# NEC4 Option A vs Option C: Which Pricing Mechanism Fits Your Project?

**Category:** Contract Strategy

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TL;DR

**Option A (Priced Contract with Activity Schedule)** is best for well-defined, low-risk projects where scope is fixed and the Employer wants cost certainty. Risk lies with the Contractor.

**Option C (Target Contract with Activity Schedule)** suits complex, high-risk projects where scope may evolve. Risk is shared through a pain/gain mechanism, incentivising collaboration.

Choose based on project definition, risk appetite, and your team’s ability to manage change. Get it wrong, and you’ll face disputes, delays, or cost overruns.

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The Core Difference: Fixed Price vs Shared Risk

At first glance, NEC4 Option A and Option C look similar: both use an Activity Schedule for payment. But the underlying philosophy is worlds apart.

**Option A** is a fixed-price contract. The Contractor prices each activity, and the total of those prices is the Price for Work Done to Date (PWDD). The Contractor carries the risk of cost overruns—if they underprice an activity, they lose money. The Employer gets cost certainty.

**Option C** is a target cost contract. The Contractor is paid their **Defined Cost** (actual costs) plus a Fee. But the final amount is adjusted using a **pain/gain share** based on the difference between the target cost and the actual cost. If the Contractor beats the target, they share the savings. If they overshoot, they share the cost overrun.

The key clause? **Clause 63.1** in Option C defines how the target cost is adjusted for compensation events. In Option A, **Clause 63.1** does the same, but the assessment is based on the activity schedule rates, not actual costs.

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When to Use Option A: The “Known Scope” Scenario

Real Example: A New Office Fit-Out

You’re managing a fit-out for a 5-storey office block. The design is 95% complete. The client wants a fixed price, and they need to secure financing. Scope changes are unlikely.

**Why Option A works here:**

The Contractor can price each activity (e.g., “Install raised flooring in Level 2 – £45,000”) with confidence.

Compensation events are assessed using the activity schedule rates (Clause 63.1). If the client adds an extra floor, the Contractor quotes at the agreed rates.

The Employer knows the total price upfront. No surprises.

**Risk allocation:** The Contractor carries the risk of productivity, material costs, and subcontractor performance. The Employer carries the risk of scope changes (paid as compensation events).

**Pitfall to avoid:** If the scope is poorly defined, the Contractor will load the activity schedule with high contingencies. You’ll pay a premium for uncertainty. Worse, if a key activity is omitted, you face a dispute over whether it’s a compensation event (Clause 60.1).

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When to Use Option C: The “Evolving Scope” Scenario

Real Example: A Major Highway Upgrade

You’re delivering a 10km highway widening through a congested urban area. Ground conditions are unknown, utility diversions are complex, and the public wants minimal disruption. The design is only 30% complete.

**Why Option C works here:**

The Contractor is paid their **Defined Cost** (actual labour, plant, materials) plus a Fee. This removes the need to price unknown risks upfront.

A target cost is agreed (say £50M). If the Contractor delivers for £45M, they share 50% of the £5M saving (Clause 54). If they hit £55M, they share the pain.

This incentivises the Contractor to innovate, manage subcontractors tightly, and avoid unnecessary delays.

**Risk allocation:** Risk is shared. The Employer pays actual costs, so they avoid a fixed-price premium for uncertainty. But they also share in cost overruns if the Contractor underperforms.

**Pitfall to avoid:** The target cost must be realistic. If it’s too tight, the Contractor will claim every possible compensation event to protect their margin. If it’s too generous, they have no incentive to control costs. Use historical data and independent cost estimates to set the target (Clause 60.4).

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Key Clause Differences to Know

| Aspect | Option A | Option C |

|--------|----------|----------|

| Payment basis | PWDD = total of completed activity prices | PWDD = Defined Cost + Fee (adjusted by pain/gain share) |

| Risk | Contractor carries cost risk | Shared cost risk via pain/gain |

| Compensation events | Assessed using activity schedule rates | Assessed using Defined Cost + Fee |

| Contractor incentive | Finish on time and within priced activities | Beat the target cost to earn gain share |

| Best for | Well-defined, low-change projects | Complex, high-change, or early-stage projects |

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How to Choose: A Practical Decision Framework

Ask these three questions before you pick:

1. **How complete is the design?**

>80% complete → Option A

<50% complete → Option C

In between? Consider Option B (bill of quantities) or Option D (target cost with bill of quantities).

2. **What is the client’s risk appetite?**

Fixed budget, no tolerance for overruns → Option A

Willing to share risk for a better outcome → Option C

3. **How capable is your team?**

Strong in change management and cost control → Option C works well

Weak in managing compensation events → Option A is safer (less room for dispute)

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Common Mistakes to Avoid

**Using Option A on a poorly defined project:** You’ll end up with a sea of compensation events, destroying the fixed-price benefit.

**Using Option C without a robust cost monitoring system:** You need to track Defined Cost weekly. If you don’t, the target becomes meaningless.

**Forgetting the pain/gain share percentages:** NEC4 allows you to set these in the Contract Data (Part 1). A 50/50 share is common, but 60/40 or 70/30 can be better depending on the project. Too low a Contractor share (e.g., 20%) reduces their incentive.

**Neglecting the Activity Schedule in Option C:** Even though payment is cost-based, the Activity Schedule is still used for assessing compensation events (Clause 63.1). Make sure it’s detailed enough to price changes.

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Real-World Case: When Option A Became a Nightmare

A contractor on a large hospital refurbishment used Option A. The design was only 60% complete. The activity schedule was loaded with provisional sums for unknown work. Every week, a new compensation event was raised. By month six, the PWDD was 40% over the original total, and the client was furious.

**Lesson:** Option A requires a fixed scope. If you can’t define it, use Option C and share the risk.

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Key Takeaways

**Option A gives cost certainty but transfers risk to the Contractor.** Use it only when scope is fixed and design is complete.

**Option C shares risk through a pain/gain mechanism.** It’s ideal for complex, evolving projects where collaboration matters.

**Your choice affects every compensation event, payment cycle, and risk allocation.** Get it right at tender stage to avoid costly disputes later.

**Always match the pricing mechanism to the project’s definition and your team’s capability.** There is no “one size fits all” in NEC4.

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*For more on activity schedules and assessing compensation events, see NEC4 ECC Clauses 60.1, 63.1, and 54. For contract data options, see Part 1 data items.*