NEC4 Main Options A to F: Choosing the Right Pricing and Risk Model

Selecting the NEC4 ECC main option determines how the Contractor is paid and how cost risk is shared. The decision should therefore be made as a commercial and governance decision, not simply as a preference for an Activity Schedule or Bill of Quantities.

Options A to F are selected in the Contract Data. Each option uses the same NEC4 core management processes, including early warnings, compensation events, programme management and payment administration. What changes is the pricing structure, the evidence required and the financial incentive created by the contract.

This is the seventh instalment in our NEC4 series, following guidance on early warnings and compensation events.

The main options at a glance

Option	Pricing document	Primary risk carrier	Cost schedule	Disallowed Cost	Incentive
A	Activity Schedule	Contractor, subject to defined contractual risks	Short Schedule of Cost Components	No	Contractor manages cost against priced activities
B	Bill of Quantities	Contractor carries rate and execution risk; Client carries quantity risk	Short Schedule of Cost Components	No	Contractor manages rates and delivery efficiency
C	Activity Schedule	Shared through pain share and gain share	Schedule of Cost Components	Yes	Joint control of Defined Cost against a target
D	Bill of Quantities	Shared through pain share and gain share; quantity risk remains relevant	Schedule of Cost Components	Yes	Joint control of Defined Cost against a BoQ-based target
E	None	Client carries most cost risk	Schedule of Cost Components	Yes	Cost transparency and control rather than target-cost sharing
F	None	Client carries most cost risk; Contractor manages delivery packages	Schedule of Cost Components	Yes	Management performance, procurement control and supply chain delivery

The distinction between the pricing document and the cost schedule is important. The Activity Schedule or Bill of Quantities establishes the priced or target basis. The relevant cost schedule determines how Defined Cost is assessed, particularly for compensation events and cost-based payment mechanisms.

The NEC4 cost-risk spectrum

The options can be viewed as a spectrum:

More Contractor cost risk
A → B → C → D → E → F
More Client cost risk

A and B place most overall cost and delivery risk with the Contractor, although Option B places quantity risk with the Client. C and D share cost risk through the target mechanism. E and F place most cost risk with the Client and require stronger client-side commercial governance.

This does not mean that every risk automatically follows the broad category. The Scope, Contract Data, secondary options, compensation event provisions and risk allocation clauses must be reviewed together. The main option establishes the commercial framework; it does not remove the need for a properly prepared contract.

Option A: Priced contract with Activity Schedule

Option A uses an Activity Schedule containing lump-sum style prices for defined activities. Payment is generally linked to completed activities rather than to the Contractor’s actual cost.

The Contractor carries most cost risk. If an activity costs more to deliver than the amount included in the Activity Schedule, that difference will generally remain with the Contractor unless it arises from a compensation event or another contractual entitlement.

Option A is usually appropriate where:

• the Scope is sufficiently developed to define the activities;
• the Contractor can price the work with reasonable confidence;
• the Client requires a priced contract structure; and
• activities can be identified, progressed and assessed clearly.

The Short Schedule of Cost Components applies when compensation events are assessed. This means the commercial team must understand the difference between routine payment, which is based on the Activity Schedule, and compensation event assessment, which uses Defined Cost plus Fee under the applicable cost schedule.

Option A can provide strong price discipline, but it also creates a need for a well-structured Activity Schedule. Poorly defined activities can distort both payment and progress reporting.

Option B: Priced contract with Bill of Quantities

Option B uses a Bill of Quantities. Payment is based on measured quantities and tendered rates, together with any applicable lump-sum items.

The Contractor generally carries rate, productivity and execution risk. The Client carries quantity risk because changes to quantities in the Bill of Quantities are dealt with through the contract’s compensation event provisions.

Option B is suitable where:

• the work is naturally measured;
• quantities may change during delivery;
• a Bill of Quantities provides a transparent tender comparison; and
• the Client requires a conventional measurement-based structure.

For example, earthworks, civils and infrastructure packages may be suited to Option B where quantities can be measured reliably but cannot be confirmed fully at tender.

As with Option A, the Short Schedule of Cost Components applies to compensation events. The commercial team must maintain accurate measurement records, rate build-ups and evidence of the quantities completed or changed.

Option C: Target contract with Activity Schedule

Option C combines an Activity Schedule with a target-cost mechanism. The Contractor is paid Defined Cost plus Fee, and the out-turn cost is compared with the target established through the Prices and Activity Schedule.

The difference between the target and the final cost is shared between the parties. Savings produce a gain share and overspend produces a pain share. The Contractor’s share is set out in the Contract Data and may include a formula and a range.

Option C is appropriate where:

• the Client wants collaboration around cost control;
• there is uncertainty that would make a fixed price inefficient;
• the activities and programme provide a suitable basis for establishing the target; and
• both parties can operate a disciplined cost management process.

The Schedule of Cost Components applies. Disallowed Cost is deducted from the amount payable where costs do not meet the contract’s requirements.

Option C changes behaviour because the Contractor does not simply seek to protect a fixed price. The Contractor has a direct financial interest in reducing Defined Cost, while the Client also benefits from efficient delivery. That incentive works only when the target is credible, the records are reliable and the parties understand how the share mechanism operates.

Option D: Target contract with Bill of Quantities

Option D applies the target-cost principles of Option C but uses a Bill of Quantities for the measured aspects of the work.

The target is established from the BoQ and associated prices. Defined Cost plus Fee is used for payment and cost assessment, with gain share and pain share applying to the final comparison against the target.

Option D may be suitable where:

• the work is measurement-led;
• quantities and rates are important to tender evaluation;
• the Client accepts that quantities may change; and
• the parties want the collaborative incentives of a target contract.

The Schedule of Cost Components applies and Disallowed Cost is deducted where relevant. Option D therefore combines the measurement discipline of a Bill of Quantities with the behavioural incentives of a target contract.

The distinction between Option C and Option D is not simply administrative. The chosen pricing document affects how the target is built, how quantity changes are managed and what information the commercial team must maintain throughout delivery.

Option E: Cost reimbursable contract

Option E is a cost reimbursable contract. There is no Activity Schedule or Bill of Quantities establishing a target price. The Contractor is paid Defined Cost plus Fee, subject to the contract’s requirements and any Disallowed Cost.

The Client carries most cost risk. This can be appropriate where the Scope cannot be defined sufficiently at tender, where the work is urgent or exploratory, or where uncertainty makes a priced contract unrealistic.

Option E requires mature Client-side governance, including:

• clear Defined Cost procedures;
• timely cost records;
• effective audit and assurance;
• procurement and supply chain controls;
• disciplined forecasting;
• prompt identification of Disallowed Cost; and
• senior review of emerging cost exposure.

A cost reimbursable contract is not an absence of commercial control. It changes the control task from managing a fixed or target price to managing actual cost, forecast cost, risk exposure and delivery efficiency.

Option F: Management contract

Option F is a management contract. The Contractor provides management and the works are largely delivered by subcontractors or other supply chain organisations.

The Contractor is paid Defined Cost plus Fee, with no target. The Client carries most cost risk, while the Contractor’s principal responsibility is to manage procurement, coordination, subcontract delivery and the wider construction process.

Option F may be appropriate where:

• the Client wants early mobilisation;
• the work will be delivered through multiple packages;
• design or scope will develop during delivery;
• package procurement and coordination are central to success; and
• the Client has the governance capability to manage an open cost position.

The commercial emphasis is on package strategy, subcontract administration, procurement assurance, cost forecasting and management performance. The absence of a target does not remove the need for cost discipline. It increases the importance of transparent records and active Client oversight.

Compensation events across Options A to F

The compensation event process remains consistent across the main options. The event is notified, assessed and implemented through the NEC4 process, with its effect considered against the Prices, Completion Date and relevant Key Dates.

The assessment uses Defined Cost plus Fee, but the applicable cost schedule changes:

• Options A and B: Short Schedule of Cost Components.
• Options C, D, E and F: Schedule of Cost Components.

This difference affects the evidence required. Under Options A and B, routine payment is based on the Activity Schedule or Bill of Quantities, but compensation events require a Defined Cost assessment. Under Options C to F, Defined Cost is central to routine payment and forecasting as well as compensation event assessment.

The commercial team should therefore maintain records that connect:

• the compensation event notification;
• the Accepted Programme;
• labour and resource forecasts;
• subcontractor information;
• cost records;
• the risk register; and
• the updated commercial forecast.

A quotation based only on a supplier’s revised price is unlikely to provide sufficient assurance. The assessment should demonstrate the contractual cause, the forecast effect and the applicable cost treatment.

How to select the right main option

The selection should be based on four practical questions.

1. How certain is the design and Scope?

Where the Scope and activities are well defined, Option A or B may provide appropriate price discipline. Where uncertainty is material, Option C or D may offer a more workable balance between flexibility and cost control.

2. How much cost risk can the Client carry?

Options E and F place most cost risk with the Client. They should not be selected without a clear understanding of the Client’s funding, assurance, audit and forecasting capability.

3. How mature is the commercial governance?

Target, cost reimbursable and management options require robust processes for Defined Cost, Disallowed Cost, forecasting, audit and decision-making. A weak governance framework will reduce the value of the chosen payment mechanism.

4. What will the market price and manage effectively?

The market’s appetite matters. A Contractor asked to accept significant uncertainty under Option A may include substantial risk pricing or decline to tender. A target option may produce better collaboration where the parties can share information and manage risk transparently.

The reason for selecting the option should be recorded and communicated to the delivery team. Behaviour follows the payment mechanism. A team working under a target contract should understand gain share and pain share. A team working under a cost reimbursable contract should understand the importance of Defined Cost and evidence. A team working under a priced contract should understand which risks it has priced and which events remain compensable.

Conclusion

The NEC4 main option is the commercial architecture of the ECC contract. It determines the relationship between payment, risk, evidence, forecasting and incentive.

• A and B provide priced mechanisms with most cost and delivery risk held by the Contractor, subject to the specific quantity position under Option B.
• C and D share cost risk through a target and pain/gain mechanism.
• E and F provide flexibility where the Client is prepared to carry most cost risk and operate stronger commercial governance.

The right option is the one that matches the certainty of the Scope, the Client’s risk appetite, the maturity of the governance framework and the way the work will actually be delivered. Selecting it carefully: and administering it consistently: strengthens forecast integrity, cost control and senior stakeholder confidence.

Sources and references

• NEC4 Engineering and Construction Contract
• NEC: NEC4 ECC pricing provisions – an introduction for new NEC users
• NEC: Understanding Defined Cost in NEC3 ECC and its simplification in NEC4 ECC
• NEC4 ECC main options, Contract Data, Schedule of Cost Components and Short Schedule of Cost Components
• NEC4 ECC guidance on selecting and administering the main options

Social-sharing summary

NEC4 Main Options A to F determine how the Contractor is paid and how cost risk is allocated. This practical guide compares Activity Schedules, Bills of Quantities, target cost, Defined Cost, Disallowed Cost, pain and gain share, cost reimbursable contracts and management contracts.

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About the Author

Nick Garvey is a chartered construction professional (MCIOB, FCaSA, FQSi) with more than 25 years of experience in commercial leadership and project controls across defence infrastructure, government estates, highways, facilities management and public-sector programmes. He leads cost, schedule, risk and performance reporting on major defence infrastructure programmes, chairs risk reviews at senior governance level, and writes about earned value management, quantitative risk analysis, NEC4 contracts and forecast integrity.

All views my own, shared in a personal capacity.