The NEC4 Engineering and Construction Contract (ECC) contains an array of core and optional clauses. These clauses are used to develop the terms and conditions of a particular construction contract.
NEC4 ECC Clauses
1. Core Clauses – These clauses form the main body of the contract. Although often amended slightly to suit the client’s requirements. It’s recommended these are left mostly untouched so the aims and objectives of the NEC4 are upheld.
2. Main Option Clauses (A,B,C,D,E & F) – To supplement the Core Clauses, a Main Option Clause must be selected. This will determine how risk is shared between parties and by what means the contractor is reimbursed. You can find our article and video on these clauses here
3. Secondary Option Clauses (X,Y & Z) – These are optional bolt on clauses which can be implemented into a contract. X & Y being a selection of pre-written clauses and Z clauses which are completely customisable prior to contractual agreement.
Under NEC4, there are 7 different options for procuring work. This article will provide descriptions of how each option works and explore the pros and cons to establish which option works best for you. Briefly, the options are titled as follows:
Main Option Clauses
- Option A: Priced contract with activity schedule
- Option B: Priced contract with bill of quantities
- Option C: Target contract with activity schedule
- Option D: Target contract with bill of quantities
- Option E: Cost reimbursable contract
- Option F: Management contract.
- Option G: Term contract
NEC4 Option C: Target Contract with Activity Schedule.
So what is Option C? Under Option C, the contractor proposes lump sum prices on an activity schedule that’s agreed with the client. This becomes the ‘target cost’ for the project, known as the Prices. The contractor is then paid their Defined Cost plus Fee, known as the Price for Work Done to Date (or PWDD for short)
If the Price for Work Done to Date exceeds the Prices, it’s classed as overspend (or pain) and if it comes in below, it’s classed as underspend (or gain). The pain or gain is then shared between both the contractor and client.
You can think of it as a middle ground between a lump sum contract (where the contractor bears the risk of overspend) and a cost-plus contract (where the client carries the risk). With a target cost arrangement, both parties share the risk and reward.
For example, let’s imagine a contract with a flat 50/50 pain-gain share arrangement.
In Scenario 1: The target cost is £1 million, but the final Price for Work Done to Date is £1.1 million. That’s £100k over – so the overspend is split 50/50. The contractor is paid £1.05 million, taking a £50k hit on their margin.
In Scenario 2: The Price for Work Done to Date is £900k, £100k under the target. Similarly, the difference is split, and the contractor is paid £950k – earning an extra £50k on top of their margin.
Now it’s not always that simple, along the way there may be changes to scope or unforeseen issues which trigger Compensation Events as detailed in Clause 60. Compensation Events are agreed between the client and contractor, and adjust the Prices upwards or downwards, depending on the nature of the change.
Let’s now explore the pros and cons of NEC Option C:
Pros of Option C:
- Encourages collaboration and transparency between client and contractor
- Shared financial incentives drive performance and cost control
- Early identification and management of risks through the pain/gain mechanism
Cons of Option C:
- Requires accurate cost forecasting and robust cost tracking systems
- Can lead to disputes if costs aren’t clearly defined or justified
- Not well suited to clients seeking price certainty from the outset
