NEC4 ECC Options Explained: A Complete Guide for QS and Commercial Teams

The NEC4 Engineering and Construction Contract gives you six main options. Which one sits in your Contract Data determines your cash flow profile, your risk exposure, and — more than most people admit — how much of your entitlement you'll actually recover. Get the option wrong at tender and no amount of good contract administration fixes it downstream.

This guide covers Options A through F — what they are, how payment works, where the risk lands, and when each makes commercial sense. It also covers the secondary options (X-clauses) and Z-clauses that overlay the main options and change the commercial picture significantly. For the broader NEC4 framework, see the NEC4 Guide.

The Six Main Options: Risk Allocation at a Glance

Before going option by option, here's the principle. NEC4's six main options exist on a spectrum from maximum cost certainty for the Client to maximum flexibility for both parties. The fundamental design choice is: who takes the risk that costs turn out higher than forecast?

• Options A and B — Contractor takes cost risk (priced contracts)
• Options C and D — Risk shared via a gain/pain mechanism (target contracts)
• Option E — Client takes almost all cost risk (cost reimbursable)
• Option F — Client takes cost risk, Contractor manages (management contract)

That spectrum matters enormously. A Tier 1 contractor quoting Option A on a poorly defined infrastructure scope is loading risk onto itself that the contract was never designed to carry. Conversely, an Employer procuring Option E without robust open-book audit capability is exposing itself to cost overrun it can't control.

Option A: Priced Contract with Activity Schedule

Option A is the closest NEC4 gets to a traditional lump sum. The Contractor prices a list of activities. Payment is made when each activity is completed. The total of the Prices is fixed, subject to compensation events.

How payment works

The Contractor submits an Activity Schedule at tender — a list of discrete work items, each with a price. The Client pays for completed activities in each assessment period. An activity is either complete (paid) or not complete (not paid). There's no partial payment for 80% complete.

That's the cash flow implication most contractors underestimate. If you have a large, complex activity — say, "Installation of mechanical plant, Level 3" priced at £400,000 — and that activity takes four months, you receive nothing for three of those months. Breaking activities into smaller, more frequent milestones improves cash flow but adds administrative overhead.

Where the risk lands

Under Option A, the Contractor takes the risk that its prices are sufficient. If concrete turns out to need more reinforcement than priced, that's the Contractor's problem. The only mechanism for adjusting the Prices is a compensation event under Clause 60 — and CEs on Option A must genuinely be Client-risk events, not errors in the Contractor's own price.

When Option A works — and when it doesn't

Option A works when: the scope is fully designed and well defined at tender; ground conditions are known; the Client wants cost certainty and is willing to pay a premium for it; the Contractor has strong estimating capability and confidence in its prices.

Option A fails when: design is incomplete at tender; the Client changes scope frequently (every change becomes a CE dispute); ground conditions are uncertain; the programme is aggressive and the Contractor is pricing in risk it may not need.

I've seen Option A used on projects where the design was 40% complete at tender. The Contractor priced a contingency, the Client complained the price was high, and then spent the next 18 months managing 60 compensation events. Nobody won.

Option B: Priced Contract with Bill of Quantities

Option B is Option A's older sibling. The Client prepares a Bill of Quantities (BoQ). The Contractor prices rates against those quantities. Payment is based on actual quantities measured at the tendered rates. The Contractor takes rate risk; the Client takes quantity risk.

How payment works

The BoQ rates are applied to actual measured quantities in each assessment period. If the BoQ showed 1,000m³ of concrete and 1,400m³ was actually placed, the Contractor is paid for 1,400m³ at the tendered rate. The Client bears the cost of additional quantity.

The Clause 60.4 compensation event trigger

Option B includes a specific compensation event at Clause 60.4. If the difference between the final total quantity of work done and the BoQ quantity exceeds 0.5% of the total of the Prices, AND the change causes the Defined Cost per unit to change, either party can notify a compensation event.

This is consistently missed. On a £10M project, 0.5% is £50,000 — a relatively low threshold. A large variation in a single BoQ item can trigger Clause 60.4 even if the overall project is running close to budget. The commercial team should track individual item quantities against BoQ throughout the project, not just at final account.

When Option B works

Option B suits projects where the type of work is known but quantities are genuinely uncertain — infrastructure work (earthworks, drainage, pavement) where the scope is defined by drawings but volumes depend on ground conditions. It is falling out of favour on large infrastructure packages as Clients have moved toward target contracts to incentivise efficiency.

Option C: Target Contract with Activity Schedule

Option C is the most commercially sophisticated of the six options, and the one where commercial management capability makes the biggest difference to the outcome. It combines a target price with an Activity Schedule, an open-book Defined Cost mechanism, and a gain/pain share.

How payment works

The Contractor is paid its Defined Cost — actual costs incurred, as defined in the Schedule of Cost Components — plus the Fee. The Fee is a percentage applied to Defined Cost, covering overheads and profit. At the same time, the Contractor has a Target. The Target is the Activity Schedule total, adjusted for compensation events as they arise. At completion, the final Defined Cost (plus Fee) is compared to the final Target. If the Contractor has spent less than the Target, the saving is shared between Contractor and Client. If more, the excess is shared in reverse.

The open-book requirement

Under Option C, the Client (through the Project Manager and Supervisor) has the right to audit the Contractor's Defined Cost records. This is not a courtesy access — it's a contractual right. Disallowed Cost is defined in Clause 11.2(25). Costs are disallowed if they are not justified by the Contractor's records — which is why site diary quality matters enormously on Option C.

The gain/pain mechanism in practice

That pain share is real financial exposure. I've seen Option C contracts where the Contractor ended up contributing £3M+ to a cost overrun that was partly its own inefficiency and partly circumstances it should have managed better. The commercial team needs to track the running cost position against Target monthly, not quarterly.

When Option C works

Option C is the right choice when: there's genuine scope uncertainty but the work type is known; both parties want to share efficiency incentives; the Client has the capability to manage open-book audit; the Contractor has a mature commercial team that can manage Defined Cost records and the CE process simultaneously.

Option C punishes contractors with weak commercial teams. The gain share can be wiped out by poor CE management, inadequate records, or disallowed costs that could have been avoided.

Option D: Target Contract with Bill of Quantities

Option D is Option C's equivalent but uses a BoQ rather than an Activity Schedule for the target. Payment works the same way — Defined Cost plus Fee, with gain/pain share against a Target. The Target on Option D is built from BoQ rates applied to actual quantities, which means the Target itself changes as quantities are remeasured.

Option D is relatively rare. It appears most often on infrastructure projects where the Client wants to use a BoQ pricing approach but also wants the incentive alignment of a target contract. In practice, the remeasurement complexity of Option D makes Option C with a well-structured Activity Schedule easier to administer.

Option E: Cost Reimbursable Contract

Option E is simple in concept and expensive in practice — for the Client. The Contractor is paid its Defined Cost plus the Fee. There is no target, no Activity Schedule, no gain/pain share. The Client bears almost all cost risk.

Option E is appropriate in genuinely exceptional circumstances: emergency works where time doesn't allow tendering a price; projects so poorly defined that pricing is impossible; early-stage enabling works before the main design is complete; post-disaster response or rapid mobilisation contracts.

The problem is that Option E removes almost all cost efficiency incentive from the Contractor. Without a gain mechanism, the only lever the Client has is the Disallowed Cost clause — and that's a reactive control, not a proactive one. Clients using Option E need a very capable client-side commercial team reviewing Defined Costs in near real time.

Option F: Management Contract

Option F is structurally different from all the others. Under Option F, the Contractor manages the works but subcontracts all construction activities. The Contractor is paid its management fee plus the cost of subcontracts it procures on the Client's behalf.

Option F transfers construction risk from the management contractor to the Client in a way that makes Client-side oversight essential. The management contractor's accountability for cost is limited — unless the procurement process is auditable and competitive, the Client has limited visibility. In the current UK market, Option F is rarely used on major projects.

Comparison Table: Options A–F

Secondary Options: X-Clauses

Secondary options are bolt-on clauses that modify the main option. They're selected by the Client in Contract Data Part 1. Getting the X-clause selection right at tender is the Client's responsibility — but the Contractor needs to understand which X-clauses apply before pricing.

X2: Changes in law. Without X2, the Contractor bears the risk of changes in law after the Contract Date. With X2, a change in law that affects the Contractor's costs is a compensation event. On long-duration contracts (3+ years), X2 is commercially significant. Always check whether X2 is included before tendering a multi-year contract.

X5: Sectional completion. X5 adds the concept of Sectional Completion — separate Completion Dates for defined sections of the works, each with their own Key Dates. Without X5, there's a single Completion Date. With X5, delay damages and time-related obligations apply section by section.

X7: Delay damages. X7 is the liquidated damages clause. The Delay Damages rate is stated in Contract Data Part 1. Without X7, the Client has no liquidated damages remedy and must prove general damages. Most NEC4 contracts include X7.

X12: Partnering. X12 introduces formal partnering obligations — a Core Group, a Partnering Information document, and Key Performance Indicators. Designed for framework arrangements with multiple organisations.

X20: Key Performance Indicators. X20 requires the Contractor to report against KPIs defined in the Incentive Schedule. Payment incentives (bonus payments) apply when KPIs are met or exceeded.

X21: Whole life cost. X21 allows the Client to select design options based on whole life cost rather than capital cost. Used on PFI/PF2-adjacent contracts and public sector projects where whole life value is a procurement criterion.

Z-Clauses: Bespoke Amendments

Z-clauses are bespoke amendments inserted by the Client (or occasionally by agreement with the Contractor). They modify or add to the standard NEC4 clauses. Every Z-clause is a departure from the standard form, and every departure has a commercial implication.

Z-clauses that restrict CE notification. Some clients add Z-clauses requiring CE notifications to be submitted within a shorter period than 8 weeks, or requiring prior approval before notification. These are legally questionable but appear in contracts and create commercial risk. Check Contract Data and the Z-clauses schedule at tender, not at the first CE dispute.

Z-clauses that change the Defined Cost definition. If a Z-clause removes categories of cost from the Schedule of Cost Components, or adds new categories of disallowed cost, the Contractor's ability to recover its actual expenditure changes. On Option C contracts in particular, a Z-clause that broadens the definition of Disallowed Cost can significantly erode the gain share calculation.

Z-clauses that modify the gain/pain share. Some Clients cap the Contractor's gain share — so the maximum upside is, say, 3% of the Target. Others introduce asymmetric pain share. These are negotiating points at tender, not surprises to discover at completion.

Z-clauses that amend Clause 10.2 (mutual trust). A Z-clause that requires the Contractor to waive claims unless raised in monthly meetings is attempting to create a quasi-time bar outside the Clause 61.3 mechanism. These clauses are commercially significant and worth specialist legal review.

Read every Z-clause against the standard clause it modifies. Identify what right or obligation the Z-clause changes, who benefits, and what the commercial impact is. Price the risk where it's material. Don't ignore it and hope it never becomes relevant.

How to Choose the Right Option

The right option depends on four factors: scope definition, risk appetite, commercial team capability, and the procurement approach.

The scope definition test. If the scope is fully defined and the design is complete, Option A gives the Client cost certainty. If the scope will evolve, Options C or E are more honest about the uncertainty.

The risk appetite test. Options A and B put cost risk on the Contractor. Options C, D, E, and F move risk progressively to the Client. No option is inherently better — the right choice depends on who is best placed to manage the risk.

The commercial team capability test. Options C, D, E, and F require both parties to manage Defined Cost records, open-book audit, and (for C and D) a running Target adjustment. If the commercial team is stretched across multiple projects, the Option C administrative overhead is a real cost.

The procurement approach. Two-stage procurement typically leads to Option C or a conversion from Option E (early contractor involvement phase) to Option A or C (delivery phase). Single-stage competitive procurement favours Options A or B.