MTRC NEC4 Training Level 2 - Module 5 Rev 1.3

MTRC NEC4 Training
Module 5 – Commercial
Ian Heaphy & Daniel Cheung making the difference
November 2021
making the difference

Turner & Townsend Confidential
Training modules
Module Module Module Module Module

One Two Three Four Five
Roles &
responsibilities Compensation Time and the
Precontract Commercial
and risk events programme
management
• Contract • What are • Payment process

• Role of the
selection compensation • Contract dates • PWDD
Project Manager
• Main and events • The programme • Defined Cost
& Supervisor
secondary • The • Delay • Schedule of Cost
• Contractor’s
option selection compensation assessment Components
obligations
• Contents of a event process • Acceleration • Reporting
• Risk
contract • Assessment and • Completion and • Title
Management
• Tender implementation take over • Contractor’s
assessment proposals
Turner & Townsend MTRC NEC4 Level 2 – Module 5 2

Training modules
Module Module Module Module Module

One Two Three Four Five
Roles &
responsibilities Compensation Time and the
Precontract Commercial
and risk events programme
management
• Contract • What are • Payment process

• Role of the
selection compensation • Contract dates • PWDD
Project Manager
• Main and events • The programme • Defined Cost
& Supervisor
secondary • The • Delay • Schedule of Cost
• Contractor’s
option selection compensation assessment Components
obligations
• Contents of a event process • Acceleration • Reporting
• Risk
contract • Assessment and • Completion and • Title
Management
• Tender implementation take over • Contractor’s
assessment proposals

Agenda – Module 5 commercial
■ Payments – interim and final

■ PWDD
■ Defined Cost
■ Schedule of Cost Components
■ Short Schedule of Cost Components
■ Reporting
■ Contractor’s proposals
■ Q&A session

NEC4 ECC v PSC
■ The following slides are based on the NEC4 ECC

■ The content is the same in the PSC, subject to changes in
terminology
■ Project Manager = Service Manager
■ Contractor = Consultant
■ works = service
■ Any other differences are specifically identified

Payments,
interim & final
making the difference 6

Interim payment
■ Project Manager assesses the amount due at each assessment

date
■ First assessment date, decided by Project Manager to suit the
procedures of the Parties, is no later than the assessment
interval
■ Later assessments dates occur at the end of each assessment
interval – commonly monthly – until issue of the Defects
Certificate (or termination) (cl 50.1)
■ Every payment is cumulative and the amount due can be
corrected in later payments
■ Contractor submits an application for payment before each
assessment date with supporting documents (in accordance with
the Scope)
■ Project Manager has to consider the Contractor’s application for
payment but does not have to pay the amount claimed (cl 50.2)

Interim payment
■ If the Contractor fails to submit an application for payment then

there will be no additional payment due, however the Project
Manager can issue a negative payment certificate (cl 50.4)
■ The amount due is
■ the Price for Work Done to Date,
■ plus other amounts to be paid to the Contractor (e.g. bonus for
early Completion, gain share, etc.),
■ less amounts to be paid by or retained from the Contractor
(e.g. retention, delay damages, pain share, etc.) (cl 50.3)
■ The Price for Work Done to Date varies between the main Options
■ The Project Manager’s certificate gives details of how the amount
due has been assessed (cl 51.1)
Interim payment
Project Manager
assesses the Client makes
assessment date
amount due payment
one week
interest due on late payment
Contractor
submits an
application for
payment three weeks or a different period stated in the
Contract Data

Final assessment
■ The Project Manager makes an assessment of the final amount due

and certifies a final payment, if one is due, no later than four weeks
after the Supervisor issues the Defects Certificate (or thirteen
weeks after the Project Manager issues a termination certificate) (cl
53.1)
■ The Project Manager gives details of how the amount due has been
assessed (cl 53.1)
■ Final payment is made within three weeks of the assessment date,
or a different period stated in the Contract Data (cl 51.3)
■ If the Project Manager fails to make a final assessment the
Contractor may do so and sends its assessment to the Client (cl
53.2)
■ An assessment of the final amount due, issued in accordance with
the contract, is conclusive evidence of the final amount due under
the contract unless a Party starts the dispute process under the
contract to challenge it within four weeks of its issue (cl 53.3)
Final assessment
interim interim interim interim interim interim

assessment assessment assessment assessment assessment assessment
final assessment
assessment
interval
assessment four weeks
interval
four weeks
starting date Completion Date Issue of the Conclusive

for the whole of Defects agreement
the works Certificate of the final
amount
due

Case study one - payment
■ Does the Contractor have to submit an application for payment?

■ What role does the Client play in assessing the amount due?
■ Does the Project Manager have to act reasonably in assessing the
amount due to the Contractor?
■ Can the Contractor assess the final amount due under the
contract?

Price for Work
Done to Date

Price for Work Done to Date
Option A (cl 11.2(29))

■ The Price for Work Done to Date is the total of the Prices for
■ each group of completed activities and

■ each completed activity which is not in a group
■ A completed activity is one without notified Defects the correction
of which will delay following work

Activity Schedule
Activity Activity Price HK$ Activity Jan Feb Mar Apr

No.
Detailed
design of
1 Detailed design of $500,000 tunnel
piled foundations
2 Site set up $250,000 Site set up
Fabrication
3 Fabrication of tunnel $1,000,000
of tunnel
boring machine boring
machine
4 Site clearance $300,000
Site
clearance
5 Install piled $750,000

Install piled
foundations in Area A foundations
in Area A
6 Install piled $1,000,000
foundations in Area B
Install piled
foundations
Total of the Prices $3,800,000 in Area B

Option B (cl 11.2(30))

■ The Price for Work Done to Date is the total of
■ the quantity of the work which the Contractor has completed

for each item in the Bill of Quantities multiplied by the rate and
■ a proportion of each lump sum which is the proportion of the
work covered by the item which the Contractor completed
■ Completed work is work which is without notified Defects the
correction of which will delay following work

Bill of Quantities
Bill Item Description Number / Unit Rate Total

No %
complete
1 Detailed design of piled 50% N/A $10,000 $5,000
foundations
2 Site clearance 100 m2 $1,000 $10,000
3 Install piled 20 No $7,500 $15,000

foundations in Area A
4 Install piled 0 No $9,500 $0

foundations in Area B
Price for Work Done to $30,000

Date

Option C, D, E & F (cl 11.2(31))

■ The Price for Work Done to Date is the total Defined Cost which
the Project Manager forecasts will have been paid by the
Contractor before the next assessment date plus the Fee

Payment
Assuming monthly assessment

interval up to 31 days
1st assessment 2nd assessment 3rd assessment

starting date date date date
assessment interval
Certify payment
within 1 week
Final date of payment is within 3 weeks of

Assessed as having been paid by the the assessment date or a different period
Contractor before the assessment date stated in the Contract Data (cl.51.2)
Forecasts what will have

been paid by the
Contractor before the
next assessment date

Payment
Assuming monthly assessment

interval up to 31 days
1st assessment 2nd assessment 3rd assessment

starting date date date date
Reconcile forecast
assessment interval
against actual Defined
Cost which has been Certify payment
paid within 1 week
Final date of payment is within 3 weeks of

Assessed as having been paid by the Contractor before the assessment date or a different period
the assessment date stated in the Contract Data (cl.51.2)
Forecasts what will have

been paid by the
Contractor before the
next assessment date

Defined Cost

Defined Cost - definition
■ Defined Cost is similar to actual cost

■ It is used in all main Options to assess the effect on the Prices
due to compensation events
■ In main Options C, D, E and F is it also used to determine the
■ Defined Cost definition changes between main Options
■ Options A & B - Defined Cost is the cost of the components in the
Short Schedule of Cost Components
■ Options C, D and E - Defined Cost is the cost of the components
in the Schedule of Cost Components less any Disallowed Cost
■ Option F – Defined Cost is the amount due to Subcontractors and
the prices (in the Contract Data) for work done by the Contractor

Schedule of Cost Components
■ There are two Schedules of Cost Components

■ Short Schedule of Cost Components
■ only used with Options A & B
■ only used to assess compensation events
■ Schedule of Cost Components
■ only used with Options C, D & E
■ used to assess compensation events and
■ determine the Price for Work Done to Date
■ The schedules are a set of rules to define those components of
the Contractor’s cost which are included in Defined Cost
■ Linked to entries in Contract Data Part 2

■ Preamble
■ Costs must be incurred in order to Provide the Works
■ Costs can only be claimed under one cost component
■ Workings Areas separate direct costs – Defined Cost - and
overheads – Fee
■ Working Areas are the Site and those parts of the working areas
which are
■ necessary for Providing the Works and
■ used only for work in the contract (cl 11.2(20))

Existing buildings Existing buildings Existing buildings
Site = Working Areas
Working Areas
Existing buildings Existing buildings Existing buildings
Site compound
Working Areas

Existing Existing
Existing buildings
buildings buildings
Site = Working Areas
Existing Existing Existing

buildings buildings buildings
Head or Working
regional Areas
office

■ The Contractor can propose to extend the Working Areas at any

time
■ Project Manager must accept or not accept the proposal
■ Stated reasons for non acceptance
■ Not needed to Provide the Works
■ Used for work not in the contract (cl 16.3)

1. People
■ The cost of people who are directly employed by the Contractor
and whose normal place of working is within the Working Areas
paid according the time worked, whether or not they are within
the Working Areas as long as they are Providing the Works
■ The cost of people whose normal place of working is not within
the Working Areas but who are working within the Working
Areas, paid for the time worked in the Working Areas
■ Costs payable - actual costs to employ
■ Salary and benefits such as bonuses, overtime, travel,
subsistence, pension and life assurance, medical aid and
benefits etc. ….

2. Equipment – in the Working Areas

■ Payments for hire or rental of Equipment not owned by the
Contractor (including associated company) multiplied by time
worked
■ Payments for Equipment owned by the Contractor at the
equivalent of an open market rate multiplied by time worked
■ Payment for “special” Equipment at the rates in the Contract
Data part two multiplied by time worked
■ Payment for Equipment that is purchased for the works based
on a depreciation calculation, plus an on cost stated in the
Contract Data
■ Payments for the purchase price of Equipment which is
consumed

3. Plant and Materials

■ Payments for purchasing, delivery, packaging, samples and
tests
■ Credits for disposal
4. Subcontractors
■ Payments to Subcontractors for work which is subcontracted
■ Without taking into account amounts paid to or retained from
Subcontractors which would result in the Client paying or
retaining any amount twice i.e. retention

5. Charges
■ Payments for utilities used in Working Areas
■ Payments to public authorities and other charges
■ Payments for items listed in cost component 53
■ Buying or leasing land in the Working Areas
■ Compensation for loss of crops or buildings
■ Consumables and equipment provided by the Contractor for
the Project Manager’s or Supervisor’s offices
■ etc.

6. Manufacture and fabrication outside of the Working Areas

■ Amounts calculated by multiplying the rates in the Contract
Date part two by the time worked
7. Design of the works and Equipment done outside of the Working
Areas
■ Amounts calculated by multiplying the rates in the Contract
Date part two by the time worked
8. Insurance
■ Deduct the cost of events for which the contract requires the
Contractor to insure
■ Deduct other costs paid to the Contractor by insurers

Short Schedule of Cost Components
■ A shortened version of the Schedule of Cost Components

■ The same eight components
■ Key differences
■ People – who have to be working within the Working Areas –
are paid based on a schedule of rates in Contract Data part two
■ Equipment paid based on rates in a published list of Equipment
identified in the Contract Data plus or minus a percentage
tendered by the Contractor
■ Often in Hong Kong this will be the HKCA Schedules for Plant
Used in Dayworks Carried Out Incidental to Contract Work
(2013 Edition) published by The Hong Kong Construction
Association, Ltd.

Defined Cost - PSC
■ Defined Cost definitions are the same in the PSC

■ Options A
■ Defined Cost is the cost of the components in the Short
■ Options C and E
■ Defined Cost is the cost of the components in the Schedule of
Cost Components less any Disallowed Cost

Schedule of Cost Components - PSC
1. People
■ The cost of people who are directly employed by the Consultant
and who are providing a part of the service
■ A cost calculated by dividing the total costs to employ by the
total time recorded on the Consultant’s time recoding system
multiplied by the time worked on the contract
■ Actual costs to employ - salary and benefits such as bonuses,
overtime, travel, subsistence, pension and life assurance,
medical aid and benefits etc. ….

2. Subcontractors
■ Payments to Subcontractors for work which is subcontracted
■ Without taking into account amounts paid to or retained from
Subcontractors which would result in the Client paying or
retaining any amount twice i.e. retention
3. The following components of the cost of support people and
office overhead
A charge for support people and office overhead costs calculated
by applying the overhead percentage stated in the Contract Data
to the total of people items 11, 12 and 13. The charge includes
provision and use of people, accommodation, equipment,
supplies and services required to provide the office and to
support people providing the service

4. Insurance
■ Deduct the cost of events for which the contract requires the
Consultant to insure
■ Deduct other costs paid to the Consultant by insurers

Short Schedule of Cost Components - PSC
■ A shortened version of the Schedule of Cost Components

■ Three cost components
■ People paid based on a schedule of rates in Contract Data part
two
■ Subcontractors at cost
■ Insurance deducted from cost

The Fee
■ The Fee is a defined term, which is the same under all main
Options
■ The Fee is the amount calculated by applying the fee percentage
to the amount of Defined Cost
■ Contents of the Fee are not defined
■ All the Contractor’s cost not included in Defined Cost are deemed
to be in the Fee (Cl 52.1)

Defined Cost
■ Amounts included in Defined Cost are at the

■ rates and percentages stated in the Contract Data
■ at open market or competitively tendered prices
■ with deductions for all discounts, rebates and taxes which can
be recovered (Cl 52.1)
■ This creates a requirement for the Contractor to demonstrate
value for money in costs claimed as Defined Cost

Disallowed Cost
■ Disallowed Cost is cost, which may fall within the definition of

Defined Cost, but the Project Manager can refuse to certify for
payment as the cost should not have been incurred
■ A failure to follow the requirements of the contract
■ Inefficiency of the Contractor
■ Disallowed Cost only appears in the main Options (C, D, E & F)
where payment is made on the basis of Defined Cost plus Fee

Disallowed Cost
Disallowed Cost – Option C & D (cl 11.2(26)) - is cost which

■ is not justified by the Contractors accounts and records,
■ should not have been paid to a Subcontractor or supplier in
accordance with its contract
■ was incurred only because the Contractor did not
■ follow an acceptance or procurement procedure stated in the
Scope
■ give an early warning which the contract required it to give or
■ give notification to the Project Manager of the preparation for
and conduct of an adjudication or proceedings of a tribunal
between the Contractor and a Subcontractor or supplier

Disallowed Cost
Disallowed Cost is the cost of

■ correcting Defects after Completion
■ correcting Defects caused by the Contractor not complying with a
constraint on how it is to Provide the Works stated in the Scope
■ Plant and Materials not used to Provide the Works (after allowing
for reasonable wastage) unless resulting from a change in Scope
■ resources not used to Provide the Works (after allowing for
reasonable availability and utilisation) or not taken away from the
Working Areas when the Project Manager requested and
■ preparation for and conduct of an adjudication, payments to a
member of the Dispute Avoidance Board or proceedings of the
tribunal between the Parties

Audit Records
■ Client’s will often include in the Scope additional requirements for

audit records
■ Development Bureau provides guidance on audit records that a
Contractor should be required to keep as a free download from its
website
■ This requires “certified records” to be kept for things like
■ People – reports, timesheets, salary details etc.
■ Equipment – weekly listings, invoices, credit notes, delivery
notes, etc.
■ Plant and Materials, Subcontracts, Charges - invoices, credit
notes, delivery notes, etc.
■ Manufacture and fabrication and Design outside the Workings
Areas – certified timesheets
■ Insurance – records of insurable events

Verifying Defined Cost
■ The Project Manager (or their delegate) will need to undertake

audit of the Contractor’s Defined Cost an “open book basis”
■ This will be a combination of
■ verification of the audit records,
■ a review resources on site and material deliveries to ensure
that these are correct and not excessive,
■ review rates and prices paid to test for value for money and
■ quality v price checks

Contra charges
■ Clause 25.2 allows for the Client to recover costs it incurs if the
Contractor fails to provide something it was to required to
provided as stated in the Scope
■ The Client and the Contractor provides services and other things
as stated in the Scope. Any cost incurred by the Client as a result
of the Contractor not providing the services and other things
which it is to provide is assessed by the Project Manager and paid
by the Contractor
■ Such a deduction would form of the amount due as “amounts to
be paid by or retained from the Contractor”

Case study two – Defined Cost
■ Which Schedule of Cost Components is used with main Option A?

■ Can the Working Areas be changed after the Contract Date?
■ Can a fabrication yard created to build reinforcement cages be
identified as part of the Working Areas?
■ Can the Contractor’s Directors be claimed as part of Defined Cost
if they attend a Site progress meeting?
■ Will an amount awarded to a Subcontractor as a result of an
arbitration be payable as Defined Cost?
■ Can the Project Manager disallow the costs of a pump the
Contractor hired as cover for an existing pump that was required
to work 24 hours a day to dewater an excavation?
■ Can the fee percentage be changed after the Contract Date?

Case study two – Defined Cost
■ Who determines whether the Contractor has proven the costs it is

claiming as Defined Cost?
■ Can you audit records required to be kept by the Contractor be
changed after the Contract Date?

Reporting

Reporting
■ In all main Options it is important for the Client to understand

what the final Price for Work Done to Date will be in order for
them to be able to understand their final outturn cost
■ In main Option A the final Price for Work Done to Date will be
sum of the completed activities in the final Activity Schedule
■ In main Option B the final Price for Work Done to Date will be the
■ final quantities of work done multiplied by the rates in the Bill
of Quantities and
■ the a proportion of each lump sum which is the proportion of
the work covered by the item which the Contractor has
completed

Reporting
■ In main Options C, D, E & F the final Price for Work Done to Date
will be the final Defined Cost plus Fee
■ In main Options C & D the final Defined Cost plus Fee will be also
be used in the assessment of the gain share / pain share
calculation
Total of the Prices = sums of the activities in the Activity Schedule
Time

Reporting
calculation
Time

Reporting
calculation
Time

Reporting
calculation
Total of the Prices
Time

Reporting
calculation
Total of the Prices
$ Forecast Defined Cost
Time

Reporting
calculation
Total of the Prices
Time

Reporting
calculation
Total of the Prices
Time

Reporting
calculation
Total of the Prices
Time

Contractor’s
proposals

Contractor’s proposals
■ A clause used to encourage the Contractor to propose value

engineering ideas – clause 16
■ Contractor may propose the Project Manager that the Scope
provided by the Client is changed in order to reduce the amount
the Client pays to the Contractor for Providing the Works. The
Project Manager consults with the Client about the change
■ Within four weeks of the Contractor making the proposal the
Project Manager
■ accepts the Contractor’s proposal and issues an instruction
changing the Scope,
■ informs the Contractor that the Client is considering the
proposal and instructs the Contractor to submit a quotation for
a proposed instruction to change the Scope or
■ informs the Contractor that the proposal is not accepted
Contractor’s proposals
■ If the proposal is accepted the Project Manager will instruct a

change to the Scope under clause 14.3
■ This will be a compensation event under clause 60.1(1) and
would ordinarily lead to a negative compensation event for the
full value of the saving created, however as the change to the
Scope was as a result of a Contractor’s proposals a different
approach is taken
■ In main Options A & B the Prices are reduced by an amount
calculated by multiplying the assessed value of the compensation
event by the value engineering percentage which is set at a
default of 50%
■ In main Options C & D the Prices are not reduced and the saving
in Defined Cost plus Fee created is shared via the gain share /
pain share mechanism
■ Main Options E & F are cost reimbursable so the change to the
Prices is not relevant
Title

Title
■ Whatever title the Contractor has to Plant and Materials which are
outside the Working Areas passes to the Client if the Supervisor
has marked them as for the contract (cl 70.1)
■ Whatever title the Contractor has to Plant and Materials passes to
the Client if they have been brought within the Working Areas.
The title to Plant and Materials passes back to the Contractor if
they are removed from the Working Areas with the Project
Manager’s permission (cl 70.2)
■ The Supervisor marks Equipment, Plant and Materials which are
outside the Working Areas if
■ the contract identifies them for payment and
■ the Contractor has prepared them for marking as the Scope
requires (cl 71.1)

Title
■ The Contractor removes Equipment from the Site when it is no

longer needed unless the Project Manager allows it to be left in
the works (cl 72.1)
■ The Contractor has title to materials from excavation and
demolition unless the Scope states otherwise (cl 73.2)

Case study three – reporting, Contractor’s

proposals and title
■ Under which main Options does the Contractor have to provide a

forecast of Defined Cost for the whole of the works?
■ What happens if the forecast is wrong?
■ How is a reduction in the Prices due to a Contractor’s proposal to
change the Client’s Scope assessed under main Option A?
■ Can the Completion Date be brought forward to an earlier date as
a result of a Contractor’s proposal to change the Client’s Scope?
■ Does the Contractor get paid for preparing a quotation for a
Contractor’s proposal to change the Client’s Scope?
■ Who by default owns copper pipes recovered from a building
demolished as part of the works?
■ Can the Contractor remove Plant and Materials from the Working
Areas?
Q&A and Feedback

Turner & Townsend Limited
Unit 201
2nd Floor, Pioneer Place
33 Hoi Yuen Road
Kwun Tong
Kowloon
Hong Kong
t: + (852) 2834 6122

e: daniel.cheung@turntown.com
www.turnerandtownsend.com
© Turner & Townsend Limited. This content is for general information purposes only and does not purport to constitute professional advice. We do not make any
representation or give any warranty, express or implied, and shall not be liable for any losses or damages whatsoever, arising from reliance on information contained in this
document.
It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any other party without our express written
permission and we accept no liability of whatsoever nature for any use by any other party.

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MTRC NEC4 Training

Ian Heaphy & Daniel Cheung making the difference

making the difference

Module Module Module Module Module

• Contract • What are • Payment process

Turner & Townsend MTRC NEC4 Level 2 – Module 5 2

Module Module Module Module Module

• Contract • What are • Payment process

Turner & Townsend MTRC NEC4 Level 2 – Module 5 3

Agenda – Module 5 commercial

■ Payments – interim and final

Turner & Townsend MTRC NEC4 Level 2 – Module 5 4

NEC4 ECC v PSC

■ The following slides are based on the NEC4 ECC

Turner & Townsend MTRC NEC4 Level 2 – Module 5 5

making the difference 6

■ Project Manager assesses the amount due at each assessment

Turner & Townsend MTRC NEC4 Level 2 – Module 5 7

■ If the Contractor fails to submit an application for payment then

Turner & Townsend MTRC NEC4 Level 2 – Module 5 9

■ The Project Manager makes an assessment of the final amount due

interim interim interim interim interim interim

starting date Completion Date Issue of the Conclusive

Turner & Townsend MTRC NEC4 Level 2 – Module 5 11

Case study one - payment

■ Does the Contractor have to submit an application for payment?

Turner & Townsend MTRC NEC4 Level 2 – Module 5 12

making the difference 13

Price for Work Done to Date

Option A (cl 11.2(29))

■ each group of completed activities and

Turner & Townsend MTRC NEC4 Level 2 – Module 5 14

Activity Activity Price HK$ Activity Jan Feb Mar Apr

2 Site set up $250,000 Site set up

5 Install piled $750,000

Turner & Townsend MTRC NEC4 Level 2 – Module 5 15

Price for Work Done to Date

Option B (cl 11.2(30))

■ the quantity of the work which the Contractor has completed

Turner & Townsend MTRC NEC4 Level 2 – Module 5 16

Bill Item Description Number / Unit Rate Total

2 Site clearance 100 m2 $1,000 $10,000

3 Install piled 20 No $7,500 $15,000

4 Install piled 0 No $9,500 $0

Price for Work Done to $30,000

Turner & Townsend MTRC NEC4 Level 2 – Module 5 17

Price for Work Done to Date

Option C, D, E & F (cl 11.2(31))

Turner & Townsend MTRC NEC4 Level 2 – Module 5 18

Assuming monthly assessment

1st assessment 2nd assessment 3rd assessment

Final date of payment is within 3 weeks of

Forecasts what will have

Turner & Townsend MTRC NEC4 Level 2 – Module 5 19

Assuming monthly assessment

1st assessment 2nd assessment 3rd assessment

Final date of payment is within 3 weeks of

Forecasts what will have

Turner & Townsend MTRC NEC4 Level 2 – Module 5 20

making the difference 21

Defined Cost - definition

■ Defined Cost is similar to actual cost

Turner & Townsend MTRC NEC4 Level 2 – Module 5 22