The NEC fee percentage is the Contractor's tendered rate that covers everything Defined Cost doesn't: typically head office overheads and profit, and any other cost with no component in the schedule. NEC4 ECC has one percentage, defined at 11.2(10). NEC3 ECC has two, at 11.2(8).
The Fee is set by a figure in Contract Data part two, and clause 52.1 is what makes it all-embracing. For the definition page, see the Fee. For the wider context, see the NEC payment and Defined Cost guide.
How it is calculated
| Edition | Percentage | Applied to |
|---|---|---|
| NEC4 ECC | Fee percentage | The amount of Defined Cost |
| NEC3 ECC | Direct fee percentage | Defined Cost of work other than subcontracted work |
| NEC3 ECC | Subcontracted fee percentage | Defined Cost of subcontracted work |
On NEC4, a tenderer who expects to subcontract most of the work can't price that lower return separately. It has to blend it. So a single percentage needs thinking about for the actual mix of work, as the worked example shows.
How it is used by main Option
| Option | When the Fee is used |
|---|---|
| A and B | When a compensation event is priced from Defined Cost. Interim payment comes from the Prices, so overhead and profit are inside those Prices. |
| C and D | In each assessment (Defined Cost plus Fee), in the share calculation and in compensation events |
| E and F | In each assessment, and in the Prices |
| All | On termination, in amounts such as the fee percentage applied to the unworked balance, depending on the reason for termination |
Worked example: blending a single percentage
A fictional tenderer moving from NEC3 to NEC4, with illustrative figures for a job expected to involve £10m of Defined Cost.
| Part of the work | Defined Cost | NEC3-style rate | Fee |
|---|---|---|---|
| Direct work | £3,000,000 | 12% | £360,000 |
| Subcontracted work | £7,000,000 | 4% | £280,000 |
| Total | £10,000,000 | £640,000 |
The blended NEC4 fee percentage is 6.4%, before looking at what else now has no component. Every site cost that has fallen out of the schedule, such as the NEC3 charges now handled differently, adds to that figure. See charges and overheads. If the mix of work then changes, say through a large direct-labour compensation event, the Contractor earns the same percentage on a different kind of cost.
What goes into the Fee
The contract doesn't list what the Fee contains. It's simply the home of whatever's excluded. A working list for an estimator might include:
- head office and regional office overheads;
- profit and risk allowance;
- people who aren't in the Working Areas, except for design or fabrication people at the Contract Data rates;
- bid costs and general insurances beyond those in the schedule;
- on NEC4, any site running cost with no listed component;
- costs of doing business such as finance, unless a Z clause says otherwise.
The Fee can never pay for a Disallowed Cost, because Disallowed Cost is removed before the Fee is calculated. So a disallowed £10,000 costs the Contractor the Fee on it as well.
What people get wrong
- Treating it as profit. A low percentage doesn't mean a low-margin bid, or vice versa, until you know what's left out of the schedule.
- Applying it to the wrong base. On a compensation event with deductions, work out Defined Cost first, then apply the percentage.
- Arguing it can be renegotiated for a large change. The percentage is a tendered Contract Data figure, used for all compensation event assessments. Departing from it needs an agreement, or a Z clause.
- Assuming bid costs are recoverable. They aren't Defined Cost. They were incurred before the contract and don't fit any component.
Related guides
- NEC Payment and Defined Cost: The Complete Guide
- The Prices
- Price for Work Done to Date (PWDD)
- NEC Clause 50: Assessing the Amount Due
- Subcontractors and Defined Cost
- Disallowed Cost Explained
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