Risk Allocation by Main Option

NEC risk allocation changes mainly with the main Option: under Option A the Contractor carries most cost risk, under Option E the Client carries most of it, and Options C and D share it through a formula. The liabilities in Section 8 and most compensation events stay the same whichever Option you use.

So choosing a main Option is the biggest commercial risk decision on an NEC job. It sits alongside the liabilities and insurance rules.

Risk by Option

Option	How the Contractor is paid	Cost overrun on stated work	Quantities	Client's admin load
A: activity schedule	Lump sums for finished activities	Contractor	Contractor	Lower
B: bill of quantities	Rates times actual quantities	Contractor on rates	Client, through re-measure and specified compensation events	Medium
C: target, activity schedule	Defined Cost plus Fee, with a share against the target	Shared by the share range	Within the target	Higher
D: target, bill of quantities	Defined Cost plus Fee, with a share against a re-measured target	Shared by the share range	Client, through the target	Higher
E: cost reimbursable	Defined Cost plus Fee	Client	Client	Higher
F: management contract	Defined Cost plus Fee, with the Contractor managing subcontractors	Client on subcontract cost, Contractor on its own stated prices	Client	Higher

For every Option, the descriptions here are a general guide. Read the main Option clauses in your own contract. See the main Options guide for each one.

Same event, four contracts

A fictional footbridge, with illustrative numbers. The steel subcontractor's price rises by £100,000 between tender and order, for reasons that are nobody's fault. It's not a compensation event, and Options X1 and X2 aren't used. The Option C and D share range is simple: 50/50 for this level of overrun.

Option	Contractor bears	Client bears
A	£100,000	£0
B	£100,000 (the steel rate doesn't change)	£0
C	£50,000, through the share	£50,000
E	£0, provided it's not Disallowed Cost	£100,000

Now suppose the same event is a compensation event. The changes are assessed on Defined Cost and the Prices move. On Option A, the Contractor's exposure largely goes away for the assessed effect. On Option C, the target rises too, so the share isn't affected by that assessed amount. On Option E, the total is paid anyway, and the assessment only sets the forecast. The guide to compensation events on Option C covers this further.

Where risk moves within an Option

• Options B and D: differences in quantities can be compensation events in the listed cases at 60.4 to 60.7, and a Bill of Quantities correction has its own rule.
• Options C, D and E: Disallowed Cost keeps some costs with the Contractor, such as correcting Defects after Completion.
• Option C and D share: the share range in the Contract Data decides the split, and clause 54 in NEC4 (53 in NEC3) applies. See the Contractor's share range.

Risks that don't depend on the Option

These apply whichever Option you choose, subject to the Contract Data:

• physical conditions and weather at 60.1(12) and 60.1(13);
• the Client's and Contractor's liabilities;
• insurance;
• Defects and the correction process;
• termination reasons and procedures.

Secondary Options then change the balance. X1 passes inflation to the Client, X2 passes changes in the law, X7 adds delay damages and X18 limits the Contractor's liability.

Choosing with risk in mind

If this is true	Consider
The design is complete and stable, and you want price certainty	A, or B if quantities may move
You want to share risk and work collaboratively, and can check cost	C or D
The scope is too uncertain to price (an emergency, for example)	E
You want to pass on a risk the market can't price	Be careful: you'll probably pay for it anyway

The guide to choosing a main Option goes into this in more depth.

Related guides

• NEC Risk, Liabilities and Insurance
• Risk Allowances in Quotations
• Limiting Liability Under NEC
• Force Majeure and NEC
• Insurance Under NEC
• Indemnities Under NEC

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.