Disallowed Costs In NEC4 Cost Contracts Explained

Good afternoon everyone and a very warm welcome to our next webinar with SECA and GABA. And this is episode 9, we're just chatting how time is flying and done a year of these webinars 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 warm welcome from myself, Glenn Hyde of GMH Planning, and joined today by Ben Walker from Gather 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, 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 plan for today's webinar. David, over to you, just to hear a little bit about SECA.

Thanks, Ben. Hi, I'm David Allen, the Executive Director for SECA 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 Glen 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 webinar, our event. Just a quick reminder about CICA and who we are. Using our full title, the Civil Engineering Contractors Association, we are a not-for-profit body who represent many of those contractors that deliver, maintain a significant part of our mainland UK infrastructure. CICA 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 SECA website. As I've noted this is previously, this is a series of NEC webinars that support our SECA 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 SECA member and the wider NEC4 user awareness, promoting the appropriate and equitable use of it that will hopefully deliver more assured outcomes for all. I'll now hand you over to Ben at Gather.

Thank you, David. Thank you, Glen. 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 cost 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 6 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 Zed Clause 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 use the slides, use the information as a prompt to go and look it up in your contract, because obviously we can only show abridged versions here of the clauses and the points, and it's well worth reading them firsthand. We'll sum up with some final thoughts, and David will help us with that bit, and then we'll jump into a questions and answers session where we should have plenty of time at the end there. So please do keep your questions coming in as we go. We will keep an eye on them and 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 in 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 fulfill certain procedural obligations relating to procurement, early warning, or dispute. Cost of correcting defects after completion which infers that correcting defects before completion is indeed allowable, and that's the case. But again, check your Z 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. It's just 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 plant and materials not used after reasonable wastage and resources not used after allowing for reasonable utilisation and availability. And finally, that preparation of conduct of a dispute between the parties. Again, I make that point about referring to NEC for the full wording. Glen, what's the definition for Option F?

Yeah, it's similar, and I think we've included this just for completeness, but in truth, F is very rarely used. But it is there as an option, so we, we thought we'd cover it anyway. You could see there's very similar— it's slightly less now. Option F is more of a management contract where traditionally contractor will be managing a series of subcontract packages on behalf of a client. 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 for 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 less, and there's one picked up there where the contractor was meant to do it themselves and 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. But F, you've got that definition as well should you need it.

Yeah, and as you say, Glenn, it being largely the work here is subcontracted. If those subcontracts are NEC, 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 the payments being vetted for those sorts of things. So the kind of similar principles will just flow down through a different channel. So why do we need disallowed cost? 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, 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 priced contract with activity schedule. Option B is a priced 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, and paying it, 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 and assessment. And compensation events, if you think about them, they're each mutually exclusive, fully assessed, kind of complete assessments of something. And I guess that the rigor around that is fairly substantial. We've got the ability to instruct revised 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 payment's a little bit different, isn't it? If we turn our attention to Options 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, the day-to-day payment for the works, and for the assessment of compensation amounts. Now again, The assessment compensation follows the same rules basically as Option A and B. A lot of it is core 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, at those that we had a look at in the last couple of slides. And that's what we want to unpick and understand how they come about, how to protect against them, and make sure that we get it right and we get the right answers, as David said in the intro. Over to you, Glen.

So yeah, carrying on with why we need them. So disallowed costs will then be part of the definition of defined costs for our cost reimbursable type contracts, which is obviously our C, D, E, and F. So for C, D, and E, the defined cost is the cost of the components in the schedule of cost components less any disallowed cost. And a very similar definition there for option F as well, but it's payment to subcontract some prices were done by contractor less again any disallowed costs. So when we're looking at main option C, D, E, and F, again the work is cumulative. So the price we're done today is based on the cumulative forecast defined cost plus the fee. And defined cost is used for payment and for compensation assessments. And the disallowed cost element is just to make sure that whilst the contractor is being paid on a cost reimbursable basis, there is some control that the client's got. Said, hang on, 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, 2 of them, 3 of them, 6 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, going to get recovery for what they 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, hang on, you've incurred more cost than we needed to there. Now in some ways with Options C and D, with the target cost mechanism, I'd say the contractor's arguably more incentivised not to waste money, but with Option E, arguably less incentive not to waste money because all they're going to do is earn fee on turnover. So arguably the more they spend with it, 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 going to run through the elements that would specifically be disallowed.

Thanks, Glenn. We've heard about what disallowed costs are and we're going to unpack them a little bit more in a moment. We know where they're used, Options C, D, or E. We know that they are part of the definition of defined cost and we know that Options C, D, and E, that's the basis for payment, the forecast defined cost to the 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. 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 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 disallowance costs creeping 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 Contractor's Application the 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 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— Glen and I and 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 programme which is going to substantiate a big chunk of that forecast. Doing it together helps a great deal so that none of it is a shock. The second bit would be costs 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 schedule 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, 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 programme and said, well, your assessment's predicated on an assumption you're going to do X metres a day and the best you've ever done is 10% less than that. So I think you're you're slightly too high in your accrual there, all the way around the course. So it could be a change is necessary. And the fourth bit that I would see would be the costs the project manager assesses 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 there? Glen, David?

No, I was just thinking that obviously this is the project manager's job to do because 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, contractors shouldn't be asking for things they're 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 would be disallowed, because I doubt the Garchad is going to offer them up for the project manager to say, yeah, I agree, I shouldn't be paying that.

Just add into that, 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 that— submitted those costs and that application. So it might be that's an indication that the picture is 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 of sort of bigger sort of discussion around that.

And some project managers would actually give the contractor a very quick second bite at 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 good practice, something that You know, the spirit of contracts does work quite nicely, but not always time for that.

You've actually made me think of 3 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 if we can, if we can get the payment application in the form that's anticipated, that might help. A great deal. The second thing is in Options C, D, and E, 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 programme 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.

Yeah.

Okay.

Okay. Over to you, Glenn. Good to take us through the first of those bullet points.

Yes, 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 open book. It's, it's fully open book, and you've got to prove the cost that 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 has been incurred 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 the costs 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 can easily provide. So this is 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 the client's team to have to see and understand, you know, the yes, is that, is that sufficient. So here, just looking across the table, so in terms of you know, not justified by contracts, record accounts, you know, people. So we've got salaries and the wages, the time, the time worked. So do we need access to payroll? We've also got little things like GDPR rules to contend with in terms of what information can we give and what we're not 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 timesheets, allocation sheets, Those are the kind of records that 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, whether it's PPE, whether it's pension contributions. So we need to think about evidence of that. When it comes to equipment, so we've got the hire or rental of equipment multiplied by the time for which it is required. And very importantly, you know, it's how long we actually need it for. And again, it's justifying that we've got the, the right time for that equipment, we've not wasted equipment. So again, timesheets, narratives on the requirements, 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 off-hire it for 7 hours, and the client can't expect just to pay for 1 hour because the equipment was needed over 2 days, albeit it was only an hour a day. So just heading off some of these questions otherwise that might be, might be sort of made or considered that could otherwise be sort of disallowed. With the other categories, plant and materials, so what payments are made, again looking at accounts or records with suppliers, Subcontractors— this was a new element added into NEC4. So previously you had to build up subcontractor cost in line with all the other elements. Now they can be included as a lump sum element. But a lot of it is coming back to, to records. When contractors are doing manufacture fabrication or doing design themselves for plant and materials or works of equipment, then what, what the, 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 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 Schedule of 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. Back to records then, isn't it?

Yeah, absolutely. I would come on to that, as you might have predicted. But yeah, defined cost— just point out Clause 52.1 is relevant here. 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 HVAC or pumps or generators that are left in the works. Escalators, air conditioning units, that sort of thing. Equipment is not passed through as real cost. It's typically— there are some exceptions, but typically it's the equivalent higher rental rate. And my understanding, Glen, is this was really to recognise 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 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 rulebook. And in this case, it's the schedule of cost components. So that schedule of cost components, which is sort of— sorry, my book's really seen better days. It's really rapidly 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 rulebook for defined costs. So if you can't put a cost into there, then it must be in your fee. That's kind of the test. And that is a mixture. So plant and materials there, Glen 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 pass-through, whereas some of these other items are proxies to make things administratively convenient. 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 all that kind of comes together in support of that table that Glen's just taken us through. Anything further, guys, or we'll move on to subcontractors. It's good. I think everything we're saying is kind of relevant to all of it. So just coming on to the subcontractor bit. So this is another bullet in that, in that list of 6 things. So 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, once you have that, they are also tested in the schedule of cost components differently to suppliers of plant and material. And this is one of the reasons under Clause 26.4 in main options C, D, or E that you have to submit 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, 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 subcontractor's application and then have an element of that cost disallowed in the, 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, for those of you using communication system. 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 did have a count. There's 28 in NEC3. 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 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 drawings, 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— 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 when 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 on LinkedIn. It's just a little bit of additional guidance to the— would it be Volume 2, Chapter 3, 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 showing, 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 on this slide compared with the previous one. But really you are not just capturing those accounts and records aligned to the schedule of cost components, but you are 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 plant and materials. Okay, that's a little bit on that. Anything further to say on subcontractors, guys?

No, I've seen, 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. So although there might have been a benefit for the project, I mean, then becomes a disallowed cost to the 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.

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

Yeah, that's a great example, Glen. And I think you're spot on, David.

Yeah.

Okay. Over to you, Glen.

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 because the contractor did not— and then we got— follow an acceptance or procurement procedure stated in the scope. Now I think that one's relatively clear, relatively black and white. 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, that the client might say, well, we need 3— we need to see you've gone to 3 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 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 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 5 years. You've never once done that X in 5 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 adjudication tribunal with a subcontractor or supplier. So if you have a supply chain and 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.

You did get the most complicated slide there, Glen. That's the trick.

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

But it might be worth giving some color to the early warning one. So I mean, the one I always do in training, hypothetical on each training is, you know, not being made aware of the potential for redundant utility apparatus through a field. So if you're doing a drainage run and you hit some utility that wasn't on the plans and 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 the site previously. It's those kinds of things that suddenly it's not so difficult to demonstrate. Well, you absolutely thought there could be and you didn't notify. I know the audit is clear-cut at that point. So how does that pan out? Well, we know that 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 quite often people think that's where the sanction starts and stops, and actually no, in Options C, D, and E there's also this other element to it, which is an F of course, where the costs are disallowed as well. So just again, Glen's said there, it's sort of dealing in the hypothetical a little bit. In the training I normally give the example of, well, if we hadn't known 2 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 would 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 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 Glen said, if in doubt, there's, you know, early warnings are fairly useful things. Why not operate it properly? So yeah, it's quite important on that. Good stuff. Right, what's next? I think it's defects, isn't it? Yes. So it's loud cost of defects. I think Glen was biting your tongue there 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, Glen, because Clearly got a story you want to share. So we could— correcting defects after completion, absolutely. That, that does infer that correcting defects before completion is not a disallowed cost, and that is the case. However, check your ZEG clauses. For whatever reason, some clients do tweak this. I think I have more sympathy when they do it for Option E. For Options A and B, of course, we're we're not talking about A and B today, but for options A and B, your core requirement, of course, 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 option 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 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, 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 avoiding the word snagging because we don't use the word snagging, but the things that we— that 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, 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 contractor has done all the works which the scope states are to be done 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. Glen, you're going to give us an example of not complying with the constraint, I think.

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

No, I always thought of things like— the one I kind of remember is if you're laying like a slurry seal on a cycleway or something and it says don't lay this below 10 degrees, it feels like a constraint in the scope to me. And if you go and lay it in -2 and it peels, then I think that's probably a candidate for a disallowed cost to have to go and fix it. But yeah, 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 hard either day either 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. I think you're right.

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 right outcomes. 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, mine's 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, Glen, and I'm sure we'll read some questions.

Sure. Another very important one is wastage and underutilisation. 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 utilisation. So this really is coming down to sort of records, particularly the resources one. The plant and materials— what is reasonable wastage? It will be subjective, and different materials have different kinds of wastage. You know, some material, you know, 40% wastage might not be ridiculous. Other materials, you know, you should be able to order very close and there should be minimal wastage, you know, 5% wastage if that. So 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, sheet 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 sheets of ply, and every day, you know, oh, there's a bit of 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, 8 pallet loads of bricks and you only needed 1 pallet load, well, there's 7 wasted. And, you know, so that would have a very good shout for wasted material. They're not going to end up in the permanent works. Resources not used after allowing for reasonable availability and utilisation, 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 going to get them back. So allow the project manager the decision process. We're planning on keeping them because if we let them go, we might not get them back. And when they— when we do get to do these works, it's going to hit it hard and it's programme critical. We've got a 100-tonne crane coming. If we don't have those resources, we'll lose the utilisation of that crane and we won't get the crane for another 3 months as well. So just explain why you've got people there. So again, this is all about keeping good tractors, 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 sat 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 off-hire it? Or we're planning on keeping it, what do you reckon? You don't know when you're going to give us access. If it is within a week or two, then it's probably cheaper to keep it. If they then progressively delay you, well, you can justify, well, you never said it was— yeah, with hindsight, you delayed this for 8 weeks. We could have offhired it, but you didn't tell us it was going to be 8 weeks. So be ready to justify and use the efficient use of plant and materials and resources is what the contract is steering us towards.

This, Glenn, is where context again comes into it, and you've sort of touched on that and you've talked talks 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 But 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 can have a bigger impact on the overall program. So there has to be a discussion about that. Within any, 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.

Yes, great point. 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 programme, of course, and in the programme 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. So we've got what we planned, 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. That's all 6 of them covered. There is one question which I'm just going to pop up now. I'm not It's not my area of particular expertise, but thank you very much for the 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 costs in any form, 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 contractor's 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 under the people component, the first component of the schedule of cost components. 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 disallowed 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 elements of adjudication or ultimately tribunal that had to be paid by the contractor to the subcontractor. Is that your reading, Mick Glen?

I think so. 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. But yeah, we're not afraid to— yeah, that's a good question. I'd have to go back and see where would it sit, because generally the cost components is a little bit of a dark art, and it's like, okay, yeah, I'd have to go back and refer to it and see where would it fit.

Okay, good stuff. We've got another one here before we sum up, just to bring another question in. Thanks for this one, Gertie. So for contracts where the HGCR Act, Housing Grounds Construction Regeneration Act, applies, Does the statutory payment regime effectively require the employers to pay disallowable costs under an EC4 ECC where a payless 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, after an amount of being certified. So because we're talking about the assessment of the amount due, which includes on Option C, D, and E, a forecasted defined cost. And defined cost, as we saw, is defined as the components in the schedule of cost components less disallowed cost. My view is it's part of the assessment of the amount. So I think that the Act would apply after that's happened, if you then tried to withhold an element. Then I think that would perhaps be what's subject to the pay less notice. David and Glen, you're likely— I'm sure you're more—

That's my understanding, yeah. 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 pay less notice applies.

So the disallowed cost is part of the ingredients of the assessment before we get to that point. It's part of what we arrive at in our assessment. Yeah, that's my understanding too. Okay, let's just do a little sum up then. Do you want to kick us off, David?

I'll let you lead the way. 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 spoken about that. In the round today. The reality is, bullet 1, from a contractor's perspective, the most common reason for costs being disallowed is the submission of insufficient or inadequately detailed records to properly demonstrate the defined cost expenditure. So that's why it's so important in capturing and relaying the right level of detail with the help will help mitigate against this issue. Moving on from that, 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— timely early warnings and compensation event notifications to avoid the risk of time, 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 into the process actually helps everyone understand the relevance and more 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 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 sheet on this one. So that's probably my starting point on this. We've got to maintain— we mentioned here— maintain a single shared truth and The reality is by working together, you're going to find that 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 programmes, 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'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.

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

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

Yeah. And collaborate. Yeah.

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 Schedule of 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? 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 core clauses. So do, do, do take account of that, but Yeah, it's— I would say it doesn't get as far as disallowed cost because 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 Rhys here. So you mentioned earlier about costs not included in defined cost that treat as 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, clean the site huts, that there'll be a service for that, you know, that may well be a defined cost. You're doing something in the site hut there, the site hut's 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 schedule of cost components, and therefore it must be in the fee. Have you got a better example, Glen? I thought of that one up on the hoof, but it's perhaps not the best example. But I'd say the working area is a very important concept to read up on when you think about the context of the Schedule of Cost Components.

Yes, well, I mean, yeah, it is as simple as if it doesn't fit within the Schedule of 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 covered anywhere. So those kind of things by default would then be left to be picked up within the fee.

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. I said to these gentlemen on the call that 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'd say— so just briefly introduce you to the next one, episode 10, looking like the 8th of June at 4:30 PM on Monday the 8th of June. And we're going to look at contractors' value engineering and the proposals from the contractor, both in terms of how we bring value engineering into the contract, but also how we might reduce the overall cost 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 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 remarks?

Thank you, William, to you both. Until next time.

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