Subcontractors and Defined Cost

On Options C, D and E, NEC subcontractor Defined Cost is what the Contractor pays for subcontracted work, adjusted so the Client never pays or retains the same amount twice. NEC4 lists it as a component in the Schedule of Cost Components, while NEC3 handled it in the definition of Defined Cost itself.

Only the Contractor's own subcontract counts as this cost. The Subcontractor's own costs don't get re-examined line by line unless its contract is itself open book. See the definition of Subcontractor and the NEC payment and Defined Cost guide.

How the two editions treat it

Point	NEC4	NEC3 ECC
Where it sits	Section 4 of the schedule, item 41	The Defined Cost definition, 11.2(23) on C, D and E
What's counted	Payments for subcontracted work	Payments due to Subcontractors
What's ignored	Amounts paid to or retained from the Subcontractor by the Contractor which would make the paying side pay or retain twice	Named deductions: retention, payment for failing to meet a Key Date, correcting Defects after Completion, payments to Others, and items in the Working Areas overheads charge
Fee	One fee percentage, 11.2(10)	A separate subcontracted fee percentage, 11.2(8)

The item number comes from the NEC4 subcontract text, where the equivalent section deals with Subsubcontractors. The same section appears in the NEC4 Short Schedule, as a simple statement that payments for subcontracted work are included.

Worked example: retention down the chain

A fictional NEC4 Option C main contract with Option X16 at 3% and a 5% retention on the subcontract. The Subcontractor's account for work done is £100,000. All figures are illustrative.

Line	Amount
Value of the subcontract work	£100,000
Contractor retains 5% from the Subcontractor	(£5,000)
Cash the Contractor pays the Subcontractor	£95,000
Defined Cost for this work under the Client's contract	£100,000
Client's 3% retention on that line (ignoring the free amount)	£3,000

The point is that Defined Cost shows £100,000, not £95,000. If it showed £95,000, the Client would gain from the Contractor's 5% retention and then take its own 3% on top, so the same value would be held back twice. The retention guide looks at this further.

What can be taken out

Being a Subcontractor's payment doesn't make the amount safe. Disallowed Cost removes:

• sums that shouldn't have been paid under the subcontract's terms;
• cost incurred only because the Contractor didn't follow a procurement procedure in the Scope;
• under NEC4, cost incurred only because it didn't notify the Project Manager about preparing for and conducting an adjudication or tribunal with a Subcontractor or supplier.

On NEC3 Option F, payments to a Subcontractor for work the Contract Data says the Contractor will do itself, or for the Contractor's management, are also disallowed.

What the Project Manager will want to see

1. The subcontract, including the pricing information.
2. Applications, certificates and proof of payment.
3. The assessment of each subcontract compensation event, because clause 52.2 makes those records a contract requirement.
4. A reconciliation between what's in the Contractor's Defined Cost and what the subcontract account says. This is usually where any problems show up.

Clause 26 also requires subcontract documents to be submitted for acceptance in many cases. Get that right at the start, because cost can be disallowed if an acceptance procedure stated in the Scope was skipped.

What people get wrong

• Paying a Subcontractor's compensation event at a generous rate. If the subcontract didn't entitle them to that sum, the extra can be disallowed, however good the commercial reason.
• Treating contra charges casually. A deduction from a Subcontractor for damage it caused needs thought: the question is whether it would mean the Client is paying or holding the same amount twice.
• Assuming the main contract's Option sets the subcontract's. A lump sum subcontract under a target main contract is common. The Contractor pays against the Prices of the subcontract, and that's the cost that flows upward. More in payment for NEC subcontractors.

Related guides

• NEC Payment and Defined Cost: The Complete Guide
• Disallowed Cost Explained
• The Fee Under NEC
• The Prices
• Schedule of Cost Components: Plant and Materials
• Schedule of Cost Components: Charges and Overheads

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.