What Is Defined Cost?

Defined Cost NEC style is not the Contractor's actual cost. It is the portion of cost the contract recognises, calculated from a schedule of permitted components, with everything else treated as covered by the Fee. What it contains depends on which main Option you are using.

This guide sets out the definition for each Option under the NEC4 Engineering and Construction Contract (ECC), with NEC3 differences. For how it fits into payment overall, see the NEC payment and Defined Cost guide.

The definition by main Option

Option	Defined Cost in NEC4 ECC	Where the term matters	NEC3 note
A and B	Worked out from the components of the Short Schedule of Cost Components	Pricing compensation events only	Same idea, called the Shorter Schedule, at 11.2(22)
C and D	Worked out from the components of the Schedule of Cost Components, with Disallowed Cost taken off	Every payment, the share, and compensation events	Subcontractor payments were a separate limb of the definition at 11.2(23), not a component
E	As C and D	Every payment and compensation events, with no target or share	As C and D
F	What is due to Subcontractors, plus the Contract Data prices for work the Contractor does itself, less Disallowed Cost	Every payment	Similar structure at 11.2(24)

We haven't given the NEC4 item number within clause 11.2 here because it varies by Option and sources do not all agree for Option F. Look it up in your own contract, in the main Option clauses.

The rule that makes it work

Clause 52.1 does two jobs. First, it makes the schedule a closed list: whatever the Contractor spends outside it counts as covered by the Fee. Second, it limits the value of what's inside. Amounts are either calculated from rates and percentages in the Contract Data, or set at market or competitively tendered prices, after taking off recoverable discounts, rebates and taxes.

So a Contractor who pays over the odds for hire from a friendly supplier doesn't automatically recover that price. And a Contractor whose head office is expensive can't argue for more than the Fee. There's more on this in our guide to clause 52.

A worked example

A fictional Option C contract with an illustrative fee percentage of 8%. In one assessment period the Contractor's ledger shows the following.

Item	Paid	Defined Cost?	Amount counted
Site team wages, working in the Working Areas	£60,000	Yes, people	£60,000
Excavator hire from an unrelated company	£12,000	Yes, Equipment	£12,000
Concrete, including £2,000 of over-ordered waste beyond reasonable wastage	£30,000	Partly	£28,000
Head office bid team time	£9,000	No, covered by the Fee	£0
Subcontractor payment, unsupported by any record	£15,000	Disallowed unless justified	£0
Total	£126,000		£100,000

The Fee is £8,000, so the value for the period is £108,000 against £126,000 spent. The missing record might be fixed later, but the rest of the gap won't close. This is why a Contractor's internal cost report and its Defined Cost report should never be treated as the same document.

How Defined Cost is used

• Interim payment on C, D and E. The Price for Work Done to Date takes the Defined Cost forecast to have been paid by the next assessment date, then adds the Fee.
• Compensation events on all Options. The change to the Prices comes from the effect on Defined Cost plus the Fee, as explained in the guide to assessing compensation events.
• The share on C and D. The final Defined Cost plus Fee is compared with the target.
• Termination. Defined Cost appears in the payment on termination amounts.

What people get wrong

• Calling it "actual cost". It often isn't. A list of what's excluded is as useful as a list of what's included.
• Assuming A and B never use it. They do, for every compensation event that needs a Defined Cost assessment.
• Treating it as cost incurred. For C, D and E the measure looks at what will have been paid before the next assessment date, not what has been accrued or invoiced.
• Applying the wrong schedule. NEC3 allowed the Shorter Schedule by agreement on Options C, D and E (63.15 in those Options). The NEC4 subcontract makes the Short Schedule part of the contract only on Options A and B, so check before carrying the habit across.

Related guides

• NEC Payment and Defined Cost: The Complete Guide
• The Schedule of Cost Components Explained
• The Short Schedule of Cost Components
• Schedule of Cost Components: People

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.