We are using an ECC Option C (target contract with activity schedule). The contractor has chosen to subcontract some of the work, but neither the project manager nor the contractor followed the procedures set out in Clause 26 regarding approval and agreement of proposed subcontractors and terms.
The contractor is now submitting defined cost as part of the assessment process, in which it appears the contractor has appointed its subcontractors on a mixture of lump sums and re-measurable contracts. This is causing issues as the contractor’s target cost is deemed to allow for all works stated in the works information but it is passing on a re-measured account from its subcontractors, which is increasing the defined costs even though the works information has not changed.
Is the contractor due this defined cost of its subcontractors, in accordance with the terms of their orders, or can the additional cost be disallowed due to the contractor not following the procedures set out in Clause 26?
The simple answer to your question is no. This cannot be disallowed because it is not listed as a disallowed cost in ECC Clause 11.2(25). If you look at the third bullet of 11.2(25) (first sub-bullet) you will see that it only covers acceptance or procurement procedures in the works information, not the contract conditions themselves. That was quite deliberate so as to exclude Clause 26.
Answer
In any event Clause 26 has only a very limited effect. It is not a case of ‘approval and agreement’ as you suggest. The only reason listed in the contract for rejection does not cover the problems you list and therefore if the project manager had not accepted the subcontractor it would have been a compensation event anyway, and the employer would have been in a worse position. Having said that the contractor and project manager should have followed the processes in Clause 26 and this matter could have been discussed at the time. However, that is as much the project manager’s fault as it is the contractor’s.
But there is also another thing you should consider. It is not always possible to match main and subcontract options as many subcontractors simply do not have the facilities to take off and price lump-sum works and insist upon re-measurement. If the contractor had insisted upon lump sums, then they were likely to be much higher than the re-measured price it got, and the employer would have been in the same or worse position that it is now. Therefore it is not simply a case of saying that the defined cost has increased, because it may well not have done in the long run.
Contractors will generally take great care to appoint subcontractors on the best terms they can. They are willing to accept a ‘re-measured’ lower price for certain trades in the knowledge that there is a risk that it will go up somewhat but will still end up cheaper than the ‘lump sum’ price they would have had to accept otherwise. That is where their commercial expertise lies. In ECC Option C the employer shares the risks if this strategy goes wrong and the reward if it goes right.
