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NEC Option F: Management Contract

The NEC management contract is main Option F of the Engineering and Construction Contract. The Contractor manages the design and construction, subcontracts nearly all of it, and is paid what is due to its Subcontractors plus the Fee. Of the six NEC main Options, it is the one where the Contractor is mainly a manager and not a builder.

Option F exists in the ECC only: the Engineering and Construction Subcontract stops at Option E. The clause detail below uses NEC3 ECC numbers, with NEC4 changes stated where they apply.

How the role differs

Under NEC3 F20.2, the Contractor's job is to manage its design, Site services and the construction and installation, and to subcontract all of those, apart from any work the Contract Data says it does itself. In effect, the Contractor sells its management skill, while the construction is bought in through subcontract packages.

Its other duties mirror those of the cost-based Options: advising the Project Manager on design practicality and subcontracting arrangements, and submitting forecasts of total Defined Cost at the interval in the Contract Data.

What the Contractor is paid

Part of the paymentWhat it covers
Amounts due to SubcontractorsPayments for subcontracted work, without taking off retention and certain other deductions listed in the contract
Prices for own workWork the Contract Data says the Contractor does itself, at the stated prices
The FeeA percentage applied to Defined Cost. NEC3 has a subcontracted and a direct percentage at 11.2(8), and NEC4 has a single percentage at 11.2(10)
Less Disallowed CostNEC3 at F11.2(26) and, per NEC's January 2019 amendments, NEC4 at 11.2(27)

Two things follow. First, the Contractor's management staff aren't paid as a separate cost item, because Defined Cost contains only subcontract payments and its own priced work. Its management cost has to come from the Fee, which makes the fee percentage the main commercial lever at tender. Second, the disallowed list blocks an obvious workaround: a payment to a Subcontractor for the Contractor's own management, or for work the Contract Data says it does itself, doesn't count.

A worked illustration

A fictional hospital fit-out, with made-up figures and a single Fee percentage of 7%.

ItemAmount
Due to Subcontractors, before their retention is taken off£820,000
Contractor's own priced work (site logistics, as stated in the Contract Data)£60,000
Less payment to a Subcontractor for a role that is really the Contractor's management(£15,000)
Defined Cost£865,000
Fee at 7%£60,550
Price for Work Done to Date£925,550

Where the risk sits

The Client carries the cost of the subcontract packages, because they pass through at cost. The Contractor doesn't guarantee a total price. Its exposure is mainly Disallowed Cost, any delay damages under Option X7 and its own performance. Fee, as a percentage, rises with subcontract cost, so the Client should think about how package prices get tested. Procedures stated in the Scope matter: under NEC3's Disallowed Cost definition, a failure to follow a stated acceptance or procurement procedure can cost the Contractor recovery.

Compensation events under Option F

Under NEC3, an event changes the forecast of the Prices (F65.3). For the Contractor's own priced work, the two sides agree any change to the price and dates, and if they can't, the Project Manager decides (F20.5). Subcontractors' compensation events will also flow through their own subcontracts, so the Contractor has to manage two levels of the process at once and keep them aligned. For how that looks in practice, see back-to-back NEC subcontracts.

When Option F fits

  • Large, complex, phased work with many specialist trade packages.
  • Design that develops in packages while construction is under way.
  • A Client that wants a professional manager's input early and can take cost risk.

Two of the secondary Options behave differently here. X16 retention can't be used with Option F, and neither X1 nor X3 is available. If you want shared incentive rather than pure management, a target contract under Option C is the obvious alternative.

Clause numbers on this page are NEC3 unless stated, so check the numbers in your own contract if it is NEC4. The principle is unchanged: Defined Cost is subcontract payments and the Contractor's own priced work, plus the Fee.

See how this works in practice

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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.