clear for weeks. The fee percentage in the Contract Data is 6%, and forecasts are required every four weeks. The Contractor's first forecast of total Defined Cost is £1,500,000.
Assessment 1
| Item | Amount |
|---|---|
| Defined Cost the Project Manager forecasts the Contractor will have paid by the next assessment date | £180,000 |
| Fee at 6% | £10,800 |
| Price for Work Done to Date | £190,800 |
| Less amount previously certified | £0 |
| Payment certified | £190,800 |
The figure looks forward. It includes cost likely to be paid before the next assessment date, so the Contractor isn't funding the work out of its own pocket. It is common to get this wrong by certifying only what has already been paid. For more, read about the Price for Work Done to Date.
Assessment 2, with Disallowed Cost
The Contractor's records show £422,000 forecast to be paid by the next assessment date. On reviewing records, the Project Manager finds that a large excavator stood unused on site for two weeks after its work was done. The hire cost for that period, £12,000, falls under resources not used to Provide the Works, so it comes out.
| Item | Amount |
|---|---|
| Contractor's forecast | £422,000 |
| Less Disallowed Cost | (£12,000) |
| Defined Cost | £410,000 |
| Fee at 6% | £24,600 |
| Price for Work Done to Date | £434,600 |
| Less amount previously certified | (£190,800) |
| Payment certified | £243,800 |
The Contractor actually loses more than £12,000. The Fee on that cost is also gone, £720, so the true effect is £12,720. The Project Manager should say which cost it has taken out and why, because a bare deduction usually leads to a dispute. The Disallowed Cost guide and open book and cost records go through what evidence supports a decision.
A compensation event
In week 11 the Project Manager instructs a further 200 metres of repairs. That is a change to the Scope, so it is a compensation event. The Contractor's quotation shows £120,000 in forecast Defined Cost, a £7,200 Fee, and a two-week delay to planned Completion.
Here's what changes and what doesn't:
| Item | Effect |
|---|---|
| Monthly payment | No direct change. When the work is done, the cost flows through Defined Cost like all other cost |
| The forecast of the Prices | Up by £127,200, from £1,590,000 to £1,717,200 (£1,500,000 plus 6% is £1,590,000) |
| Completion Date | Two weeks later, which matters if delay damages apply |
The quotation doesn't cap what the Contractor is paid for the extra work. If the 200 metres ends up costing £150,000, the Contractor still recovers it, subject to Disallowed Cost. More on this in compensation events under Option E.
What the Client's report should show
A useful monthly report for an Option E job shows, in one view:
- Price for Work Done to Date.
- Latest forecast of total Defined Cost plus Fee, and how it has moved since the last one, with the Contractor's explanation.
- Implemented compensation events, showing what is Scope growth and what is not.
- Disallowed Cost taken so far and any open questions about it.
- How much Defined Cost has been finalised under 50.9 and how much is still open.
In this example, the forecast rises by £127,200 as soon as the event is assessed. A Client watching only monthly payment wouldn't see that until the cost arrived, weeks later.
What to take from it
- Fee follows cost, in both directions, including when cost is removed.
- Compensation events are about time and forecasting here, not monthly money.
- Deductions need reasons, recorded at the time.
Related guides
- NEC Main Options: A to F Explained
- NEC4 Option A: What to Know
- NEC4 Option B: What to Know
- NEC4 Option C: What to Know
- NEC Option A Worked Example
- NEC Option C Worked Example
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