No, not as a separate subcontractor margin under NEC, unless the Prices or an agreement include it: your margin on subcontracted work is the Fee. You add the fee percentage to the Defined Cost of the subcontract, and nothing else on top.
What decides the numbers is the edition and the main Option. The NEC4 Engineering and Construction Contract (ECC) has one fee percentage, at 11.2(10). NEC3 has separate direct and subcontracted percentages, at 11.2(8). This is one of our NEC questions answered.
How it works by situation
| Situation | Margin comes from | Can you add more? |
|---|---|---|
| Tendered Option A or B Prices | Whatever you priced into your lump sums or rates | You set this at tender. No one checks the build-up |
| Compensation event on Option A or B | Fee on Defined Cost, using the Short Schedule or Schedule as your contract says | No. Only if rates or lump sums are agreed (63.2 in NEC4; 63.14 in NEC3) |
| Options C, D, E: each assessment | Fee on Defined Cost, including what you pay for subcontract work | No |
| NEC3 Options C, D, E | Subcontracted fee percentage only, on that part | No |
| Subcontractor's own profit and overhead | Inside its Prices or its own Fee under its subcontract | This isn't your margin: it is part of what you pay, and so is cost to you |
The key rule is 52.1: costs outside Defined Cost are treated as already covered by the Fee. Your management of the Subcontractor falls into this too, unless those people fit a component of the schedule.
Pricing a subcontract compensation event: step by step
- Get your Subcontractor's quotation in time. Your own period is three weeks under the main contract (62.3). Under the NEC4 subcontract, its period is two weeks, so ask for it immediately.
- Check it reads as the subcontract allows. If you pay more than the subcontract requires, the excess may be Disallowed Cost on Options C to E. Keep the assessment: 52.2 asks for it.
- Add your own Defined Cost, such as supervising people in the Working Areas.
- Apply the fee percentage once to the total Defined Cost.
- Show the build-up clearly. Separate the Subcontractor's figure, your own cost and your Fee.
A fictional worked example
An NEC4 Option C contract and an NEC4 subcontract, with illustrative figures and a main contract fee percentage of 7%. A Scope change affects the piling Subcontractor.
| Line | Amount |
|---|---|
| Subcontractor's Defined Cost for the change | £80,000 |
| Subcontractor's Fee at its 12% | £9,600 |
| Amount due to it under the subcontract | £89,600 |
| Contractor's own site people and Equipment | £6,000 |
| Contractor's Defined Cost | £95,600 |
| Contractor's Fee at 7% | £6,692 |
| Change to the Prices | £102,292 |
If the Contractor then added "10% main contractor's attendance and profit" to the £89,600, that £8,960 should come out. It's not a component, and the Fee is already on the same sum.
What you will hear, and the workable answers
- "Your percentage is the same on subcontract as on direct work, so you are over-recovering." On NEC4, that is the deal: one percentage across the whole of Defined Cost. Tenderers blend it on the mix they expect. See the fee percentage guide.
- "We need to see the subcontract's rates." On Options C to E, payments, proof of payment and subcontract event assessments can be inspected under 52.3, and the Project Manager will expect to see the pricing. On A and B, supply what supports the quotation.
- "We manage the risk on this, so we should get more." A real risk with a significant chance of occurring can go into the assessment as a risk allowance (63.8 in NEC4). A flat markup isn't that.
Traps that go beyond the wording
| Trap | Problem |
|---|---|
| Group company as subcontractor at a padded rate | On Options C to E, the price is tested for market value. An inflated sum can fall outside 52.1 |
| Paying a sub's event generously to keep it happy | What wasn't due under the subcontract can be disallowed, so you pay it and bear it |
| Taking a cash discount and charging the full invoice | Discounts are deducted under 52.1, on top of a credibility problem |
| Assuming the Fee covers a Z clause rate | Read the amended clause. Some Clients cap the percentage on subcontract work |
For how subcontract payments appear in the schedule, see Subcontractors and Defined Cost. If you are the Subcontractor being asked why your Fee is so high, the answer is simple: it's the percentage tendered in the subcontract, and the NEC subcontract works the same way one tier down.
Related guides
- NEC Questions Answered: Real Situations on Site
- When Should Retention Be Released?
- A Defect Appeared After Completion: Who Fixes It?
- A Defect Appeared After the Defects Date: What Now?
- The Client Wants to Audit Our Books: Do We Have to Agree?
- Are Our Head Office Overheads Recoverable?
See how this works in practice
Click through Contract Status with sample contracts: raise the notice, reply to it, and watch both sides of one record.
Take the guided tour Book a demo
Use the NEC deadline calculator, use the free NEC tools or download free NEC templates.
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.