On an NEC Engineering and Construction Contract (ECC) option C (target contract with activity schedule) recently audited, the contractor has included in his payment application a sum for insurance premiums. The schedule of cost components (SCC) has not been amended, so are these costs disallowed?
Answer
With two exceptions (which I deal with at the end) this is not paid. It is not that it is a disallowed cost (a defined term), it is just that it is not allowed in the first place. Only those costs listed in the SCC are paid; any other costs incurred are deemed to be included in the contractor’s fee- see clauses 11.2(29), 11.2(23) and 52.1. As insurances premiums are not listed in the SCC, they are not paid as defined cost.
You will see that this is therefore a two-part process. The first part is to ask: is it allowed? If the answer is no, because it is not a payment to a subcontractor nor is it listed in the SCC, then it is not paid. The second part is to ask: is it a disallowed cost? Note that second part only gets applied if the answer to the first part is yes.
The first exception to this is the cost of employer’s liability insurance. In the UK, the law requires that this insurance is taken out, so it is normally paid as part of item 13(i) in the SCC. The practical problem is that this cover is normally included within the contractor’s all-risks policy and there are no separate premiums for that. You probably need to discuss with the contractor a reasonable amount for that part of their all-risks policy.
The second exception is insurance is insurance for all cars and vans used as transport by staff, which would be paid as part of SCC item 13(i) (same reason as before) or, probably more logically, under SCC item 13 (n).
