What Is Defined Cost in NEC4? Actual Cost for EVM

<div class="ge-article-wrapper"> <nav class="ge-toc" aria-label="Table of contents"> <p class="ge-toc-label">In this article</p> <ul class="ge-toc-list"> <li><a href="#the-definition">The Definition</a></li> <li><a href="#whats-inside-defined-cost">What's Inside Defined Cost</a></li> <li><a href="#scc-vs-sscc-which-one-applies">SCC vs SSCC: Which One Applies?</a></li> <li><a href="#worked-example-20m-option-c-at-month-6">Worked Example: £20M Option C at Month 6</a></li> <li><a href="#why-defined-cost-matters-for-evm">Why Defined Cost Matters for EVM</a></li> <li><a href="#the-records-problem">The Records Problem</a></li> <li><a href="#common-mistakes">Common Mistakes</a></li> <li><a href="#frequently-asked-questions">Frequently Asked Questions</a></li> </ul> </nav> <article class="ge-article-body"> <p>Defined Cost is the NEC4 term for the actual, reimbursable costs of providing the works. If you're running <a href="/en/earned-value">earned value management</a> on an NEC4 Option C or D contract, Defined Cost is your <a href="/en/earned-value/definitions/actual-cost">Actual Cost (AC)</a>. Same concept, different language. The EVM textbook says AC. The contract says Defined Cost. Understand both or your reporting will confuse everyone in the room.</p> <p>The reason Defined Cost deserves its own page is that it's not just "what you spent." It's what the contract says you're allowed to claim you spent. There's a difference. And that difference, the gap between total expenditure and Defined Cost, is where <a href="/en/earned-value/definitions/disallowed-cost">Disallowed Cost</a> lives.</p> <p>This page is part of the <a href="/en/earned-value/definitions">earned value definitions glossary</a>. For the full formula reference, see the <a href="/en/earned-value/formulas">earned value formulas page</a>.</p> <h2 id="the-definition">The Definition</h2> <div class="ge-formula-box ge-anim"><span class="ge-formula-label">Formula</span><code>Defined Cost = the cost of the components in the Schedule of Cost Components (or Shorter Schedule of Cost Components) less Disallowed Cost</code></div> <p>That's clause 11.2(23) in NEC4. It's deceptively simple.</p> <p>The Schedule of Cost Components (SCC) lists what counts as a cost. The Shorter Schedule of Cost Components (SSCC) is the simplified version used for assessing compensation events on Options A and B. On Option C, the full SCC governs payment of the contractor's actual costs, and every line item in that schedule is a potential battleground.</p> <h2 id="whats-inside-defined-cost">What's Inside Defined Cost</h2> <p>Here's the breakdown. Each component maps to the SCC:</p> <pre class="ge-ascii-diagram ge-anim"> ┌──────────────────────────────────────────────────────┐ │ DEFINED COST COMPONENTS │ │ (Schedule of Cost Components) │ │ │ │ ┌─────────────┐ ┌─────────────┐ ┌──────────────┐ │ │ │ PEOPLE │ │ EQUIPMENT │ │ SUBCONTRACT │ │ │ │ │ │ &amp; PLANT │ │ COSTS │ │ │ │ Staff wages │ │ Owned plant │ │ Subcontractor│ │ │ │ NI, pension │ │ Hired plant │ │ amounts due │ │ │ │ Travel, hotel│ │ Consumables │ │ under their │ │ │ │ Training │ │ Maintenance │ │ subcontracts │ │ │ └──────┬──────┘ └──────┬──────┘ └──────┬───────┘ │ │ │ │ │ │ │ v v v │ │ ┌─────────────────────────────────────────────────┐ │ │ │ + CHARGES (insurance, bonds, design fees) │ │ │ │ + MANUFACTURE AND FABRICATION │ │ │ │ + DESIGN (if contractor-designed portions) │ │ │ └────────────────────┬────────────────────────────┘ │ │ │ │ │ v │ │ ┌─────────────────────────────────────────────────┐ │ │ │ TOTAL COST COMPONENTS │ │ │ │ │ │ │ │ minus DISALLOWED COST (clause 11.2(26)) │ │ │ │ = DEFINED COST │ │ │ └─────────────────────────────────────────────────┘ │ │ │ │ DEFINED COST + FEE = PRICE FOR WORK DONE TO DATE │ │ (PWDD) │ └──────────────────────────────────────────────────────┘ </pre> <p>The fee sits on top of Defined Cost. It covers head office overheads and profit, applied as a percentage stated in the Contract Data. On a typical NEC4 Option C contract, fee percentages run between 6% and 12%.</p> <h2 id="scc-vs-sscc-which-one-applies">SCC vs SSCC: Which One Applies?</h2> <p>This confuses people. Constantly.</p> <div class="ge-table-wrap ge-anim"><table class="ge-table"> <thead> <tr> <th>Schedule</th> <th>Used For</th> <th>Applies To</th> <th>Level of Detail</th> </tr> </thead> <tbody> <tr> <td><strong>Schedule of Cost Components (SCC)</strong></td> <td>Calculating monthly PWDD (actual cost reimbursement)</td> <td>Option C and D contracts</td> <td>Full breakdown: named staff rates, plant schedules, actual subcontract costs</td> </tr> <tr> <td><strong>Shorter Schedule of Cost Components (SSCC)</strong></td> <td>Assessing compensation events</td> <td>Options A and B (and CE assessment on C and D)</td> <td>Simplified: people rates per hour, percentage adjustments</td> </tr> </tbody> </table></div> <h2 id="worked-example-20m-option-c-at-month-6">Worked Example: £20M Option C at Month 6</h2> <span class="ge-worked-label">Worked Example</span> <div class="ge-callout ge-anim"> <p><strong>Scenario:</strong> Amey is delivering a £20M NEC4 Option C highways maintenance package in Yorkshire. At the month 6 assessment date, the commercial team compiles the Defined Cost submission.</p> <p><strong>Cost component breakdown:</strong></p> <div class="ge-table-wrap ge-anim"><table class="ge-table"> <thead> <tr><th>Component</th><th>Amount</th><th>Notes</th></tr> </thead> <tbody> <tr><td>People (directly employed)</td><td>£1,840,000</td><td>38 staff on site, rates per SCC</td></tr> <tr><td>Equipment and plant</td><td>£620,000</td><td>4 excavators, traffic management fleet</td></tr> <tr><td>Subcontract costs</td><td>£3,200,000</td><td>Surfacing sub, drainage sub, VRS sub</td></tr> <tr><td>Charges (insurance, bonds)</td><td>£185,000</td><td>CAR insurance, performance bond</td></tr> <tr><td>Design costs</td><td>£95,000</td><td>Temporary works design</td></tr> <tr><td><strong>Total cost components</strong></td><td><strong>£5,940,000</strong></td><td></td></tr> <tr><td>Less: Disallowed Cost</td><td>(£78,000)</td><td>PM disallowed cost of rework on drainage</td></tr> <tr><td><strong>Defined Cost</strong></td><td><strong>£5,862,000</strong></td><td></td></tr> <tr><td>Fee (8.5%)</td><td>£498,270</td><td></td></tr> <tr><td><strong>PWDD</strong></td><td><strong>£6,360,270</strong></td><td></td></tr> </tbody> </table></div> <p><strong>EVM mapping:</strong></p> <ul> <li><a href="/en/earned-value/definitions/actual-cost">AC</a> = £5,862,000 (Defined Cost, excluding fee)</li> <li><a href="/en/earned-value/definitions/cost-performance-index">CPI</a> = £5,700,000 / £5,862,000 = <strong>0.972</strong></li> </ul> </div> <h2 id="why-defined-cost-matters-for-evm">Why Defined Cost Matters for EVM</h2> <p><strong>First</strong>, Defined Cost is your AC on target cost contracts.</p> <p><strong>Second</strong>, Disallowed Cost is a direct hit to the contractor's margin.</p> <p><strong>Third</strong>, Defined Cost determines the accuracy of your <a href="/en/earned-value/definitions/estimate-at-completion">EAC</a>.</p> <h2 id="the-records-problem">The Records Problem</h2> <p>Defined Cost requires evidence. Every pound claimed must be supported by records. On NEC4 Option C, clause 52.2 requires the contractor to keep records that allow the Project Manager to verify Defined Cost.</p> <h2 id="common-mistakes">Common Mistakes</h2> <ol> <li><strong>Including Disallowed Cost in AC for EVM.</strong> Use Defined Cost as AC, and track Disallowed Cost separately.</li> <li><strong>Confusing the SCC with the SSCC.</strong> Different schedules, different rates, different outcomes.</li> <li><strong>Forgetting the fee is separate from Defined Cost.</strong> Don't double-count it.</li> <li><strong>Not reconciling Defined Cost to the cost ledger.</strong></li> </ol> <div class="ge-product-note ge-anim"> <p><strong>How Gather helps.</strong> Gather's AI reads your site diaries daily and maps progress against your cost-loaded programme. <a href="https://gatherinsights.com/contact">Book a demo</a> to see it working on a live NEC4 project.</p> </div> <h2 id="frequently-asked-questions">Frequently Asked Questions</h2> <h3>Is Defined Cost the same as Actual Cost in EVM?</h3> <p>On NEC4 Options C and D, yes, Defined Cost maps directly to <a href="/en/earned-value/definitions/actual-cost">AC</a> in earned value terminology.</p> <h3>What's the difference between Defined Cost and the Prices?</h3> <p>Defined Cost is what the contractor actually spent (minus disallowed amounts). The Prices are the target.</p> <h3>Does the fee count as Defined Cost?</h3> <p>No. Fee is applied on top of Defined Cost. Defined Cost + Fee = PWDD.</p> <h3>How do I handle Disallowed Cost in my EVM reporting?</h3> <p>Exclude it from AC. But track it separately as a risk metric.</p> </article> </div>