An NEC audit of Defined Cost is an inspection of the Contractor's records to confirm that what's being paid fits the schedule, was actually paid, and isn't disallowed. Clause 52.3 gives the Project Manager the right on Options C, D and E, to see those records at any time during working hours.
The contract doesn't use the word "audit" or set a method, so the method below is good practice rather than a contract rule. Check your Scope and any Z clause for a specific audit process, then read it with the NEC payment and Defined Cost guide and our page on clause 52.
Audit early and often
Auditing at the end is the most expensive way to do it. Staff have moved on, memories are gone and a large sum may hang on one question. A rolling audit run over each assessment interval or quarter costs less and lets the Contractor fix a system problem before it repeats.
| Timing | Purpose |
|---|---|
| First assessment | Agree the ledger structure, report format and how evidence will be accessed |
| Each assessment | Reasonableness check of the application and forecast |
| Quarterly or by package | Sample testing |
| When Defined Cost is finalised (NEC4 50.9) | A closer review within the clause's review time |
| Before Completion | Check the largest and riskiest items |
Section-by-section checks
| Section | Check | Red flag |
|---|---|---|
| People | Payroll ties to bank. Time in the Working Areas is backed up. Allowances follow employment terms | Round percentages for shared staff |
| Equipment | Hire dates match actual use. Group hire is at open market rates. Off-hire is timely | Internal plant company rates used without comparison |
| Plant and Materials | Quantities match the works plus reasonable wastage. Surplus is credited correctly | Large deliveries near Completion |
| Subcontractors | Payments follow subcontract terms. Procurement was as per the Scope. Compensation events are properly assessed | Payment above the subcontract assessment |
| Charges | Each cost fits a listed item, and is not also in an overhead percentage (NEC3) | Cancellation charges with no compensation event |
| All | Discounts and rebates are deducted. Recoverable tax is removed. Each cost is in one component only | Credit notes missing from the ledger |
A simple sampling plan
- Get the full ledger for the period, and total it to the application.
- Test the 20 largest items.
- Pick a random sample from the rest, say 25 items. Trace each from ledger to invoice, order, and payment.
- Note error rates and whether errors go only one way. Honest systems make mistakes in both directions.
- Look separately for what should be there and isn't: credit notes, rebates and insurance receipts.
If a sample reveals a system error, such as a wrong on-cost rate, ask the Contractor to find every affected line. Don't apply an extrapolated figure without agreement. Disallowed Cost is a matter of specific items and specific reasons, so a projected figure is hard to defend.
Worked example of a finding
A fictional Option E contract, with illustrative figures. The sample tests £400,000 of Equipment and finds £6,000 of group plant charged above open market rates. It records:
- What was found: four group excavators at £1,250 a week, with evidence that market rates were about £1,100 for 40 weeks in total.
- The rule: Equipment item 22, open market rates.
- The amount: £150 × 40 = £6,000, plus the Fee on it.
- What's next: the Contractor checks all other group hires. The next certificate corrects the assessment under 50.6.
Doing it fairly
Share queries as they come up, not in one list at the end. Give the Contractor a real chance to provide further records, as the 50.9 process itself does. And don't turn an inspection into a re-tender. The contract tests prices against open market or competitive prices, not against the lowest figure anyone could ever have achieved.
An audit result shouldn't appear as a surprise deduction in a certificate. Discuss it first, then certify with details of how you reached the amount, as the clause 51 guide explains. If the dispute continues, the normal dispute process is available.
Related guides
- NEC Payment and Defined Cost: The Complete Guide
- Common NEC Payment Mistakes
- Payment for NEC Subcontractors
- Retention Under NEC
- Closing Out the Final Account
- Open Book and Cost Records
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