What Is Disallowed Cost in NEC4? Clause 11.2(26) Guide

<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-grounds-for-disallowance">The Grounds for Disallowance</a></li> <li><a href="#how-it-works-in-practice">How It Works in Practice</a></li> <li><a href="#worked-example-500k-disallowed-on-an-18m-project">Worked Example: £500K Disallowed on an £18M Project</a></li> <li><a href="#the-records-problem-and-why-its-worth-solving">The Records Problem (and Why It's Worth Solving)</a></li> <li><a href="#the-pain-gain-impact">The Pain/Gain Impact</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>Disallowed Cost is money the contractor has spent but the Project Manager won't reimburse. It's the NEC4 mechanism for ensuring the employer doesn't pay for the contractor's mistakes, waste, or failures. Under clause 11.2(26), there are specific grounds on which a cost becomes disallowed, and "inadequate records" is the one that catches more commercial teams than any other.</p> <p>On an NEC4 Option C contract, Disallowed Cost is subtracted from <a href="/en/earned-value/definitions/defined-cost">Defined Cost</a> before the Price for Work Done to Date (PWDD) is calculated. In <a href="/en/earned-value">earned value management</a> terms, Disallowed Cost is the gap between what the contractor actually spent and what counts as <a href="/en/earned-value/definitions/actual-cost">Actual Cost (AC)</a>. That gap comes directly off the contractor's margin.</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-grounds-for-disallowance">The Grounds for Disallowance</h2> <p>Clause 11.2(26) in NEC4 defines Disallowed Cost as amounts that fall into these categories:</p> <pre class="ge-ascii-diagram ge-anim"> ┌────────────────────────────────────────────────────────┐ │ DISALLOWED COST GROUNDS │ │ NEC4 Clause 11.2(26) │ │ │ │ (a) Cost not justified by the Contractor's │ │ accounts and records │ │ (b) Cost which the contract does not require the │ │ Contractor to pay │ │ (c) Cost arising from the Contractor not │ │ following an acceptance or procurement procedure │ │ (d) Cost which should not have been paid in │ │ accordance with the Contractor's contract │ │ with a Subcontractor │ │ (e) Cost of correcting Defects caused by the │ │ Contractor not complying with a constraint │ │ in the Works Information │ │ │ │ Total Cost Components │ │ MINUS Disallowed Cost (a+b+c+d+e) │ │ = DEFINED COST │ │ + Fee │ │ = PWDD (Price for Work Done to Date) │ └────────────────────────────────────────────────────────┘ </pre> <p>Ground (a) is the big one. I've seen it account for 60% to 80% of all Disallowed Cost on NEC4 Option C contracts. Not because contractors are doing bad work. Because their records don't match their cost claims.</p> <h2 id="how-it-works-in-practice">How It Works in Practice</h2> <p>The process is straightforward but brutal:</p> <ol> <li>Contractor submits monthly application with Defined Cost components</li> <li>PM reviews the submission against the contractor's records</li> <li>PM identifies costs that fall under clause 11.2(26)</li> <li>PM disallows those costs</li> <li>PWDD is calculated on the remaining Defined Cost</li> <li>Disallowed Cost is absorbed entirely by the contractor</li> </ol> <p>There's no appeal mechanism within the payment cycle. If the contractor disagrees, they notify a dispute under the contract's dispute resolution procedure.</p> <h2 id="worked-example-500k-disallowed-on-an-18m-project">Worked Example: £500K Disallowed on an £18M Project</h2> <span class="ge-worked-label">Worked Example</span> <div class="ge-callout ge-anim"> <p><strong>Scenario:</strong> A Tier 1 contractor is delivering an £18M NEC4 Option C flood defence scheme in Somerset. At the month 9 assessment, the PM's quantity surveyor identifies the following Disallowed Costs:</p> <div class="ge-table-wrap ge-anim"><table class="ge-table"> <thead><tr><th>Item</th><th>Amount</th><th>Ground</th><th>Issue</th></tr></thead> <tbody> <tr><td>Labour costs (drainage crew, 3 weeks)</td><td>£127,000</td><td>(a) Records</td><td>Site diary shows 8 operatives; cost claim shows 12.</td></tr> <tr><td>Plant hire (tracked dumper)</td><td>£38,000</td><td>(b) Not required</td><td>Dumper on site for 6 weeks but not used on the works.</td></tr> <tr><td>Subcontract overpayment (piling)</td><td>£215,000</td><td>(d) Subcontract</td><td>Paid for 340 piles; works information requires 295.</td></tr> <tr><td>Rework on concrete pours</td><td>£86,000</td><td>(e) Defects</td><td>Three pours failed cube tests due to wrong mix design.</td></tr> <tr><td>Travel and accommodation</td><td>£34,000</td><td>(a) Records</td><td>No supporting receipts or justification.</td></tr> <tr><td><strong>Total Disallowed</strong></td><td><strong>£500,000</strong></td><td></td><td></td></tr> </tbody></table></div> <p><strong>Impact:</strong> Defined Cost for month 9 (before disallowance): £2,340,000. Disallowed Cost: £500,000. Defined Cost (net): £1,840,000. Fee at 9%: £165,600. PWDD: £2,005,600.</p> <p><strong>EVM impact:</strong> The contractor's <a href="/en/earned-value/definitions/actual-cost">AC</a> for EVM purposes should be £1,840,000 (Defined Cost net of disallowance). The EVM system should track Defined Cost (net) as AC, with Disallowed Cost reported as a separate metric.</p> </div> <h2 id="the-records-problem-and-why-its-worth-solving">The Records Problem (and Why It's Worth Solving)</h2> <p>Ground (a), "cost not justified by the Contractor's accounts and records", is the disallowance ground that keeps commercial managers awake at night. The solution is daily site diaries that record who was on site, what plant was deployed, what activities were worked on, and what instructions were given. Every day. No exceptions.</p> <h2 id="the-pain-gain-impact">The Pain/Gain Impact</h2> <p>On NEC4 Option C, Disallowed Cost hits the contractor twice through the pain/gain mechanism. The contractor pays the cost, doesn't get reimbursed, and doesn't get the benefit of a lower Defined Cost in the share calculation. It's a direct pound-for-pound loss.</p> <h2 id="common-mistakes">Common Mistakes</h2> <ol> <li><strong>Not tracking Disallowed Cost separately in EVM.</strong> Your AC should be Defined Cost, not total spend. But you need visibility of Disallowed Cost as a separate metric.</li> <li><strong>Assuming Disallowed Cost is negotiable.</strong> The PM has a contractual obligation to disallow costs that meet the clause 11.2(26) criteria.</li> <li><strong>Waiting until final account to address Disallowed Cost.</strong> Address it monthly.</li> <li><strong>Confusing Disallowed Cost with disputed valuations.</strong> Different mechanism, different legal basis.</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>What's the most common reason for Disallowed Cost?</h3> <p>Inadequate records. Ground (a) of clause 11.2(26) accounts for the majority of disallowances on NEC4 Option C contracts.</p> <h3>Can the contractor dispute Disallowed Cost?</h3> <p>Yes. If the contractor disagrees with the PM's assessment, they can notify a dispute under the W1 or W2 procedure.</p> <h3>How does Disallowed Cost affect the <a href="/en/earned-value/definitions/estimate-at-completion">EAC</a>?</h3> <p>If you're using Defined Cost as AC (which you should), then Disallowed Cost doesn't directly appear in your EVM metrics. But your EAC should be supplemented with a Disallowed Cost forecast to give the true picture.</p> <h3>How can contractors minimise Disallowed Cost?</h3> <p>Maintain daily site records, follow every acceptance and procurement procedure, and reconcile your cost submissions against your records before sending them to the PM.</p> </article> </div>