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/definitions">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 = <a href="/en/earned-value/definitions/price-for-work-done-to-date">PRICE FOR WORK DONE TO DATE</a> │ │ (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 <a href="/en/earned-value/definitions/compensation-event">CE</a> assessment on C and D)</td><td>Simplified: people rates per hour, percentage adjustments</td></tr></tbody></table></div><p>On an Option C contract, you use the SCC for monthly payments but you might use the SSCC for assessing compensation events if the contract says so. Check Contract Data Part 1. Getting this wrong means you're using the wrong cost components to build your CE quotations.</p><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 (28 September 2025), 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 (poor workmanship, clause 11.2(26))</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>Target (from contract): £20M total, month 6 <a href="/en/earned-value/definitions/planned-value">PV</a> baseline = £6,100,000</li><li>Physical progress (weighted milestones): 28.5%</li><li><a href="/en/earned-value/definitions/earned-value">EV</a> = £20M x 0.285 = £5,700,000</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><p>The CPI of 0.972 tells us Amey is spending slightly more than the value they're earning. For every pound of earned value, they're spending £1.03. That's a manageable overrun at this stage, but it needs watching.</p><p>Notice: the £78,000 of Disallowed Cost isn't in AC. It was spent, but the contract doesn't recognise it. That's money out of Amey's pocket. It comes straight off the Contractor's share.</p></div><h2 id="why-defined-cost-matters-for-evm">Why Defined Cost Matters for EVM</h2><p>Three reasons, and the third one is the one most teams miss.</p><p><strong>First</strong>, Defined Cost is your AC on <a href="/en/earned-value/definitions/target-cost">target cost</a> contracts. If you're tracking <a href="/en/earned-value/definitions/cost-performance-index">CPI</a> and <a href="/en/earned-value/definitions/schedule-performance-index">SPI</a>, the cost side of every formula flows from Defined Cost. Get the cost components wrong and your entire EVM dataset is unreliable.</p><p><strong>Second</strong>, Disallowed Cost is a direct hit to the contractor's margin. It's excluded from Defined Cost, which means it doesn't count towards the PWDD, which means the contractor absorbs it entirely. On the pain/gain share, that's a pound-for-pound loss. I've seen £500K of Disallowed Cost on a single NEC4 project due to inadequate records. That's not a rounding error. That's profit evaporating.</p><p><strong>Third</strong>, and this is the one people miss, Defined Cost determines the accuracy of your <a href="/en/earned-value/definitions/estimate-at-completion">EAC</a>. If Disallowed Costs are rising month on month, your AC trend is actually understating total expenditure. The contractor is spending more than Defined Cost shows, but the disallowed portions are invisible to the EVM system. You need a separate tracker for Disallowed Cost to see the full picture.</p><h2 id="the-records-problem">The Records Problem</h2><p>Defined Cost requires evidence. Every pound claimed must be supported by records.</p><p>On NEC4 Option C, clause 52.2 requires the contractor to keep records that allow the Project Manager to verify Defined Cost. If you can't evidence a cost, it gets disallowed. Simple as that.</p><p>This is where site diaries become commercially critical. A well-maintained diary records who was on site, what plant was deployed, what work was done, and crucially what instructions were given. Without that, the PM has grounds to disallow costs under clause 11.2(26), "cost which the contract does not require the Contractor to pay" or "cost not justified by the Contractor's records."</p><p>I've seen commercial teams lose arguments over six-figure sums because their site records didn't match their cost claims. The money was genuinely spent. The work was genuinely done. But they couldn't prove it to the PM's satisfaction.</p><h2 id="common-mistakes">Common Mistakes</h2><ol><li><strong>Including Disallowed Cost in AC for EVM.</strong> Defined Cost already has Disallowed Cost stripped out. If you're using raw expenditure as AC rather than Defined Cost, your CPI will be artificially low. Use Defined Cost as AC, and track Disallowed Cost separately.</li></ol><ol><li><strong>Confusing the SCC with the SSCC.</strong> The full Schedule of Cost Components is for monthly PWDD on Options C and D. The Shorter Schedule is for CE assessment. Different schedules, different rates, different outcomes. Using the SSCC to compile monthly costs will produce wrong numbers.</li></ol><ol><li><strong>Forgetting the fee is separate from Defined Cost.</strong> The fee percentage covers head office overheads and profit. It's applied on top of Defined Cost to calculate PWDD. In EVM terms, the fee should be in your <a href="/en/earned-value/definitions/budget-at-completion">BAC</a> but it's a separate line item from AC. Don't double-count it.</li></ol><ol><li><strong>Not reconciling Defined Cost to the cost ledger.</strong> Your finance system tracks total expenditure. Defined Cost is a subset of that (minus Disallowed Cost, plus timing adjustments). If you can't reconcile the two, you've got a data integrity problem that will undermine every EVM metric downstream.</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, giving you accurate earned value data without manual spreadsheet updates. <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. The key distinction is that Defined Cost has already had Disallowed Cost removed. In EVM, your AC should reflect what the contract recognises as legitimate expenditure, not total spend.</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, what the contractor is expected to spend. On Option C, the pain/gain share mechanism compares final Defined Cost against the Prices (the target). If Defined Cost exceeds the target, the contractor absorbs a share of the overrun.</p><h3>Does the fee count as Defined Cost?</h3><p>No. Fee is applied on top of Defined Cost. Defined Cost + Fee = PWDD. The fee covers head office overheads and profit. It's a percentage stated in Contract Data Part 1, typically 6% to 12%. In your EVM model, include the fee in <a href="/en/earned-value/definitions/budget-at-completion">BAC</a> as a separate allowance.</p><h3>How do I handle Disallowed Cost in my EVM reporting?</h3><p>Exclude it from AC (it's already excluded from Defined Cost). But track it separately as a risk metric. Rising Disallowed Costs mean the contractor's records or practices are failing, and the real expenditure is higher than what the EVM system shows. Report Disallowed Cost alongside CPI in your monthly <a href="/en/earned-value/report-template">earned value report</a>.</p></article></div>