Defined Cost is the contract's own measure of what the Contractor's work has cost. How much it matters depends on the main Option. Under Options C, D and E the Contractor is paid Defined Cost plus the Fee as the job goes on. Under Options A and B it is paid the Prices for completed work, and Defined Cost appears when a compensation event has to be priced.
This guide explains how the money side of an NEC contract fits together, from the definition of cost to the last payment. It describes the NEC4 Engineering and Construction Contract (ECC) unless it says otherwise, and points out where NEC3 differs. Your Contract Data, secondary Options and Z clauses may change any period given here, so treat your own contract as the final word.
The three questions behind every NEC payment
Most confusion about NEC payment clears up once you separate three things that people run together.
- What counts as cost? Defined Cost, built from a schedule of permitted components.
- What is the value of the work so far? The Price for Work Done to Date, whose meaning depends on the main Option.
- What is paid this time? The amount due, adjusted for other sums, less what the previous assessment already covered.
Each question has its own clauses and its own disputes. A row about whether a site cabin is a recoverable cost is a Defined Cost question. A row about whether an activity is finished is a Price for Work Done to Date question. A row about a missing notice is about the payment process. Identify which one you have before arguing it.
Defined Cost: what the Contractor can recover
What Defined Cost means changes with the main Option. On Options A and B it is worked out from the Short Schedule of Cost Components. On Options C, D and E it comes from the full schedule, with Disallowed Cost taken off. Clause 52.1 then sets the sweeping rule: anything the Contractor spends that isn't Defined Cost is treated as already covered by the Fee.
The Schedule of Cost Components is a closed list arranged by type of resource, and it applies on Options C, D and E. The Short Schedule of Cost Components does a similar job for Options A and B, using rates stated in the contract so that nobody has to open the Contractor's books to price a change.
Five guides go through the full schedule section by section:
- People costs cover who qualifies and how time away from the Working Areas is handled.
- Equipment costs separate hired, owned, purchased, special and consumed items, which is where most pricing arguments begin.
- Plant and Materials explains what is paid for items that become part of the works, and how disposal receipts are credited.
- Charges and overheads covers utilities, authority charges and other listed payments, and why the NEC3 percentage for Working Areas overheads needs a second look on an NEC4 job.
- Subcontractors and Defined Cost explains how payments down the chain are counted, and how to avoid the same retention being taken twice.
Two further terms finish the picture. Disallowed Cost is the list of costs taken out of Defined Cost on Options C, D and E, even where the money was truly spent. The Fee is the percentage that covers everything outside Defined Cost, typically including head office overheads and profit.
The Prices and the value of the work
The Prices mean different things under each main Option: lump sums on an Activity Schedule, rates and quantities in a Bill, a target, or a running forecast. The Price for Work Done to Date drives each assessment, and the table below shows how sharply it changes between Options.
| Main Option | The Prices | Price for Work Done to Date | Open-book records? |
|---|---|---|---|
| A: priced, Activity Schedule | Lump sums for activities | Prices of completed activities and groups | No |
| B: priced, Bill of Quantities | Rates times quantities, plus lump sums | Completed quantities at the rates, plus the completed proportion of lump sums | No |
| C: target, Activity Schedule | Lump sums for activities, acting as the target | Defined Cost forecast to be paid by the next assessment date, plus the Fee | Yes |
| D: target, Bill of Quantities | Rates times quantities, with the total acting as the target | As Option C | Yes |
| E: cost reimbursable | A forecast (NEC4) | As Option C | Yes |
| F: management contract | Defined Cost plus the Fee (NEC3 wording) | Forecast of cost plus the Fee on the NEC3 text | Yes |
The practical split is that A and B reward finishing work, while C, D and E reimburse spending and rely on records. Our guide to the main Options covers how to choose between them.
The payment cycle, step by step
NEC payment runs on a repeating cycle, and each stage has its own guide.
- Dates are set. The assessment date and assessment interval start the cycle. The Project Manager picks the first date and the Contract Data gives the interval.
- The Contractor applies. A payment application goes in before the assessment date under NEC4. Missing it has a direct price consequence.
- The Project Manager assesses. Clause 50 sets out how the amount due is built up.
- The Project Manager certifies. Clause 51 covers the certificate, payment and interest.
- A Party may give notice to pay less. Pay less notices come from Option Y(UK)2 and the Construction Act, and the deadline is strict.
- Payment is made. The NEC payment timeline sets out each date in sequence, for the main contract and the subcontract.
Payments are cumulative. Each assessment recalculates the whole amount due, and the certified payment is the change since the last one. So an error last month can be corrected this month, and clause 50.6 requires it. It also means a falling amount due produces a payment from the Contractor to the Client, which surprises people the first time they see it.
The amount due in one example
A fictional Option A contract for a culvert, with illustrative figures and Options X7 and X16 in place.
| Line | Amount |
|---|---|
| Price for Work Done to Date (completed activities) | £900,000 |
| Other sums due to the Contractor | £0 |
| Retention: 3% of the excess over a £200,000 retention free amount | (£21,000) |
| Delay damages | £0 |
| Amount due at this assessment date | £879,000 |
| Amount due at the previous assessment date | (£760,000) |
| Certified payment | £119,000 |
Run the same arithmetic on Option C and only the top line changes its basis: forecast Defined Cost plus the Fee replaces the completed activities. Everything below it is the same.
Secondary Options that change the money
Two secondary Options appear on many contracts and affect the amount due directly. Retention under Option X16 holds back a percentage once the Price for Work Done to Date passes a stated free amount, halving at Completion or take over. Delay damages under Option X7 are a daily sum that runs from the Completion Date, and they are repaid with interest if that date later moves. Neither applies unless the Option has been chosen, so read the Contract Data before assuming either way.
Cost records and audit
Options C, D and E are only as sound as their records. Clause 52 sets the rules on how Defined Cost is calculated and what must be kept. Open book and cost records looks at setting up the accounts so they stand up to inspection. Auditing Defined Cost gives the Project Manager's side: what to sample, and what commonly fails. NEC4 also lets parts of Defined Cost be finalised during the job under clause 50.9, so that audit disputes don't all pile up at the end.
Finishing the account
NEC3 had no formal final account step. NEC4 added one at clauses 53.1 to 53.3. The final assessment explains the timing and when the figure becomes conclusive. Closing out the final account is the practical version: what to clear, in what order, so that nothing is still open when the deadline arrives.
Where projects go wrong
The common NEC payment mistakes guide collects the errors seen most often, such as treating a pay less notice as a deduction, or applying after the assessment date. Payment for NEC subcontractors covers the longer periods in the subcontract and how they fit under the main contract's dates, including fair payment points for those lower in the chain.
Money and programme also connect. Compensation events change the Prices, so the guide to assessing compensation events is the natural next read once you understand Defined Cost. And where the Contract Data names no programme, a missing first programme means a quarter of the value of work done is held back under clause 50.5, which is covered in the first programme guide.
All guides in this section
- What Is Defined Cost?
- The Schedule of Cost Components Explained
- The Short Schedule of Cost Components
- Schedule of Cost Components: People
- Schedule of Cost Components: Equipment
- Schedule of Cost Components: Plant and Materials
- Schedule of Cost Components: Charges and Overheads
- Subcontractors and Defined Cost
- Disallowed Cost Explained
- The Fee Under NEC
- The Prices
- Price for Work Done to Date (PWDD)
- NEC Clause 50: Assessing the Amount Due
- NEC Clause 51: Certifying Payment
- NEC Clause 52: Defined Cost Accounting
- The NEC Payment Timeline
- Assessment Date and Assessment Interval
- Making an NEC Payment Application
- Pay Less Notices Under NEC
- The Final Assessment
- Closing Out the Final Account
- Open Book and Cost Records
- Auditing Defined Cost
- Common NEC Payment Mistakes
- Payment for NEC Subcontractors
- Retention Under NEC
- Delay Damages
Related guides
- NEC Contracts Explained: The Complete Guide
- NEC4 Contracts: A Complete Guide
- NEC Contract Types: Which Form Do You Need?
- NEC Compensation Events: The Complete Guide
- NEC Early Warnings: The Complete Guide
- The NEC Programme: A Complete Guide
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