If you’re working under NEC Option C, D, E or F, you’ll inevitably come across the term “disallowed cost.” Unlike “defined cost,” which can be recovered from the employer or client, disallowed cost is non-recoverable—and as you can imagine, this often becomes an area of dispute.
In this post, we’ll break down:
- What the NEC contracts say about disallowed cost.
- The differences between NEC3 and NEC4 definitions.
- Common areas of confusion.
- Practical tips for contractors to avoid disallowed cost.
What the Contract Says
Disallowed Cost in NEC3
Defined in Clause 11.2 (25) of the main option clauses, disallowed cost includes:
- Costs not justified by the contractor’s accounts and records.
- Costs wrongly paid to a subcontractor or supplier.
- Costs incurred because the contractor failed to:
- Follow procurement or acceptance procedures in the Works Information.
- Give an early warning when required.
It also covers costs associated with:
- Correcting defects after completion.
- Correcting defects caused by non-compliance with the Works Information.
- Plant and materials not used (after reasonable wastage).
- Resources not used or not removed when requested.
- Adjudication or tribunal proceedings.
Disallowed Cost in NEC4
The Clause 11.2 (26) definition under NEC4 is similar, but with some refinements:
- References to “Works Information” are replaced with “Scope.”
- Contractors must notify the Project Manager of adjudication or tribunal preparations involving subcontractors or suppliers.
- Payments to members of the Dispute Avoidance Board are explicitly included.
The rest—defects, unused resources, plant, and materials, remains largely consistent with NEC3.
“Pain” vs. “Disallowed Cost”
It’s important to distinguish between costs that lead to contractor “pain” and those classed as disallowed.
- Under target cost contracts, certain contractor errors may increase the defined cost, reducing the chance of “gain” and increasing the risk of “pain.”
- However, that doesn’t automatically make them “disallowed.”
Ultimately, it’s the Project Manager’s decision, made in line with the contract, that determines whether a cost is disallowable. This decision must be formally certified and communicated to the contractor.
Avoiding Disallowed Cost
Here are some practical tips contractors can follow to reduce the risk of incurring disallowed cost:
- Maintain detailed daily site records including start/finish times, work locations, direct and subcontract resources, activities completed, outstanding works, and events that may impact cost or time.
- Submit Early Warnings on time and in line with the contract requirements.
- Strengthen Quality Management Systems (QMS) to ensure defects are prevented or corrected before completion.
- Keep the site clean and organised, promptly removing wastage when required by the Project Manager.
- Fully understand the Scope (formerly Works Information) and ensure all stakeholders are clear about their responsibilities.
Final Thoughts
Disallowed cost is one of the more contentious aspects of NEC contracts. While the definitions in NEC3 and NEC4 are broadly similar, small differences—such as references to the Scope, dispute board costs, and notification obligations—can have significant implications.
For contractors, the key to avoiding disputes lies in accurate record-keeping, proactive communication, and disciplined quality management. By staying ahead of these requirements, you can minimise the risk of costs being deemed disallowable and protect your commercial position.
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