NEC Option E: Cost Reimbursable Contract

NEC Option E is the cost reimbursable contract: the Contractor is paid its Defined Cost plus the Fee, with no target and no share. The Client carries nearly all the cost risk, and in exchange gets flexibility and full sight of what the work costs.

It is the right tool where the work can't be defined in time to price it, and a costly one if it is used out of habit. It is one of the six NEC main Options. The notes below follow NEC4 ECC, with NEC3 differences noted.

How Option E works

• No pricing document. There is no Activity Schedule or Bill. The Contractor tenders a fee percentage and the data needed for the Schedule of Cost Components.
• Payment is by forecast cost. At each assessment, the Project Manager forecasts the total Defined Cost that will have been paid by the next assessment date and adds the Fee.
• The Prices are a forecast. Under NEC4 they are the forecast of total Defined Cost for all the works plus the Fee. Under NEC3 E11.2(32), they are simply Defined Cost plus the Fee.
• The Contractor reports regular forecasts. The forecast interval is in the Contract Data, and each forecast explains what has changed.
• Records are open. Clause 52.2 sets out the records the Contractor keeps, and 52.3 lets the Project Manager inspect them during working hours.

How the Client controls cost

With no target or lump sum, the Client relies on four things:

1. Disallowed Cost. In NEC4 ECC it is at 11.2(26) of Options C to E. It takes out, among other things, unsupported cost, wrongly paid subcontract sums, wasted materials and idle resources, as well as the cost of correcting Defects after Completion.
2. Procurement control. Subcontract pricing information goes to the Project Manager under 26.4, and costs caused by not following a stated procurement procedure are disallowed.
3. Regular forecasting and challenge. Forecasts give an early warning that cost is moving. They need someone reading them critically.
4. Finalising Defined Cost. NEC4's clause 50.9 lets parts of Defined Cost be closed out during the job. There are stated periods for the review, and a late decision has consequences, so check them in your contract.

Option X16 retention is available with Option E. Options X1 (inflation) and X3 (multiple currencies) aren't, as cost already reflects both.

What compensation events still do

People sometimes assume compensation events don't matter here. They do, for three reasons:

• Time. The event can move the Completion Date and Key Dates. That can change delay damages if Option X7 applies.
• Forecast. It updates the forecast of the Prices, which the Client relies on to report its budget.
• Disallowed Cost. Missing an early warning can still affect the assessment and what's allowable.

Keep the process simple but do run it. The guide to compensation events under Option E looks at how to keep the workload proportionate.

When to use Option E

• Emergency works, where you have to start before you can define the work.
• Investigative or early-stage work with a Scope that will develop as you learn.
• Highly uncertain or specialist work where the risk premium in a fixed price would be excessive.
• Early contractor involvement stages. Option X22 can be used only with Options C and E.

Option E is weak when the Scope is actually settled, since the Contractor has little commercial reason to reduce cost beyond keeping its reputation. Fee is paid as a percentage of cost, so more cost means more Fee. Good teams manage this directly, and some clients move part of the job to a target contract once it can be defined.

What goes wrong

• Treating it as a blank cheque. Disallowed Cost exists, but a Client who doesn't resource reviews won't get the protection.
• Waiting until the end to audit. People move on and paperwork gets lost. Review monthly, and use 50.9.
• Weak Scope discipline. The Contractor still has a Scope to deliver, and changing it is still a compensation event.

See the Option E worked example for the numbers, and NEC4 Option E or NEC3 Option E for edition detail.

Related guides

• NEC Main Options: A to F Explained
• NEC Option F: Management Contract
• NEC Option A Worked Example
• NEC Option C Worked Example
• NEC Option C: Target Contract With Activity Schedule
• NEC Option D: Target Contract With Bill of Quantities

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.