This is my 5 min summary of 5 keys to validating cost under NEC contracts.This will be helpful if you are responsible for validating Defined Cost or perhaps have a difference or dispute.It is for employers, quantity surveyors, contractors, subcontractors, suppliers or project managers.The first key is to recognise that use of main Options C and E should not be a licence to print money! Cost reimbursable options are a sensible choice if a premium is otherwise paid for risk.Its my concern that the schedule of cost components does not provide a clear definition of cost. It’s also not clear how cost is allocated between components. A lot is left to your interpretation!If you don’t address this risk, a difference or dispute is possible! So then, how can you be certain if the cost claimed has been properly incurred?Before you start a project, are you clear whether or not you are going to pay for
-private mileage?
-director bonuses?
-magasine subscriptions?
-professional fees?
-entertaining and
-training?
The second key is the contract should set out the requirements for open book cost management including:
-a detailed definition of cost
-how cost is going to be validated whether monthly, quarterly or annually
-it should list accounts and records to be held
-state the period they are held for such as 12 years
-indicate where they are to be located
It’s not helpful if your project is the UK but all the project HR records are held in Malaysia!
-also set out any ethical values for financial management. The third key is to define costs in lots of detail and agree upon the allocation preferably before you get into contract!for example, it may be agreed that private mileage is not paid as Defined Cost and is treated as in the Fee. Every project and all clients will differ in their approach!Allocation depends upon the Contractor and what is acceptable. All businesses deal with the allocation of cost between project and overheads in different ways! The fourth key is to have a single joint approach to open book cost management. Ensure that
- costs are jointly managed by the parties and
-subcontractors and suppliers are properly supported.
My fifth & final key is to agree a work or service breakdown structure.
This is essential for effective commercial reporting and forecasting. Most cost ledger systems including SAP or COINS allocate unique codes to individual cost ledger entries.This clerical function is often overlooked. It does require guidance to allocate project costs properly at source to unique WBS or SBS codes.In summary, provided that clear cost component allocation is agreed between the parties, validation of cost becomes a simple and clerical task.If you follow these steps there is less opportunity for a difference or a dispute. There is also every opportunity that project costs are managed more effectively.Thank you for listening.Those were my 5 keys to cost validation when using NEC contracts. If you would like to find out more please visit my website at lexius.co.uk which has lots more helpful tools and tips.You may also wish to look at my webinars and online courses for open book cost management. Connect with me on LinkedIn, follow me on Twitter or book online a FREE 1:1 session with me if you’ve got anything you’d like to ask me about.Thank you again and I look forwards to hearing from you soon.
Негізгі бет AUDIT OF DEFINED COST UNDER NEC STANDARD FORMS OF CONTRACT
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