NEC Contract: Option A vs.
Option E
Option A (Priced contract with activity
Aspect Option E (Cost reimbursable contract)
schedule)
The contractor is paid according to a pre-
The contractor is reimbursed for the
Payment agreed activity schedule. Costs are set at the
actual costs incurred, including labor,
Mechanism start, and the contractor is incentivized to
materials, and overheads, with a fee.
meet milestones and targets.
The contractor bears a significant amount of The employer assumes more risk
risk. The contract price is fixed, and if actual because they pay for actual costs,
Risk Profile
costs exceed the agreed amount, the though the contractor may still carry
contractor absorbs the extra cost. some risks, such as inefficiency.
Variable price, based on the actual costs
Fixed price based on the activity schedule
Contract Price incurred, with a negotiated fee added on
agreed at the start of the project.
top.
The employer has less control over the
The contractor must manage costs efficiently
Cost Control final price because the cost reimbursed
to complete the project within the fixed price.
can vary.
Payments are made based on actual
Payment Payments are made based on the agreed
costs incurred, typically with regular
Timing schedule or milestones.
submissions of cost records.
The scope is usually well-defined at the start, The scope may evolve more freely during
Scope of Work and changes may be difficult or costly to the course of the work, and changes are
accommodate. typically easier to accommodate.
Projects where the scope is uncertain or
Projects where the scope is well-defined and
Appropriate for likely to change, or where the risks of
where the risk of cost overruns is low.
fixed pricing are too high.
Changes are easier to accommodate, as
Changes to the scope or design are more
they are reimbursed based on actual
Change Control difficult, as they can impact the contract price
costs, though a change control process
significantly.
still exists.
Financial Contractor's costs are not usually disclosed; Requires full transparency of actual costs
Transparency the focus is on meeting milestones. incurred by the contractor.
Example Clauses for Each Contract Option
(Clause Example)
Clause 14.1 - Contractor’s Design Obligations:
"The Contractor shall prepare an Activity Schedule setting out the work they will undertake and the
prices they have agreed for each activity. This schedule shall be submitted to the Employer before
starting the work. Payment will be made based on the successful completion of each activity according
to the terms and timeframes specified."
In this clause, the contractor is responsible for delivering the work according to the fixed prices and
agreed milestones. Payment is made as the contractor completes the agreed work, based on the activity
schedule.
NEC Option E (Clause Example)
Clause 50.2 - Reimbursement of Costs:
"The Contractor shall be reimbursed for all reasonable and properly incurred costs in the performance of
the contract. These include labor, materials, plant, and subcontractor costs. The Contractor must
maintain accurate records of the costs and submit them to the Employer regularly. The agreed fee
percentage for overheads and profit will be added to the reimbursed costs."
This clause sets out how the contractor will be reimbursed for their actual costs, including labor,
materials, and other expenses. It also includes the agreement for a fee to cover overheads and profit,
which is added to the reimbursed costs.
Key Takeaways
Option A is best for projects with a well-defined scope and where cost predictability is
important. The contractor is incentivized to complete the project efficiently, as they are paid a
fixed price for specific activities.
Option E is more suitable for projects where the scope is uncertain or likely to change, as the
contractor is reimbursed for actual costs, reducing the risk for them but leaving the employer
with the potential for higher overall costs.
Each option has its benefits depending on the nature of the project, risk tolerance, and degree of
certainty around scope and costs.
Clauses for NEC Option A (Priced Contract with Activity Schedule)
1. Clause 10 - Employer’s Agent (or Project Manager)
o Defines the role and authority of the Employer’s Agent or Project Manager, who
oversees the contract and manages the relationship between the Employer and the
Contractor.
2. Clause 11 - Contractor’s Obligations
o Specifies the contractor’s duties, including providing the work in accordance with the
contract and complying with the Activity Schedule.
3. Clause 12 - Performance and Completion
o Sets out the required milestones, completion dates, and conditions for the project. It
details how the work must be completed to ensure payment.
4. Clause 13 - Payment (Activity Schedule)
o Defines how the contractor will be paid based on the completion of activities as per the
Activity Schedule. This includes interim payments upon achieving certain milestones.
5. Clause 14 - Contractor’s Design Obligations (if applicable)
o Specifies any design responsibilities the contractor may have, including how designs
must be delivered and approved by the Employer or Employer's Agent.
6. Clause 15 - Key Dates
o Lists the key dates by which certain activities or milestones must be completed,
impacting payment and the project timeline.
7. Clause 16 - Early Warning
o Requires both parties to raise early warnings about issues that could affect the project’s
progress, such as delays or risks.
8. Clause 17 - Compensation Events
o Describes events that could justify changes to the contract, including unforeseen
conditions or delays beyond the contractor’s control.
9. Clause 18 - Risk Allocation
o Outlines the distribution of risk between the Employer and the Contractor, including the
handling of unforeseen costs and delays.
10. Clause 19 - Variations
o Specifies the procedures for handling changes to the project scope or Activity Schedule,
including the evaluation of costs and impact on the contract price.
11. Clause 20 - Dispute Resolution
o Provides a mechanism for resolving disputes between the Employer and Contractor,
such as mediation or adjudication.
12. Clause 21 - Termination
o Details the conditions under which either party can terminate the contract, such as
contractor default or failure to meet critical milestones.
Clauses for NEC Option E (Cost Reimbursable Contract)
1. Clause 10 - Employer’s Agent (or Project Manager)
o Defines the role and authority of the Employer’s Agent or Project Manager, who will
monitor the Contractor’s costs and manage payments.
2. Clause 11 - Contractor’s Obligations
o Specifies the contractor’s obligations to carry out the works in accordance with the
contract terms and maintain proper cost records.
3. Clause 12 - Payment for Defined Cost
o Explains how the contractor will be reimbursed for actual costs incurred, including labor,
materials, and other necessary expenses.
4. Clause 13 - Fee Percentage
o States the contractor's fee for overheads and profit, usually as a percentage of the
defined costs, to be added to the total amount payable.
5. Clause 14 - Payment Procedures
o Outlines how payments will be made, typically based on submitted cost records, with
intervals for submission and payment, and reconciliation of actual costs.
6. Clause 15 - Key Dates
o Specifies any key dates or deadlines for particular work items, even though the overall
cost is reimbursed.
7. Clause 16 - Early Warning
o Requires both parties to inform each other of any events that could affect the project’s
progress or increase costs.
8. Clause 17 - Compensation Events
o Details events that could result in a change in the reimbursable costs or adjustments to
the contract’s scope and timeline.
9. Clause 18 - Risk Allocation
o Specifies how risks will be shared, with the employer generally assuming more risk
under a cost-reimbursable contract, as the contractor is reimbursed for their actual
costs.
10. Clause 19 - Variations
o Describes how changes to the scope of work will be managed, and how the costs for
those changes will be reimbursed, often involving negotiation.
11. Clause 20 - Dispute Resolution
o Establishes a dispute resolution process, such as mediation or adjudication, to resolve
disagreements on costs or other contract matters.
12. Clause 21 - Termination
o States the grounds and procedures for terminating the contract, including for
convenience or due to default, with provisions for the contractor to be paid for the work
performed up to that point.
13. Clause 50 - Reimbursement of Costs
o A detailed clause specifying the types of costs that will be reimbursed, such as labor,
materials, equipment, and subcontractor costs. It ensures that the contractor provides
accurate documentation for each cost.