# NEC4 Defined Cost: What Counts and What Doesn't Under the Schedule of Cost Components

**TL;DR**

Defined Cost under NEC4 is not simply "what you spent" — it's strictly what the contract says you can recover, calculated using either the Schedule of Cost Components (SCC) or the shorter Shorter Schedule of Cost Components (SSCC).

Only costs explicitly listed in the SCC are recoverable; anything omitted is at the Contractor's risk unless the Project Manager agrees otherwise.

Common pitfalls include claiming for head office overheads, financing charges, and unapproved subcontractor costs — all of which are excluded unless specifically included in the Contract Data.

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Why Defined Cost Matters

If you work with NEC4 ECC contracts daily, you know that Defined Cost is the engine that drives compensation events, target cost adjustments, and ultimately the final account. Get it wrong, and you either leave money on the table or face a disputed assessment.

NEC4 clause 11.2(22) defines Defined Cost as:

> *"the amount of payments made by the Contractor, or amounts due but not yet paid, for resources used in providing the works, calculated in accordance with the Schedule of Cost Components (SCC) or the Shorter Schedule of Cost Components (SSCC)."*

That final phrase is crucial: *calculated in accordance with* the SCC. It means you cannot simply submit your invoices and call it a day. You must map every cost item to the SCC structure and exclude anything that doesn't fit.

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The SCC Structure: A Quick Refresher

The Schedule of Cost Components (main option A or B) divides costs into six categories:

1. **People** (directly employed site staff and labour)

2. **Equipment** (owned, hired, or leased plant)

3. **Plant and Materials** (items for incorporation)

4. **Charges** (third-party services like utilities, testing, haulage)

5. **Manufacture and Fabrication** (off-site work)

6. **Insurance** (premiums for specific policies)

Each category has its own rules on what counts and, just as importantly, what doesn't.

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What Counts: Practical Examples

1. People Costs – The "Directly Employed" Trap

Only people *directly employed* by the Contractor and working on the site or in the Contractor's design office are included. Subcontractor staff are not — unless the subcontract is on an SCC basis (clause 26.3).

**Example:** On a highways project, the Contractor's site agent spends 80% of their time on the ECC contract and 20% on a separate project. The SCC allows recovery of 80% of their salary, employer's NI, pension contributions, and travel expenses (clause SCC1.1). But you cannot claim for the project manager's bonus unless it is part of a "defined benefit" scheme (SCC1.1(5)).

2. Equipment – The "Standing Time" Problem

Owned plant is calculated at the "Equipment Schedule" rates (SCC3.1), which include depreciation, maintenance, and fuel. Hired plant is recovered at the actual hire charge (SCC3.2) — but only for the period it is *required for the works*, not for idle periods caused by the Contractor's own inefficiency.

**Example:** A piling rig is on hire at £2,000 per week. The rig is on site for 10 weeks, but only 8 weeks of work is needed due to a redesign. The Contractor claims 10 weeks. The Project Manager rightly disallows the 2 idle weeks because the rig was not "used for providing the works" (clause 11.2(22)). If the idle period was caused by a compensation event, the Contractor may recover — but only if they notified the Project Manager.

3. Charges – The "Third-Party" Rule

Charges (SCC4) include utilities, transport, testing, and site security. But note: only *third-party* charges are recoverable. If the Contractor uses their own in-house testing lab, the cost must be recovered under People or Equipment, not Charges.

**Example:** A concrete pour requires a third-party slump test from a UKAS-accredited lab. The invoice for £150 is a valid charge. But if the Contractor's own technician performs the test, the cost is their salary (People) — not a separate charge.

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What Doesn't Count: The Hidden Exclusions

1. Head Office Overheads

NEC4 is explicit: head office overheads are **not** included in Defined Cost. They are deemed to be covered by the fee percentage applied to Defined Cost (clause 52.2). This is a common source of disputes.

**Example:** The Contractor's finance director spends 10% of their time on the contract. The Contractor tries to include a proportion of their salary under People. Wrong — the finance director is not "working on the site or in the Contractor's design office" (SCC1.1). The cost is covered by the fee.

2. Financing Charges

Interest on overdrafts, loan arrangement fees, or late payment charges from suppliers are not recoverable as Defined Cost. Clause 52.2 states that the fee percentage includes "costs not included in Defined Cost," which typically covers financing.

**Exception:** If the Project Manager is late in certifying a payment, the Contractor can claim interest under clause 51.2 — but that is a separate entitlement, not part of Defined Cost.

3. Unapproved Subcontractor Costs

If the Contractor appoints a subcontractor without the Project Manager's acceptance (clause 26.1), the costs of that subcontractor are excluded from Defined Cost. The Contractor cannot recover them through a compensation event or target cost adjustment.

**Example:** A mechanical subcontractor is appointed without acceptance. Their £50,000 invoice is submitted as Defined Cost. The Project Manager rejects it. The Contractor must either terminate the subcontract (at their own cost) or accept the commercial hit.

4. "Otherwise Unavoidable" Costs

Clause 11.2(22) includes a key phrase: *"the amount of payments made by the Contractor... for resources used in providing the works."* This excludes costs the Contractor could have avoided with reasonable management.

**Example:** The Contractor orders 20% more rebar than needed due to poor take-off. The excess is not "used in providing the works." The cost of the unused rebar (after deducting scrap value) is not recoverable.

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Practical Scenarios from Site

Scenario 1: The Compensation Event for Poor Ground

A Contractor encounters unexpected rock during excavation. They claim a compensation event for additional breaking. Their Defined Cost submission includes:

Plant hire for a rock breaker (valid under SCC3.2)

Operative's time (valid under SCC1.1)

A 5% "project management fee" (invalid — not in the SCC)

A proportion of the site office rent (invalid — rent is a charge, but only if it is a *third-party* charge; if the Contractor owns the office, it is not recoverable)

**Outcome:** The Project Manager accepts the plant and labour costs but disallows the management fee and office rent. The Contractor learns to stick to the SCC.

Scenario 2: The Target Cost Overrun

Under Option C, the target cost is £5M. The actual Defined Cost is £5.5M. The Contractor argues that £5.5M is their "cost." But the Project Manager reviews the submission and finds:

£200k of head office overheads (excluded)

£100k of unapproved subcontractor work (excluded)

£50k of standing time on hired plant (excluded)

**Adjusted Defined Cost:** £5.15M. The Contractor's share of the overrun is based on this adjusted figure — a significant difference.

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Key Takeaways

**Defined Cost is not actual cost** — it is a contractual calculation based strictly on the SCC. Always map your costs to the SCC categories before submitting.

**Exclusions are as important as inclusions** — head office overheads, financing, and unapproved subcontractor costs are the most common traps. Check the Contract Data for any additional exclusions.

**The Project Manager is your gatekeeper** — if you are unsure whether a cost counts, ask for a written ruling before incurring it. A retrospective dispute is harder to win.

**Keep contemporaneous records** — NEC4 places the burden of proof on the Contractor (clause 63.1). Without timesheets, hire agreements, and invoices mapped to the SCC, your claim will fail.

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*For more on NEC4 cost management, see our posts on [Compensation Event Assessments] and [Target Cost Mechanics].*