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 <a href="/en/earned-value/definitions/price-for-work-done-to-date">Price for Work Done to Date</a> (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/definitions">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 │ │ │ │ ────────────────────────────────────────── │ │ │ │ THE RECORDS KILLER. If you can't evidence │ │ │ │ it, you don't get paid for it. │ │ │ └───────────────────────────────────────────────────┘ │ │ │ │ │ ┌───────────────────────────────────────────────────┐ │ │ │ (b) Cost which the contract does not require the │ │ │ │ Contractor to pay │ │ │ │ ────────────────────────────────────────── │ │ │ │ Gold plating, over-specification, work not │ │ │ │ in the Works Information │ │ │ └───────────────────────────────────────────────────┘ │ │ │ │ │ ┌───────────────────────────────────────────────────┐ │ │ │ (c) Cost arising from the Contractor not │ │ │ │ following an acceptance or procurement │ │ │ │ procedure │ │ │ │ ────────────────────────────────────────── │ │ │ │ Skipping the required approval process │ │ │ └───────────────────────────────────────────────────┘ │ │ │ │ │ ┌───────────────────────────────────────────────────┐ │ │ │ (d) Cost which should not have been paid in │ │ │ │ accordance with the Contractor's contract │ │ │ │ with a Subcontractor │ │ │ │ ────────────────────────────────────────── │ │ │ │ Overpaying subcontractors or paying for │ │ │ │ work the subcontract doesn't require │ │ │ └───────────────────────────────────────────────────┘ │ │ │ │ │ ┌───────────────────────────────────────────────────┐ │ │ │ (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 (labour, plant, materials, subcontractors, charges)</li><li>PM (or PM's commercial team) 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. But the money stays disallowed until the dispute is resolved.</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 reviews the contractor's cost submission and 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. No explanation for the 4 additional people.</td></tr><tr><td>Plant hire (tracked dumper)</td><td>£38,000</td><td>(b) Not required</td><td>Dumper was on site for 6 weeks but records show it wasn't used on the works. Appears to be servicing another project.</td></tr><tr><td>Subcontract overpayment (piling)</td><td>£215,000</td><td>(d) Subcontract</td><td>Piling subcontractor was paid for 340 piles; works information requires 295. Contractor hasn't explained the variance.</td></tr><tr><td>Rework on concrete pours</td><td>£86,000</td><td>(e) Defects</td><td>Three concrete pours failed cube tests. Rework cost due to contractor not following the mix design in the Works Information.</td></tr><tr><td>Travel and accommodation</td><td>£34,000</td><td>(a) Records</td><td>Expense claims with 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 on the contractor:</strong></p><ul><li>Defined Cost for month 9 (before disallowance): £2,340,000</li><li>Disallowed Cost: £500,000</li><li>Defined Cost (net): £1,840,000</li><li>Fee at 9%: £165,600</li><li>PWDD: £2,005,600 (instead of £2,551,600 without disallowance)</li></ul><p><strong>Cash impact:</strong> £546,000 less in the month 9 payment. That's not a valuation dispute. It's money the contractor has already spent and will never recover.</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). But the contractor actually spent £2,340,000. If the commercial team uses total spend as AC rather than Defined Cost, the <a href="/en/earned-value/definitions/cost-performance-index">CPI</a> will be artificially depressed. 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. Not because they're doing anything wrong. Because proving what happened three months ago from incomplete site diaries is genuinely difficult.</p><p>The typical failure pattern looks like this:</p><ol><li>Work happens on site. Nobody records the details properly.</li><li>At month-end, the commercial team compiles the cost application from timesheets and invoices.</li><li>The PM asks for evidence: "Where's the record showing these 12 operatives were on the drainage activity on 14 March?"</li><li>The site diary for that day says "drainage works ongoing, 8 labourers." The cost claim says 12.</li><li>The PM disallows the cost of 4 people. That's £127,000 the contractor will never recover.</li></ol><p>The solution isn't complicated. It's just hard to do consistently. 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><p>I've worked with contractors who went from £400K of annual Disallowed Cost to under £30K by implementing proper daily recording. The fix wasn't technology (though that helped). It was discipline.</p><h2 id="the-pain-gain-impact">The Pain/Gain Impact</h2><p>On NEC4 Option C, Disallowed Cost doesn't just reduce the monthly payment. It hits the contractor twice through the pain/gain mechanism.</p><p>Here's why. The Contractor's share is calculated by comparing total Defined Cost against the target (the Prices). Disallowed Cost is excluded from Defined Cost but the contractor still incurred it. So the contractor pays the cost, doesn't get reimbursed, and doesn't get the benefit of a lower Defined Cost in the share calculation (because the money was spent, it just wasn't recognised).</p><p>On the £18M project above, that £500K of Disallowed Cost is a direct pound-for-pound loss to the contractor. It doesn't reduce the Defined Cost total for share purposes. It was never in Defined Cost to begin with. The contractor spent £500K, got nothing back, and their share calculation doesn't improve as a result.</p><h2 id="common-mistakes">Common Mistakes</h2><ol><li><strong>Not tracking Disallowed Cost separately in EVM.</strong> Your <a href="/en/earned-value/definitions/actual-cost">AC</a> should be Defined Cost, not total spend. But you need visibility of Disallowed Cost as a separate metric. If it's rising month on month, that's a trend that needs management attention. It means the contractor's records or practices are deteriorating.</li></ol><ol><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. This isn't a commercial negotiation. It's a contractual determination. The contractor's remedy is through dispute resolution, not persuasion.</li></ol><ol><li><strong>Waiting until <a href="/en/earned-value/definitions/final-account">final account</a> to address Disallowed Cost.</strong> By then, the records that could have prevented disallowance are long gone. Address it monthly. If the PM is disallowing costs, fix the underlying records problem immediately.</li></ol><ol><li><strong>Confusing Disallowed Cost with disputed valuations.</strong> Disallowed Cost is a specific NEC4 mechanism under clause 11.2(26). A disputed <a href="/en/earned-value/definitions/interim-valuation">interim valuation</a> on a JCT contract is a different thing entirely. Don't conflate the two, the legal basis and remedies are different.</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), "cost not justified by the Contractor's accounts and records", accounts for the majority of disallowances on NEC4 Option C contracts in my experience. The contractor did the work and spent the money, but they can't prove the cost to the PM's satisfaction because the site records don't match the claim.</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 contract's W1 or W2 dispute resolution procedure. In practice, the disallowance stands in the interim payment until the dispute is resolved through adjudication or agreement.</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 <a href="/en/earned-value/definitions/actual-cost">AC</a> (which you should), then Disallowed Cost doesn't directly appear in your EVM metrics. But it represents real expenditure the contractor can't recover. Your <a href="/en/earned-value/definitions/estimate-at-completion">EAC</a> should be supplemented with a Disallowed Cost forecast to give the true picture of the contractor's financial position.</p><h3>How can contractors minimise Disallowed Cost?</h3><p>Three things. First, maintain daily site records that match your cost claims, who was on site, what plant was used, what work was done. Second, follow every acceptance and procurement procedure in the contract without exception. Third, reconcile your cost submissions against your records before sending them to the PM. If you can't evidence a cost, don't claim it. Fix the records gap first.</p></article></div>