NEC4 Disallowed cost: applying the definition and supporting the records

A queried cost needs two separate checks: does it qualify under the contract, and do the accounts and records substantiate it? A well-documented expense can still be excluded. Equally, a missing diary entry does not by itself establish that every other record of the cost is worthless.

This article concerns NEC4 Engineering and Construction Contract (ECC) Options C, D and E. Option F has a different definition and must be checked separately. The defined term is Disallowed cost; it is not a general power to reduce an application whenever the reviewer is dissatisfied.

Start with the correct definition

For Options C, D and E, Disallowed cost is defined at clause 11.2(26). Option F uses clause 11.2(27). Options A and B do not use this Disallowed cost definition, although their Defined Cost and compensation-event assessment rules still constrain what is recoverable.

Apply the actual wording to the cost in question. The definition covers several distinct grounds, not just missing records. They include insufficient substantiation, amounts that should not have been paid under a subcontract or supply contract, and particular costs caused by failures to follow specified procedures or give a required early warning.

Do not turn specific exclusions into blanket rules

Defect correction is not automatically disallowed whenever the Contractor caused the Defect. For Options C–E, distinguish correction after Completion from correction caused by failure to comply with a constraint on how the works are provided in the Scope. A general statement that all pre-Completion rework is excluded is wrong.

For unused Plant and Materials, consider reasonable wastage and the exception concerning a change to Scope. For other unused resources, consider reasonable availability and utilisation and the rule about removal from the Working Areas. Idle time needs explanation; it is not automatically excluded in every circumstance.

Costs covered by the Fee must not also be included in Defined Cost. That boundary follows the applicable cost-component and Fee provisions; it should not be presented as an extra bullet added to the Disallowed cost definition.

Build an evidence trail the reviewer can follow

Connect each queried entry to the work, the relevant cost component and the original source records. Depending on the cost, that may mean timesheets, payroll information, hire records, delivery documents, subcontract assessments, invoices and site records. No single document automatically proves every element of entitlement.

• Use consistent activity, location and cost references.
• Explain changes in resource use and periods of standing time.
• Reconcile conflicting entries rather than deleting the original record.
• Check subcontract payments against the subcontract terms.
• Distinguish missing evidence from a contractual exclusion.

Agree a practical presentation of records early and comply with any additional requirements in the Scope. A preferred spreadsheet format or activity code is not itself a universal NEC condition for payment.

An illustrative review

Suppose a review queries £94,000: £41,000 of plant, £30,000 of labour and £23,000 paid beyond a subcontractor’s contractual entitlement. These figures illustrate the review process; they are not a reported customer result.

The team should investigate the plant and labour records and the applicable cost rules. Better evidence may resolve those queries, but the review must still consider utilisation, the work performed and any exclusions. Evidence that the £23,000 was paid does not make an otherwise excluded overpayment recoverable. A diary improves the evidence trail; it does not change the contract.

Respond to a deduction precisely

Ask which provision is being applied, to what amount, and on what factual basis. Respond with the records and contractual reasoning relevant to that issue. Keep interim assessment, finalisation of Defined Cost, final assessment and dispute procedures distinct; a later correction may depend on the stage reached and the applicable notices or time limits.

For target contracts, calculate the effect on payment and the Contractor’s share separately. Do not describe every disallowed pound as an additional pound of lost gain. The result depends on the share mechanism and figures.

See Gather’s Disallowed cost reference and NEC4 payment guide for the related processes. Gather helps teams organise the site records used in these reviews. Explore Gather’s site records.

Sources and further reading

• NEC: Disallowed costs and the contractual definition
• GMH Planning/CECA bulletin 31: Disallowed costs
• GMH Planning webinar with Ben Walker: Disallowed cost

These sources explain standard provisions. Check the contract form, edition, incorporated amendments, options, Contract Data and any Z clauses for the project.

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