Disallowed Costs In NEC4 Cost Contracts Explained

Disallowed cost is one of those NEC4 ECC ideas that sounds simple until it hits your payment certificate. When you are working under cost reimbursable contracts like NEC4 Option C, Option D or Option E, one challenged line item can turn “defined cost” into a cost you carry yourself. We unpack what disallowed cost really means, why it exists, and how it acts as a commercial control to keep cost-based payment honest without turning the contract into a blame game.

We talk through the real mechanics of payment assessment under clause 50: the Contractor’s application, the Project Manager’s duty to assess the amount due, and how disallowed cost fits into the calculation because defined cost is the Schedule of Cost Components less disallowed cost. From there we go deep on the most common trigger we see on projects: costs not justified by accounts and records. Open-book accounting only works when the evidence is clear, consistent, and mapped to the cost components, with enough narrative to explain context, decisions, and timing.

The conversation also covers supply chain and process traps: subcontractor costs that should not have been paid, procurement or acceptance procedures stated in the Scope, missed early warnings, and dispute notifications that can make otherwise valid expenditure unrecoverable. We explore defects after Completion and why the Scope definition of Completion is commercially critical, plus “reasonable wastage” and “reasonable utilisation” when you are deciding whether to keep people and plant on site in the real world.

If you manage NEC4 cost options, this will sharpen how you set expectations pre-contract, run collaborative commercial conversations during delivery, and keep records that stand up to audit. Subscribe, share it with your Project Manager or QS, leave a review, and tell us: which disallowed cost category causes the biggest arguments on your jobs?

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Transcript

Welcome And Today’s Focus

SPEAKER_00 0:32

Good afternoon, everyone, and a very warm welcome to our next uh webinar with Seeker and Gava. And this is episode nine. We're just chatting how time is flying and uh done a year of these webinars with uh with a few more to go. So all the time, people give us feedback, they're enjoying the webinars, we'll keep producing them for you. So a warm welcome from myself, Glenn Hyde, GMH planning, and joined today by Ben Walker from Gaver and David Allen from Seeker. You'll hear from them very shortly. So today's episode is all about disallowed costs. So when we're working on cost reimbursable contracts, um, this is obviously a very big important element. So we thought we'd just dive into a little bit of detail on the definition of disallowed costs and when and how they should be applied. So that's the

Seeker And The NEC Webinar Series

SPEAKER_00 1:20

plan for today's webinar. David, over to you just to hear a little bit about Seeker.

SPEAKER_01 1:25

Thanks, Ben. Yeah, hi, I'm David Allen, the Executive Director for Seeker Southern, and I'm looking forward to hearing more around the topic of disallowed costs under the NEC4, a process that in reality should help assure commercial outcomes if it is managed and delivered in a consistent and adequately informed manner. Ben and Glenn will provide more detail on the topic shortly, and there will be an opportunity to discuss any issues you may have at the end of the webinar. However, just a quick reminder about Seeker and who we are. Using our full title, the Civil Engineering Contractors Association, we are a not-for-profit body who represents many of those contractors that deliver and maintain a significant part of our mainland UK infrastructure. Seeker Southern is just one part of this member-led National Trade Association, which is now in its 30th year, with a UK coverage that includes England and the devolved nations of Scotland and Wales, and a policy with our policy office in Westminster. We engage with governments and those bodies that impact on our industry at both the national and regional levels. And you can find out more about our activities on the Seeker website. As I've noted, this is previously, this is a series of NEC webinars that support our Seeker upskilling and training core pillar ambitions, providing an additional layer of awareness to the suite of seminars and bulletins that we already deliver around the NEC4. We're looking to increase both Seeker member and the wider NEC4 user awareness, promoting the appropriate and equitable use of it that will hopefully deliver more short outcomes for all. I'll now hand you over to Ben and Gether.

SPEAKER_02 3:17

Thank

What Disallowed Cost Means

SPEAKER_02 3:18

you, David. Thank you, Glenn. Good afternoon, all. So, disallowed cost explained. So, in this episode, we're going to have a look at what a disallowed cost is. We're going to explore why we need disallowed costs, at least in parts of the NEC contract. And then we're going to look at disallowed costs in the context of payment assessments, which is the main place obviously where we're looking at it and thinking about it and how that sort of fits in. And then we're going to take a bit of a deep dive in each of the sort of six bullets that set out what a disallowed cost is. And I'll say, and I'm sure we'll say many times again throughout this. This is a kind of published, unamended form of NEC, and disallowed cost is one of those areas that does attract a bit of Zenglore's attention. So care should be taken there. This webinar series is not legal advice, but hopefully will be a good prompt to start conversation, have a think about different things. The other thing I'd say as well, again, true for all the webinars, really, and any training you partake in too, is you know, use the slides, use the information as a prompt to go and look it up in your contract because obviously we can only sort of show abridged versions here of the clauses and the points, and it's well worth reading them first hand. Well, so Matt with some final thoughts and uh and David help us with that bit, and then we'll jump into a questions and answers session uh where we should have plenty of time at the end there. So please do keep your questions coming in uh as we go. We will uh keep a keep an eye on them and uh build some time in at the end to walk through them. So, first of all, let's have a think about what a disallowed cost is. Now, there are two definitions for this. There's a definition for main options C, D, and E, and then there is a separate definition for F, which Glenn will take you through in just a moment. So for options C, D, and E, it's defined term 11.226. And disallowed cost is cost which is not justified by the contractor's accounts and records, and that's quite a big one and worth a slide or so to have a good look at that later. Should not have been paid to a subcontractor or supplier, was only incurred because the contractor did not fulfil certain procedural obligations relating to procurement, early warning uh or dispute. Uh, cost of correcting defects after completion, which infers that correcting defects before completion is indeed allowable. And that's the case. Uh, but again, check your clauses. We've got a slide that unpicks that a little bit further, and of course, the importance of stating what completion is. So we'll come to that as well. So it's an item for scope. Or due to not complying with constraints in the scope. We're going to also look at the disallowed cost for uh plant and materials not used after reasonable wastage and resources not used after allowing for reasonable utilization and availability, and finally that preparation of conduct of a dispute between uh the parties. Again, I make that point about referring to an EC for the full wording. Glenn, what's the definition for option F?

SPEAKER_00 6:23

Yeah, it's similar. And I think we've included this just for completeness, but in truth, F is is very rarely used, but it is there as an option. So we we thought we'd uh would cover it anyway. You can see there's very similar, there's slightly less. Now, option F is more of a management contract where traditionally a contract will be managing a series of subcontract packages on behalf of a client. And so that's typically when it sort of might be used. So the first couple we've already seen. The third bullet is a payment to a subcontractor or supplier for work or management that the contract was required to do itself. So with an option F, there is the potential for some elements of the contractor to do themselves. So that could then lead to a disallowed cost. We've then got a similar one about procedural obligations and preparing the dispute. So there's one or two lists, and there's one picked up there where the contract was meant to do it themselves when they got someone else to do it, so that could also be a disallowed cost. But for the purposes of this workshop, we're going to focus on C D and E, because they're the ones that are much more commonly used than F. You can uh you've got that definition as well, um, should you need it.

SPEAKER_02 7:30

Yeah, and as you say, Glenn, it being uh largely the work here is subcontracted. If those subcontracts are any C, then of course you're likely to find those couple of bullet points that aren't in option F around wastage or underutilisation appearing in those subcontracts anyway. And it's a question of you know the payment the payments being vetted for those sorts of things. So the kind of similar principles will just flow down through a different channel.

Why Cost Options Need This Control

SPEAKER_02 7:58

So why do we need disallowed costs? Let's have a quick think about this just to sort of orientate ourselves a little bit. So, firstly, we don't use it in options A and B. So disallowed cost is not a thing in options A and B. It's a thing in main options C, D, E, and F. Why is that? Well, in A and B, we've got priced contracts. So option A is a price contract with activity schedule. Option B is a price contract with a bill of quantities. So the price for work done to date, the bit we pay, is founded in the prices that we've tendered. So we're literally looking things up and finding that price and paying it. Uh, and it's a cumulative assessment based on those prices. We do still have defined costs, don't forget, and we still tender a fee percentage, but they're only only used for compensation assessment. And compensation events, if you think about them, they're each and each exclusive, fully assessed, kind of complete assessments of something. And I guess that the you know the the rigour around that is fairly substantial. We've got the ability to instruct revise quotations until we get to where we need to be. Ultimately, we have project manager assessments. So there's already quite a lot of mechanisms around establishing the right assessment. Whereas payments are a little bit different, isn't it? So if we turn our attention to option C, D, E, and F, these are cost-based contracts. So we're paying forecast defined cost to the next assessment date, and the price for work done to date there being rooted in that forecast defined cost and fee. So defined cost is used for two things. It's used for the assessment of the amount due, of the data of the day-to-day payment for the works, and for the assessment of compensation events. Now, again, the assessment of compensation events follows the same rules, basically, as option A and B. A lot of it is called clause. So the real difference is that focus on cost-based paying for the work based in cost rather than pricing. And so we do have disallowed costs in the cost options, and these are costs that the contractor has included in their application for payment. And they may, on the face of it, appear as defined costs, but are then subsequently disallowed for specific reasons stated in the contract, those that we had a look at uh in the last couple of slides. And that's what we want to unpick and understand how they come about, how to how to protect against them and make sure that we get it right and we get the right answer, as David said in the intro.

SPEAKER_00 10:32

Over to you, Glaire. So, yeah, carrying on with why why we need them. So, disallow costs will then be part of the definition of defined costs for our cost reimbursable type contracts, which is obviously uh C D E and F. So for C D and E, the defined cost is the cost of the components in the scheduler cost components less any disallowed costs, and a very similar definition there for option F as well. It's payment of subcontracts and prices work done by the contractor less again any um disallowed costs. So when we're looking at main option C, D, E, and F, again, the work is uh cumulative. So the price work done today is based on the cumulative forecast defined cost uh plus the fee. And defined cost is used for payment and for compensation assessments. And the disallow cost element is just to make sure that whilst the contractor's being paid on a cost reimbursable basis, there is some control that the client's got said, hang on, we yes, we're paying you for your actual cost, but hang on, that cost you didn't need to spend. Or so we need something just to make sure that the contractor needs to be kept on check and thinking, happy days, we're getting paid for this. Yeah, two of them, three of them, six of them, have a bigger one of them, get one of them. We might not need it, but let's have it anyway. So it's just going to keep the contractor in control to make sure they are, yes, gonna get recovery for what they've spent, but in a controlled way. So the contractor needs to make sure they're not wasting cost that otherwise the client could say that uh hang on, you've incurred more costs than we needed to there. Now, in some ways, with option C and D, with the target cost mechanism, I'd say the contractor's arguably more incentivized not to waste money, but with option E, arguably less incentive not to waste money because all they're gonna do is earn fee on turnover. So arguably the more they spend with it, that the better. So that's what disallowed costs were brought in to do, just to try and keep things in check. That yes, while a contractor is going to be paid on actual cost basis or actual forecast cost basis, that there is some control here. And then obviously we're now gonna run through the elements that would specifically be disallowed.

SPEAKER_02 12:46

Thanks, thanks, Glenn. Yeah, so we've we've we've heard about what disallowed costs are, and we're gonna unpack them a little bit more in a moment. And we've we uh know where they're used, option C, D, or E. We know that they are part of the definition of defined costs, and we know that option C, D, and E, that's the basis for payment, the forecast defined cost to the

Where It Appears In Payments

SPEAKER_02 13:06

next assessment. So let's just bring those few things together so that we understand the context of a payment assessment and how they fit together. So the first thing is the contractor submits an application for payment before each assessment date, and that's clause 50.3. And in NEC4, that's really important. It used to be the case that it was kind of optional. Uh, everybody, not everybody, but most people tended to do it. Now it's it's it's a prerequisite to to being paid effectively. There's a bit more nuance than that, but that's effectively it. The next step then is the project manager still assesses the amount due. It's still the project manager who assesses the amount due at each assessment date, and that's clause 50.1. And then in 51.1, we talk about the PM certifying the amount, and the project manager's certificate includes details of how the amount due has been assessed. And this is where I typically would think it's to start to see to sell our costs creep in. But let's put them sort of in order as to where they might sit. So let's unpack that a little bit. How the amount due has been assessed will likely include, firstly, a statement as to which parts of the contracted application a project manager assesses to be correct. Yeah, I agree with all these bits here. Thank you very much. And hopefully that's it. That's that's all you get. Yep, I agree. Fantastic. Let's move forward. I assess your application to be fully correct. Of course, you're much more likely to get to that point if you follow a practice that we've, Glenn and I and and and uh David have talked about many times around collaborating together and treating the submission and acceptance as more of a formality. I think a lot of the most successful teams will have worked together on the application for payment. And of course, the program, which is going to substantiate a big chunk of that forecast. So doing it together helps a great deal so that none of it is a shock. The second bit will be costs to the project manager assesses are to be added due to the contractor omitting to apply for them. Yes, I have said that. That is what I really mean. There is the case where the contractor may well have forgotten to put something, I don't know, an incentive scheduled payment under X20 or a price adjustment for inflation or whatever it might be. There will be various other amounts to be paid to or retained from. So we're talking about the paid to bit that perhaps have been missed. If you spot it, remember project managers, your job is to get the right answer under the contract. So if it's missing, your job is to assess the amount due. You've got to put it in. It'll only be found later on, and then there'll be interest due on it. So let's just put it in and get it right first time. The third element is changes that the project manager assesses are necessary due to the contractor under or over applying. So it's really the bits that they disagree with on the first bullet point. It could be a remeasure, or perhaps given that we are forecasting to the next assessment, maybe they've had a little look at the program and said, well, your assessment's predicated on an assumption you're going to do X meters a day, and the best you've ever done is 10% less than that. So I think you're you're you're slightly you're slightly too high in your in your um accrual there. All the other way around, of course. So it could be a change as necessary. And the fourth bit that I would see would be the cost the project manager assesses it to be disallowed due to them being one of the disallowed costs that we've already mentioned at the start. And it's that over the next however many slides are left, we're going to unpick. Anything to add uh Glenn, David?

SPEAKER_00 16:36

No, I was I was just thinking that uh obviously this is the project manager's job to do because I I doubt many contractors are going to put in an application and cross out some items and say that would be a disallowed cost. I don't think I've seen that very often, if at all. So it really is for the project manager to define these. Yes, obviously, in collaboration, Kachatus shouldn't be asking for things not entitled to, but it's a commercial world, they want cash flow in. So yeah, this is on the owners for the project manager to be finding and unpicking and deciding what they consider will be disallowed, because I doubt the good chatter is going to offer them up for the for the project manager to say, yeah, I agree, I shouldn't be paying that.

SPEAKER_01 17:18

Sorry, just to add into that, the what I would say though, obviously, in assessing what the project manager might consider needs to be disallowed, they probably need to know what context maybe the contractors put submitted those costs and that application. So it might be that's an indication that the picture's not complete, as it were. So maybe there needs to be some discussion and engagement at that point. I know we've we've talked about working collaboratively in general, but this is one of those things where you can't always look at the black and white, although you have to assess on the black and white. There's usually a bit a sort of bigger sort of discussion around that.

SPEAKER_00 18:01

And some project managers would actually give the contractor a very quick second bite of the cherry to say, well, I've assessed this, let's have a quick meeting because I think I'm right. I'll give you 24 hours to challenge any bits, otherwise, I'm going to go with that anyway. There's nothing in the contract that says they've got to do that, but obviously that's that's good practice. Something the you know the spirit of contracts does work quite nicely, but not always time for that.

SPEAKER_02 18:27

You've actually made me think of three other things, gents. So it's always worth having a conversation about this stuff, isn't it? The first thing is preparation. Now, don't forget, clause 50.2, the final sentence there says the contractor's application for payment includes details of how the amount has been assessed and is in the form stated in the scope. So if we know that we have a particular sensitivity to an area of the contract that we want to really drill down on, we might take our perhaps our amended schedule of cost components and hopefully not, but maybe, and really build out the way in which we want things presented that might shed a better light on them somehow. I don't know. But that sentence is there for a reason. So when you're putting your scope together, consult your auditors, consult your finance people, and think about how you want that application for payment to be presented. It's never too late to change the scope, but better if you've already done it before you start and you can head off that. So it's perhaps one of those things to put on your project startup checklist that you know, what do we expect application for payment to be? Rather than leaving it to this amazing surprise at the first at the end of the first month, where there's quite a lot going on, isn't there, guys? I think that if we can if we can get the payment application and form that's uh anticipated, that might help a great deal. The second thing is in option C DE, there is a requirement under clause 20.4 to prepare forecasts of the total defined cost for the whole of the works in consultation with the project manager, submitting them to the project manager. Now, I would suggest that that alongside updating your program on a regular basis, are two further management opportunities for aligning information so that your application is nothing more than a formality of what we've already discussed. So that collaboration point, you know, it's not the contract's very clear about how we communicate formally with one another. You submit this, I accept it, you propose that, I'll think about it. But but really behind the scenes, it's inviting us to do quite a bit more with those other management tools. Okay.

unknown 20:35

Okay.

SPEAKER_02 20:36

Over

Open-Book Records And Proof

SPEAKER_02 20:37

to you, Glenn. You've got to take us through the first of those bullet points.

SPEAKER_00 20:41

Yeah, so the very first one is cost not justified by contractors, records, and accounts? So the first thing that this really leads us to is that option C onwards is an open book. It's it's fully open book, and you've got to prove the cost that uh you have incurred as a contractor, because unless you can prove it, then you you won't be paid it. So there's more onus on the contractor to prove that it has been incurred. And obviously, Ben's point about agreeing things at tender stage, this is a massive thing that needs to be agreed early on in terms of what records and accounts do we need to see in order to verify um the cost that have been incurred. One small tip for a contractor would be not to say to the client, what would you like to see? Because their answer will be, well, everything, please. So, really, as a contractor, think what you can easily provide. So it's not about hiding stuff, it's just about what is a nice, easy way within your records and accounts that you can easily demonstrate the cost you've incurred. You know, your own accounting system, which bits are easy to abstract and show and see if that's enough for for the client's team to have to see and understand you know, that yes, is that uh is that sufficient. So here just looking across the table, so in terms of uh you know not justified by contracts record accounts, you know, people. So we've got salaries and the wages for time, for time worked. So do we need access to payroll? Um, we've also got little things like GDPR uh rules to contend with in terms of what information can we give and what we are allowed to give, but we need to give it to verify the cost, but then is that breaching GDPR rules? So there's all sorts of these little things. So time sheets, allocation sheets, those are the kind of records that might be uh might be needed. When it comes to people for payments and expenses, well, were they incurred necessary to fight the works? So again, we need evidence of the travel, the subsistence, you know, whether it's uh PPE, the whether it's pension contributions. So we need to think about evidence of that. Uh when it comes to equipment, so we've got the hire or rental of equipment uh multiplied by the time for which it is required. And very importantly, uh, you know, it's how long we actually need it for. And again, it's justifying that we've got the right time for that equipment. We've not wasted equipment. So again, timesheets, narratives on uh the requirement, or if it was stood down, why was it stood down? So head that off as a contractor, you know, we expect some downtime with equipment. And obviously, if you needed equipment for an hour one day and an hour the next day, you're not going to offhire it for seven hours and the client can't expect just to pay for one hour because the equipment was needed over two days, albeit it was only an hour a day. So just heading off some of these questions, otherwise, that might be uh might be sort of uh made or considered that could otherwise be sort of disallowed. With the other categories, planter materials. So, what payments are made? Again, looking at accounts of records, good suppliers, subcontractors. This was a new element added in to NET4. So previously we had to build up subcontractor costs in line with all the other elements. Now they can be included as a lump sum um element. But a lot of it is coming back to uh to records when contractors are doing manufacture fabrication or doing design themselves for planted materials or or works of equipment, then what what the rates will potentially be agreed within the contract. But what isn't pre-agreed is the number of people you need and the amount of time you need them for. So the rates itself will be pre-agreed as part of contract data, but the amount of time spent and on what is then what will be covered for is that justifiable? And is that therefore something that should be paid, or is it something that should not be paid? The last one within the change of the cost components is insurances, which tells you what you can't claim for. So really there's not much that can be claimed anyway, with regards to insurances. So any insurance premiums, for example, should be included within the fee percentage.

SPEAKER_02 24:54

Back to records, then, isn't it? Yeah, absolutely. I would come on to that as you might have predicted. But um, yeah, defined cost. Just point out clause 52.1 is relevant here. All can all the contractors all the contractors' costs which are not included in defined cost are treated as included in the fee. Now remember, defined cost is sometimes an absolute real cost pass through, and sometimes it's a proxy. So Glenn mentioned when we talk about equipment, by that of course, we mean excavators, cranes, rollers. Plant is planting materials are things that become part of the permanent work. So plant would be havac or pumps or generators that that are left in the works, escalators, air conditioning units, that sort of thing. Equipment is not passed through as real cost. It's it's typically, there are some exceptions, but typically it's the equivalent high rental rate. And and my understanding, Glenn, is this was really to recognize where we have these proxies that you know, trying to work out the depreciation for every item of equipment a contractor owns is perhaps quite a quite an onerous task. In fact, I think NEC2 used to do that, and we kind of moved away from it to make things a bit simpler. So you do need to map what I'm getting to with all this, is that you need to map your cost capture against the rule book. And in this case, it's the scheduler cost components. So that scheduled cost components, which is sort of sorry, my books really seem bad days, it's really dramatically falling apart now. I should definitely get another one. But the penultimate shaded section is the components of cost, and it's that's the rule book for defining costs. So if you can't put a cost into there, then it must be in your fee. That's that's kind of the test, and that and that is a mixture. So patent materials there, Glenn was talking about accounts and records with suppliers, that will be your net payments with deductions for discounts, rebates, and taxes that you get back. So it really is cost passed through, whereas some of these other items are are proxies to make things administratively convenient and and and sort of practicable. So there's that, and also remembering that under the cost options, you have to make your accounts and records available to the project manager to audit during working hours. So yeah, I guess I guess all that kind of comes together in support of uh of that table that Glenn's just taken us through. Uh, anything further, guys, or we'll move on to subcontractors. I I think everything we're saying is kind of relevant to all of it. So just coming on to the subcontractor

Subcontractors Suppliers And Overpayment Risk

SPEAKER_02 27:33

bit. So this is another bullet in that in that list of six things. So it should not have been paid to the subcontractor. So when you are proposing a subcontractor for acceptance, remember to check the definition of subcontractor to make sure you're treating subcontractors and suppliers appropriately. Suppliers, you engage them, but subcontractors, you have to get the project manager's acceptance before you appoint them. It's actually one of the reasons for termination if you allow them to do a substantive amount of work before appointing them. So just be careful of that. Once you have that, they are also tested in the schedule of cost components differently to suppliers of plan and material. And this is one of the reasons under clause 26.4 in main option C D or E that you have to submit uh further information, including pricing information about the subcontracts, so that the project manager can make this determination, can decide that actually you shouldn't have paid that to your subcontractor. So we've got to be a little bit careful here. It doesn't have to be an NEC subcontract, it can be any contract. The project manager would be able to look at the conditions of that contract you've signed with your subcontractor and determine whether you've overpaid them. And if you've overpaid them, then that over-element would be subject to being a disallowed cost. So it's really important as a contractor that you've got robust enough records from your subcontractor that speaks to the subcontract you've signed between you. Otherwise, you can have a situation where you pay a subcontract's application and then have an element of that cost disallowed in the head contract. So be careful there. There's that clause 52.2 and 52.4 requiring the keeping of accounts and records and proof of payments and other things as well, really important for those of you using communication systems. We're always saying why not use that down into the supply chain as well. Well, here's a good reason to do that. You need to keep records of your communications relating to compensation events with your subcontractors and other and other records as stated in the scope. So again, we've got that reference back to scope. And again, clause 52.4, which requires the contractor to allow the project manager to inspect those records during working hours. A little bit of trivia. I I did have a count, there's 28 in any C3. I don't know how many it is. I got a feeling it's probably a few more, maybe 32, something like that. 30 to 32 places in this in the conditions of contract that reference the scope. It's quite a lot, isn't it? So when we think about scope, we think about drawing specifications and constraints. But it's also certainly more than two dozen places in the conditions of contract that rely on some form of statement in the scope, either to make them work, and the definition of completion is really important one, or just to enhance it. And it's an opportunity pre-contract. Of course, you can do it post-contract because it's scope, but better to do it before, where you can sort of be clearer about what you want and how you want to run things. And if you're clear from the outset, obviously that helps the contractor meet those requirements, and we have a smoother management experience. The little QR code there just links to a little form of model scope for records that you might like to have a look at. So by all means, borrow from that. It's it's not LinkedIn, it's just a little bit of additional guidance to be volume two, chapter three, how to write scope, with a particular focus on what you might ask for and where you might put this information about additional sort of records and how you want them to be formatted. I hope that's useful. And on the left-hand side there, just some screenshots. So it's showing uh you know the kinds of things that we might be thinking about, keeping an idea of those work log of events. So, what's the contractor working on, what was the plan versus actual, and then our hours allocation with that important narrative and context that Glenn was talking about before. So, this isn't unique just to subcontractors, just a bit more space from this slide compared with the previous one. But really, you're not just capturing those accounts and records aligned to the scheduled cost components, but you're also narrating them and keeping context around them and of course the ability to evidence them. Timesheet for time, but with allocated activities, even stronger with that narrative. Invoices, obviously, for passing through of defined cost on planet materials. Okay, that's a little bit on that. Anything further to say on subcontractors, guys?

SPEAKER_00 32:12

No, I've seen uh well, I've seen, like, for example, contractors paying a subcontractor a bonus for some reason, and that wasn't part of their contract, and that is then instantly disallowed. Um, although there might have been a benefit for the project, I mean then becomes a disallowed cost to the uh to the contractor. So again, I think it's like sharing that to the client as to why we're planning on doing this and getting the client's buy-in to do it rather than just do it, because otherwise, you know, it could be disallowed.

SPEAKER_01 32:41

It's upfront engagement and understanding the context around why some of these things are done and maybe the the wider importance to the program and other things. So if you've had those conversations, you understand where you're going on this, then that's half the answer.

SPEAKER_02 33:02

Yeah, that's a great example, Glenn. And and I think you spot on David, yeah. Okay. Over to you, Glenn.

Procedures Early Warnings And Disputes

SPEAKER_00 33:10

Oh, thanks. I get this one. Okay, so this is potentially subjective, but obviously we've got to try and make all of these things as objective as possible. So the contract talks about cost is incurred only if the contractor did not. And then we've got follow and acceptance or procurement procedure stated in the scope. Now I think that one's relatively clear, relatively black and white, but there would have to be a procedure in the scope that clearly hasn't been followed. How much could then be disallowed of that is more of a difficult question, but at least the principle should be relatively black and white. So there might be a certain procurement procedure. For example, the the client might say, Well, we need three, we need to see you've gone to three separate subcontractors for a quote, and we want to see each of those quotes before you make your decision. And if you haven't done that, you've not given the opportunity to do that. So then there might be a slowed process down, which has incurred money that uh potentially then could be disallowed. Give an early warning which the contract required. Now, that one is likely to be a bit more subjective, and certainly the cost that the project manager is going to disallow would definitely be subjective because we're now talking about hypothetically what they could have done. I remember experiencing this myself where the I didn't give an early warning as a contractor, and the project manager pointed that out. And I said, Okay, you are right, but there's not anything you really could have done had we given the early warning. And they said, Well, if you'd have given us the early warning, we would have done X, whatever X was. And I remember actually laughing out loud in the meeting, which was very unprofessional. Once I'd recovered myself, I said, Look, I'm sorry, I didn't mean to laugh, but I've worked with you for five years. You've never once done that X in five years. And their response was, yeah, but we could have done this time. And for once I had no smart aleck response because it's like, ah, okay, but I don't think you would have done, and it cost us a lot of money because in theory, they could have done X and we didn't get the opportunity to do it, and we couldn't argue that it was a disallowed cost. So again, we've talked on other webinars about the importance of the early warning process. There's another reason why it's really important. If in doubt, share the early warning and give the client the opportunity, the client's team, to be engaged in that process to make a decision, and they can't say you haven't told them. And the last one is notify the project manager of preparation for and conduct an adjudicational tribunal with a subcontractor or supplier. So if you have a supply chain, you don't warn the project manager about that, then the cost of all of that going around or you choosing to go into dispute with your subcontractors, that is a disallowed cost because the client's view is well, that's a matter for you, not for us. So that would also be disallowed. Thankfully, not too common one, but obviously from time to time there might be a reason why that does come about. And again, explain to the project manager why that's happening, and at least they might have some sympathy with that as well.

SPEAKER_02 36:21

You did get the most complicated slide there, Glenn.

SPEAKER_00 36:24

That's the trick. It's always a bit more emotive, isn't it? And a bit more uh yeah, a bit more subjective and as to how and why we can, you know, actually the most common one I I even did want to bring, but uh procurement well, actually acceptance. There's you know elements that uh if the contractors I guess it comes out to defects. So I'll let you uh talk about that one in defects, really.

SPEAKER_02 36:49

But but might be worth giving some colour to the early warning one. So I mean the one I always do in training, hypothetical training is you know, not being made aware of a of a potential of the potential for a redundant utility apparatus through through a field. So if you're if you're doing a drainage run and you you you uh you hit some utility that wasn't on the plans and wasn't wasn't there, and it looks redundant, but nonetheless, you know, you've got to stop work. And then you find out, as these things sometimes happen on an email chain, that actually a couple of weeks ago the contractors people were talking about the possibility of this, having discussed it with someone who'd worked at the site previously. It's those kinds of things that suddenly it's not so not so difficult to demonstrate. Well, you absolutely thought there could be, and you didn't notice five-minute audience, that's clear-cut at that point. So, how does that pan out? Well, we know that whether if if that's an unforeseen physical condition, yes, that will play out as a compensation event, and yes, the assessment of the compensation event is potentially dramatically different, but but quite often people think that's where the sanction starts and stops, and actually, no, in option C, D, and E, there's also uh this other element to it, which is and that's of course where where the costs are disallowed as well. So just just again, Glenn's said there, it's sort of dealing in the hypothetical a little bit. I in the training I normally give the example of well, if we hadn't known two weeks ago, we'd have got the utility person out at normal rate and they would have you know made it safe, and then we'd have carried on with our drainage run without any interruption at all. So the kinds of money you'd be disallowing on that, perhaps, are the premium element of the call out because it's an emergency call out, and uh any any prolongation type costs that we're incurring because we're stood, and of course they can mount up. So it's not a small sanction this. And as Glenn said, if in doubt, there's you know, early warnings are fairly uh useful things. Why not why not operate it properly? So, yeah, it's a quite important one there. Good stuff, right? What's next? I think it's defects,

Defects Completion And Scope Constraints

SPEAKER_02 39:00

isn't it? Yes. So this loud cost of defects. I think Glenn was uh was biting your tongue around a little bit because you wanted to do one of these. I think you can have a go at the second bit in a second, then Glenn, because you've clearly got a story you want to share. So so we could correcting defects after completion. Absolutely, that that it does infer that correcting defects before completion is not a disallow cost, and that is the case. However, check your Z clauses for for whatever reason. Some clients do tweet this. Uh, I think um I have more sympathy when they're when they do it for option E. For options A and B, of course, we're not talking about A and B today, but for options A and B, uh your core requirement, clause 20.1, is to provide the works in accordance with the scope. So you just keep doing it until you get it right, and there's no way of recovering that money. In options C and D, these are I see them as partnering main options, which for me means sharing in the risk and rewards. So if we have a bit of bad luck and we have to correct some defects, then you get paid the defined cost for them. But of course, the target doesn't move. So there's an incentive not to keep doing it. It's not like we're doing it on purpose, but we are sharing the the financial costs of doing it again. And then for for option E, it is the case because there's no target that each time we get something wrong, we do get reimbursed the costs for it, and of course, our fee on top. And some clients, you know, I have sympathies with why they they look at the Zen clause, but on balance, I would leave it how it is because I think this incentivizes a defect-free handover at completion, and I think that's really worthwhile incentivizing. And yes, the contractor will naturally build up those minor defects that they can run around and do economically, those sorts of things that aren't holding up. I'm I'm avoiding the word snagging because we don't use the word snagging, but the things that we that we wouldn't be efficient for us to go and fix as we find them, but they're not holding up other operations, and it's economical for us to do them as a load in one go. Of course, what you don't want to do is be caught out by a completion certificate because you haven't fully understood the definition of completion. Because then you find you're doing all your defect corrections, the wrong side of completion, and therefore they are disallowed. So keeping one eye on when we're going to complete is incredibly important. And and I said there's about 30 or so places in the scope where the conditions of contract lean on the scope for a statement or two. This is, I think, the first example. So completion is when the when the contractor has done all the works which the scope states are to be done by the uh by the completion date. So that's the definition that we need to go and check and see what it says in order to plan effectively that efficient wrap-up of defects. Glenn, you're gonna give us an example of not complying with a constraint, I think.

SPEAKER_00 41:52

Well, yeah, the one that often I well not often, but sometimes I see shoehorned in is the the project manager saying the scope says you've got to set things out right, you didn't you didn't follow your quality procedure, you set it out wrong, therefore that's uh you failed a constraint, I could disallow it. And it's just shoehorning that in. And if if it did meet that, they just say any defect will be a disallowed cost, but it doesn't. So that's one just to be to be careful of and try and be ready to argue back on. Obviously, don't deliver things out wrong, but I don't believe that Chanel can't blanch be a disallowed cost.

SPEAKER_02 42:25

No, I always thought of things like the one I kind of remember is if you I don't know, if you're laying like a slurry seal on a cycleway or something and it says don't lay this below 10 degrees, it's it feels like a constraint in the scope to me. And if you go and lay it in minus two and it and it peels, then I think that's probably a candidate for a disallowed cost to have to go and fix it. But uh hopefully we don't have too many of those. And you know, but again, it's keeping those records so that there is if it rained hardly the day on the side, you can say no, no, it was on a good day, and being able to demonstrate that and show that again. Records, records, records.

SPEAKER_01 43:00

I think you're right. It it does come down to the records, but it also comes down to the engagement within the team with the project manager, sort of understanding where some of the defects are, what needs to be done, and how that might better fit in to the way you're going to move towards completion. And I think that having that understanding means that everybody's singing off the same page and you you arrive at the out the right outcomes.

SPEAKER_02 43:28

Absolutely. I've just seen an unnamed LinkedIn user asking me a question. Have I got a new copy of the contract yet? No, clearly not. I'm still falling apart. If anyone would like to sponsor a new copy of this, put your label on the front and wave it around. I'm just keeping one eye on the questions as well as we go, so which is helpful because I think the next slide is yours, Glenn. And I'll shall read some questions.

SPEAKER_00 43:52

Sure.

Wastage Utilisation And Keeping Plant

SPEAKER_00 43:53

Another very important one is wastage and underutilization. So The one bullet says plant materials not used after allowing for reasonable wastage. And the second one is resources not used after allowing for reasonable availability and utilization. So this really is coming down to sort of records, particularly the resources one. But plant of materials, what is reasonable wastage? It will be subjective. And different materials have different kinds of wastage. Other materials, you know, you should be able to order very close and uh there should be minimal wastage, you know, 5% wastage if that. So it really does depend on the material. So again, it's about you know, not a contractor thinking, oh well, we get paid, yeah, just buy, oh, there's you know, cheap supply. Oh yeah, just use a new sheet, don't reuse the old one for temporary works. You know, how we we've used so much plywood on this job. I remember being on a job down at Brighton and my very first job where you know we were getting through so many cheap supply, and every day, you know, that oh, there's a bit scratch on that one, we get a new sheet, we get paid anyway. So it's about making sure we're fully utilising these materials and not wasting them. So there will be an element of subjectivity there, but again, we should be ready for what is sensible wastage for that particular material and what isn't. You know, we were chatting before, if you've ordered you know, eight pallet loads of bricks and you only needed one pallet load, well, there's seven wasted. And uh, you know, so that would uh have a very good shout for uh wasted material, they're not gonna end up in the uh in the permanent works. Uh resources not used after allowing for reasonable availability and utilization or taken away when the project manager requested. Again, engage the project manager in the reasons why you're keeping people on site. If you were to release certain skilled resources, you don't know when you're gonna get them back. So allow the project manager the decision process. We're planning on keeping them. If we let them go, we might not get them back. And when they when when we do get to uh to do these works, it's gonna hit it hard and it's program critical. We've got a hundred-ton crane coming. If we don't have those resources, we'll lose the utilization of that crane and we won't get the crane for another three months as well. So just explain why you've got people there. So again, this is all about keeping attractors, making sure they're trying to be optimum, timely, effective using of equipment, resources, and that's really what it's there for. So again, that equipment that's out there, it's almost a simple math exercise. Yes, if you've got an excavator sat there for a day, the cost of demobilising it and bringing it back is probably infinitely more infinitely more than it would be to actually keep it on site for a day or even a few days. So be ready to justify why that is the case. And again, allow the project manager, we should be able to use that in a week. Should we offhire it or we're planning on keeping it? What do you reckon? You don't know when you're going to give us access, but if it is within a week or two, then it's probably cheaper to keep it. If they then progressively delay you, well, you could justify, well, you never said it was yeah, with hindsight, you delayed us for eight weeks. We could have off hired it, but you didn't tell us it was going to be eight weeks. So be ready to justify and use the efficient use of plant of materials and resources, is what the contract is steering us towards.

SPEAKER_01 47:12

This, Glenn, is where context again comes into it. And you've sort of touched on that and you've talked about it being a mathematical sort of uh situation, but actually it's sort of supported by the risk and the consideration around why you are going to do something or not do something, remove plant or not remove it. That may be dependent on the context of what's going on within the region, within the UK, or on a global basis, it can be for a whole number of things. And I think that um if you're having that conversation with the project manager, you can sort of get to better informed decisions as to well, if we do do this, you know, technically we would remove this plant and we'd call it back in at date, whatever. The risk is we won't have that, or we won't have that resource as you touched upon. And if you're not actually managing those risks, you could have a bigger impact on the overall programme. So there has to be a discussion about that within the within any process, but also that reasoning needs to be retained so that in any retrospective view, or if you're looking at that picture in a snapshot, you can actually see why we've done what we've done.

SPEAKER_02 48:26

Yes, great point. And a and another opportunity would be an early warning to draw that context out, I think, and say, well, look, this has happened. We've got these extra costs as a result of that. One possible mitigation is to off-hire it, but then there's the maths. But then to David's point, well, what's the risk of being able to get it back and that availability as the clause introduces there? And we also have the program, of course. And in the program, we're supposed to show for each operation a statement of how we plan to do the work, identifying the principal equipment and other resources. So, again, there's another opportunity there to have that commentary and make sure your records tie back to it. And so we've got what we've planned and what we're doing and what we plan to do, kind of all kind of saying the same thing. So, yeah, all good points. Okay. I think we're on the just keep an eye on the questions. Yeah, that's the that takes us through to those. So that's that's all six of them

Audience Questions And Edge Cases

SPEAKER_02 49:26

covered. There is one question which I'm just gonna pop up now. I'm not, it's not my area of particular expertise, but uh question. I think we can probably answer this one. Adjudication and legal fees paid for an adjudication between the contractor and the subcontractor are not disallowed cost in any four option C, but under which component can these be paid? I'll have a quick stab at that one. I think that they're paid if you've got the the contractors' people working on that, then they are working on work under this contract. I think it's captured really by the broader definition of doing the ancillary things necessary under the definition of provide the works. So they are expending resources and under the people component, the the first component of the scheduled cost component. So those elements I think will be picked up there, subject to notifying the PM of the occurrence of this in the appropriate way, which is what would make it a disallow cost if you didn't. And then I guess the second element would be any payments that are eventually made to the subcontractor in accordance with their contract, which presumably would include the the elements of adjudication or or or ultimately tribunal that were had to be paid by the contractor to the subcontractor.

SPEAKER_00 50:43

Is that your reading, Mick, Glenn? I think so. Uh it's one of those where, like you, I'd be quite happy to now dive into my slightly more pristine book compared to yours. Um but yeah, we're not afraid to. Yeah, that's a good question. And I I'd have to go back and see where where would it sit because Gentile cost components is a little bit of a dark art when it's like, okay, yeah, I'd have to go back and refer to it and see where, okay, where would it fit?

SPEAKER_02 51:10

Okay, good stuff. Um we've got another one here before we sum up, just to bring another question in. Uh, thanks, thanks for this one, Gertie. So for contracts where the HGCRA, the Housing Grounds Construction Regeneration Act applies, does the statutory payment regime effectively require the employers to pay to sell out costs under an EC4, ECC where a pay less notice has not been served in time? I don't think so, because I think that my understanding of it, again, this is not legal advice and it's a little bit outside my area of expertise. We can put you in the direction of lots of good authorities on this, but my understanding of it is that this would apply after an amount have been certified. So because we're talking about the assessment of the amount due, which includes on option C, D, and E a forecast a defined cost. And defined cost, as we saw, is defined as the components in the scheduled cost components less disallowed cost. My view is it's is is part of the assessment of the of the amount. So I think that the act would apply after that's so after after that's happened. If you then try to withheld an element, then I think that would that would perhaps be what's subject to the payless notice. David and Glenn, you're clear you're sure you're more.

SPEAKER_00 52:26

That's my understanding, yeah. That's what I'd uh that's my understanding of it. So it's once the payment's been certified, it's what if the project manager, the client is going to pay less than that, that's when the payless notice applies.

SPEAKER_02 52:38

So so the the disallow cost is part of the ingredients of the assessment before we get to that point. It's it's part of what we arrive at in our assessment. Yeah, that that that's my understanding too. Okay, let's just do a little sum up then.

Practical Rules To Avoid Disallowance

SPEAKER_02 52:54

Do you want to kick us off, Claire? David, I'll let you um lead the way.

SPEAKER_01 52:58

Okay. I mean, obviously we've titled this avoiding disallowed costs, but it's really it's worth reiterating that the disallowed cost is not intended to be a penalty, but rather as a commercial control mechanism. And I know we've sort of spoke spoken about that in the round today. The reality is, bullet one, from a contractor's perspective, the most common reason for costs being disallowed is the submission of insufficient or adequately detailed records to properly demonstrate the defined cost expenditure. So that's why it's so important and capturing and relaying the right level of detail with the help will help mitigate against this issue. Moving on from that, it it's really just the simple actions that make a real difference from a contract management perspective. If we start with all parties having that clear pre-contract understanding, so having briefings that identify what may constitute a disallowed cost, and then by providing early work uh timely early warnings and compensation event notifications to avoid the risk of time uh time bar. And also, as we've touched on as well, keeping contemporaneous records that support defined cost expenditure and align with the payment applications, given due consideration for the context and narrative at that time. Because I think that that's one of the most important things. The that sort of additional leg to the process actually helps everyone understand the relevance and why you're going to come to the decisions you're going to come to. And we've mentioned working in collaboration, and even by building the application together with the project manager, you might actually address some of the challenges around the more complicated issues. And the other key thing I think that's come out of this, and you're looking at the um the process in the round, the whole process needs to be cascaded in the right way, in a consistent way, to the subcontractors and suppliers, so that everybody's singing off the same hymn hymn sheet on this one. So that's probably my starting point on this. We've we've got sort of maintain, we mentioned here, maintain a single shared truth. And the reality is by working together, you're going to find that uh sort of path a bit easier. We obviously see that there is a need to make sure that we get the records, you know, we plug the records into the programs, into the payment applications, and compensation event assessments. And that sort of collaboration with the project manager and his team makes sure that we are achieving agreement as we actually progress through this. When these basics are in place, payment assessments are significantly smoother, and that helps to develop a greater trust and assurance around the outcomes, which ultimately, as it says at the bottom, sort of creates a focus on actually delivering the works rather than just on the commercial challenges that sometimes arise. I don't know if anyone wants to add anything to that, but it it's it's very much from my perspective of actually understanding how all the bits fit together and you're not just making an isolated sort of decision on information that's not understood in the round.

SPEAKER_02 56:42

I think that's very well said, David. Yeah, and um yeah, I personally haven't got anything to add to that. I'll jump into questions if if you agree, James.

SPEAKER_00 56:51

Yeah, I was just thinking I I'd summarise that by saying set the rules from the outset, share the decisions being made along the way, and then justify the things. That's how I was just thinking we could summarize that.

SPEAKER_02 57:03

Yeah, and collaborate.

SPEAKER_00 57:05

Yeah.

SPEAKER_02 57:06

Yeah. Good stuff. Okay, so a couple of questions we haven't answered yet. I have been reading them. Let's have a quick look at this one from Owen. So uh scheduled cost components states an amount is included only if it's incurred in order to provide the works. If not incurred in order to provide the works, do you consider disallowed cost is not justified by accounts and records? Uh I think it's the latter. I think it never becomes a defined cost. So you don't get as far as disallowed because it's just it doesn't fall. It is worth checking that definition of provide the works because it is quite a broad. Remember, it's a defined term provide the works in the court clauses. So do do do take account of that. But yeah, it's um I I would say it doesn't get as far as disallowed cost because it's it's only a defined cost if it's in order to provide the works in the first place. And we've got a similar question from Reese here. So you mentioned earlier about costs not included in defined costs, the treatise is included in the fee. I did say that, yeah. Can we explore that in more detail? Sure. So if you're going to, I don't know, clean the site hut, uh clean the site huts, that there'll be a service for that, you know, that that may well be a defined cost. You're doing something in the in the site hut there, the site huts necessary in order to provide the works. If you are watering the plants in the contractor's head office, there's no way due to working areas and a few other reasons why that would ever meet one of the tests in the scheduler cost components, and therefore it must be uh in the fee. Have you got a better example, Glenn? I thought of that one up on the hoof, and it's perhaps not the best example, but I'd say the working area is a very important concept to read up on uh when you think about the context of the scheduled cost components.

SPEAKER_00 58:47

Yeah, it's well, I mean, yeah, it is as simple as if it doesn't fit within um the scheduler cost components, then go, it must be included within the fee. So bank charges, for example, that's not recoverable anywhere. Insurance premiums, that's not recoverable anywhere. So those kind of things by default would then be left to be picked up within the fee.

SPEAKER_02 59:10

Absolutely. Well, thank you for all your questions. I'm sorry we don't have a bit more time. I did exactly the same as I did last time.

Next Webinar And Closing

SPEAKER_02 59:16

I said to these gentlemen on the call that uh I'm sure we'll finish this early because there's not as much to talk about in this one, and we're already over time. So I'm gonna say so just briefly introduce you to the next one, episode 10, looking like the 8th of June at 4:30 p.m. on Monday, the 8th of June. And we're going to look at contractors' value engineering and and and the proposals from the contractor, both in terms of how we bring value engineering into the contract, but also uh how we might reduce the overall cost of the of the asset over its lifespan. So, yeah, it should be a really interesting one, and of course, we'll unlock the ways in which that value is shared with with the contractors as well. So, really important one to put in your diaries, and we look forward to seeing you then. I think we're slightly over. So, with that, thank you for attending. Thanks for all the questions. We will go through them after as well when we get a chance. And thank you to Clem. Thank you to David. Any closing on that? See you both.

SPEAKER_01 1:00:12

Until next time.

SPEAKER_02 1:00:14

Until next time. Thank you very much. Bye bye, have a good evening.