NEC4: Schedule of Cost Components and Short Schedule of Cost Components

We continue our NEC4 mini-series, and this week we focus on the Schedule of Cost Components (SCC) and Short Schedule of Cost Components (SSCC). The SCC is used under Main Options C, D, E, and F (which are target cost or cost reimbursable), whereas the SSCC is used under Main Options A and B (which are lump sum).

We will provide an overview of the standard form requirements before providing some practical tips and guidance.

The basics

In the SCC you will find all the individual cost elements that can be used when calculating the Defined Cost along with a detailed description of what can be included. This detail is necessary because it is used for assessing the Price for Work Done to Date in interim payments as well as assessing compensation events. The SSCC is a simplified version used for assessing compensation events only.

The SCC and SSCC list 8 headings of Defined Cost which are People, Equipment, Plant and Materials, Subcontractors, Charges, Manufacture and Fabrication, Design, and Insurance. If a cost does not fall under one of the Defined Cost headings, then it is deemed to be part of the Fee percentage (or Disallowed Cost, which is a defined term applicable to Main Options C, D, E, and F only).

Under Main Options C, D, E, and F, Disallowed Cost will erode the amount you are paid and therefore the margin you return from the contract. The financial records you contemporaneously keep are crucial because this will be the reference point for determining whether a cost should be a Disallowed Cost (e.g. amounts that should not have been paid to a subcontractor or a supplier in accordance with the agreement made, costs for correcting Defects, or costs for resources not used to Provide the Works, etc.).

Practical Tips and Guidance

It sounds obvious, but if you are tendering a project to be executed under NEC4 Main Option A or B, you should check that the SSCC is included and not the SCC. It does happen, and, while the headings are the same in both documents, the definition is more detailed, so it could present challenges when you are assessing compensation events.

A big part of your financial success will depend upon the level to which you have aligned your estimating and financial systems with the NEC rules. For example, does the way you estimate an NEC project align with the SCC or SSCC? Ditto for your financial system used to record costs. It is the gaps between these systems and the contract rules where you will leak profit because the rules will be strictly applied, and even if you are certain that a particular cost is recoverable, you need to be able to demonstrate it. This comes back to the old 'records, records, records’ adage.

An area that is normally the subject of disagreement is People resources and whether individuals should be part of the main contractors overhead or not. Again, even if a person genuinely isn’t part of your overhead, then it is your ability to demonstrate this point that will determine whether you are paid or not. Some ways you can deal with this are:

1. Include a list of people and rates in Contract Data Part Two for all people that are likely to be required throughout the project.
2. Issue regular organisation charts indicating who people are and what role they perform. Show who is part of the project and who is in the overhead. If there are concerns, then these can be raised and resolved early.
3. The Working Area definition will have a bearing on whether you can recover for a person or not. The Working Area definition needs to be wide enough to cover all locations where project personnel may work, including head office and home working.

If you introduce a new person to the project, then you can agree on a new rate for that person or role, so bear in mind that you may be required to demonstrate the rate used in your assessments. It might save time for all if you agree on a mechanism for calculating these rates showing how the rate is calculated, how it aligns with the People definition, and what evidence you rely upon to support your calculation.

If you setup your systems in the right way and structure information in the contract so that these enable quotations to be prepared, this is extremely helpful in situations where the volume of compensation events is high. When this happens, you need to standardise as much as you possibly can because it could be a significant time saver later down the line!

Final reflections

In theory, this issue should be a straightforward matter of aligning contract rules with your estimating and financial business system rules. The output should be high-quality cost data that allows you to demonstrate your entitlement to recover under the contract.

However, all too often, projects are not setup with this in mind. You work hard to deliver a project on time and to the right quality, but because you can’t demonstrate certain costs, your margin return isn’t what you expected, and you feel short-changed. A nominal investment in understanding the rules and tightening up your systems and processes to comply with the rules can help you overcome this issue.

In next week’s article, we will build on previous articles in the mini-series by covering programme.

Keep an eye out for that, and, in the meantime, enjoy the rest of your week!