NEC clause 52 has two jobs. Clause 52.1 is a core rule on every main Option that sets what Defined Cost can and can't include. Clauses 52.2 and 52.3 are added on the cost-based Options and require the Contractor to keep particular records and let them be inspected.
The numbers are the same in NEC3 and NEC4 Engineering and Construction Contracts. Read this with the NEC payment and Defined Cost guide and our page on what Defined Cost is.
52.1: three rules in one clause
- Everything else is in the Fee. Costs not in Defined Cost count as already covered by the Fee. There's no third category of recoverable cost.
- Value is limited. Defined Cost only includes amounts worked out from Contract Data rates and percentages, or set at market or competitively tendered prices.
- Reductions come off. All discounts, rebates and recoverable taxes are deducted.
The second rule surprises people. An invoice is evidence of what was paid, but not automatically of the right amount. If the Contractor paid above market for a good reason, it may still have to justify the price.
Example of the three rules
| Illustrative item | Invoice | Counted | Why |
|---|---|---|---|
| Concrete with a 5% prompt-payment discount taken | £10,000 | £9,500 | Discount deducted |
| Hire with a year-end rebate of £400 later received | £8,000 | £7,600 | Rebate deducted once known |
| Hire from a sister company at £1,200 a week when the market rate is £1,000 | £1,200 | £1,000 | Open market rate under the schedule |
| Materials with £2,000 of recoverable VAT | £12,000 | £10,000 | Recoverable tax deducted |
52.2: the records (Options C, D and E)
The Contractor must keep four kinds of records:
- accounts of its Defined Cost payments;
- proof the payments were made;
- communications and assessments of compensation events for Subcontractors;
- other records the Scope asks for (the Works Information in NEC3).
Read the Scope for that fourth point. It's where a Client might add monthly cost reports, payroll formats or supplier tender records, and it could take effect from day one.
The second point catches some Contractors out. An invoice isn't proof of payment. A bank record or a payment run report that ties to it is.
52.3: inspection
The Contractor must allow the Project Manager to inspect these records at any time within working hours. The NEC4 subcontract extends this to the main Contractor and the Project Manager. There's no minimum notice period, though a sensible Project Manager will arrange a time. Our guide to auditing Defined Cost covers how to use this right.
This clause doesn't use the word "audit", and it doesn't describe a process. If the Client wants a formal audit, with reports and a right to copy, it'll probably appear in the Scope or a Z clause.
What happens if records fail
Clause 52 sets no penalty itself. The consequence comes through the Disallowed Cost definition, under which cost that the accounts and records don't justify is removed. So a missing record has a direct price, plus lost Fee on the amount.
Applying it to Options A and B
Clause 52.1 applies there too, for pricing compensation events. But 52.2 and 52.3 don't, so the Project Manager has no standing right to look at a lump sum Contractor's books. A compensation event quotation can still be queried and can be supported by evidence. See the Short Schedule of Cost Components.
Setting up on day one
- Create a job cost code for each section of the schedule, with Subcontractors kept separate.
- Arrange for bank or payment proof to be attached automatically, rather than chased at audit time.
- Agree the form of monthly reporting, in writing.
- Note who holds the rebate agreements and when rebates come through.
- Read the open book guide for more on the records themselves.
Related guides
- NEC Payment and Defined Cost: The Complete Guide
- The NEC Payment Timeline
- Assessment Date and Assessment Interval
- Making an NEC Payment Application
- NEC Clause 50: Assessing the Amount Due
- NEC Clause 51: Certifying Payment
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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.