In Parts 1 and 2 of this series, I looked at People costs, Subcontractors, Charges and the Fee. Together, those articles explored how the PSC4 departs from traditional consultancy charging models by constructing payment through a layered contractual methodology rather than agreed commercial charge-out rates. In this third and final article of the series, I take a detailed look at two further aspects. The first concerns the treatment of insurance under cost component 4 of the Schedule of Cost Components. The second concerns Disallowed Cost.

As illustrated in the Part 2 payment model diagram, Disallowed Cost operates not as a separate payment mechanism but as an adjustment within the determination of Defined Cost itself.

Insurance cost component 4

The treatment of insurance under cost component 4 is often incorrectly assumed to be associated with the Consultant's insurance premiums. The cost of taking out insurance does not form part of the Defined Cost and is therefore, in accordance with clause 52.1, deemed to be included in the Fee.

Cost component 4 states the following are deducted from cost:

• the cost of events for which the contract requires the Consultant to insure and

• other costs paid to the Consultant by insurers.

The first deduction ensures that the ensures that losses allocated to the Consultant’s insurance arrangements do not remain recoverable from the Client. It applies where no claim is made, whether for premium management reasons or because the loss falls within the policy excess. The second deduction avoids the risk of double recovery by the Consultant, including circumstances where reimbursement is obtained under optional insurance arrangements or under policies providing cover beyond the contractual requirements.

In both cases, there is the question of the delay between any insurable losses incurred by the Consultant and when payment is received from its insurer. This presents a cash flow risk and is something the Consultant may need to build into its fee percentage (see above).

Disallowed Cost

The term Disallowed for Option C and E in the PSC4 is defined in clause 11.2(18) and is presented as a structured list of categorised items. The list is similar to that found in the NEC4 Engineering and Construction Contract, but not as extensive.  Disallowed Cost comprises costs that the Consultant cannot recover from the Client. It serves to ensure that payment to the Consultant is limited to costs genuinely and properly incurred in providing the service, whilst placing the financial consequences of non-compliance and inefficiency with the Consultant.

At first glance, users may instinctively view Disallowed Cost as something entirely separate from Defined Cost. However, by definition, Disallowed Cost is part of the assessment for determining Defined Cost. As discussed above, clause 11.2(17) defines Defined Cost as:

‘….the cost of components in the Schedule of Cost Components less Disallowed Cost.’

Clause 11.2(18) then addresses Disallowed Cost.

Disallowed Cost may be better understood as a cost which would otherwise sit within Defined Cost but which is removed from recovery if it falls within the list of ten items described in 11.2(18). Disallowed Cost may be viewed as cost that prima facie satisfies a Schedule of Cost Components test but is subsequently excluded from recovery. This distinction is important as it presents a significant commercial risk to the Consultant. Simply because cost has been incurred, properly recorded and attributed to a cost component does not automatically mean it is recoverable.

Disallowed Cost includes costs unsupported by the Consultant’s accounts and records, or should not have been paid to a Subcontractor or supplier in accordance with its contract. It also includes costs arising from the Consultant’s failure to comply with contractual requirements, including procurement, acceptance, early warning, or notification obligations.

The cost of correcting Defects after Completion are also disallowed. This suggests that defect correction costs incurred before Completion are not automatically disallowed under this limb of clause 11.2(18), although they must still satisfy the wider Defined Cost rules. This is a sensible approach, incentivising the Consultant to promptly take corrective action. It is also worth considering that a consultant operating under an Option A contract is likely to have made some allowance for correcting Defects within its fixed prices. The cost of correcting Defects arising from failure to comply with constraints in the Scope is disallowed.

Further, the cost of resources that were not used to Provide the Service, subject to reasonable allowances for availability and utilisation, are not recoverable. The Consultant also bears its own costs associated with adjudication or tribunal proceedings between the Parties.

Overall, Disallowed Cost allocates to the Consultant the financial consequences of poor compliance, inefficiency, unsupported expenditure and certain dispute-related activities. Unsurprisingly, the assessment of Disallowed Cost can give rise to arguments. In Costain v Bechtel (2005), a dispute arose when the project manager retrospectively disallowed costs under an NEC ECC Option C contract after the amounts had already been assessed, certified and paid.

Summary and Conclusion

The treatment of Insurance and Disallowed Cost completes the picture of the PSC4 cost reimbursable payment regime under Options C and E. Insurance premiums are not identified within the Schedule of Cost Components and therefore, under clause 52.1, would ordinarily be treated as included within the Fee. Instead, cost component 4 operates through deductions intended to preserve the contractual allocation of insured risk and prevent double recovery.

Disallowed Cost performs an equally important, though different, function. Although often viewed as separate from Defined Cost, it forms part of the process of determining Defined Cost itself. Costs may satisfy a contractual cost component yet still fail the recoverability test if they fall within clause 11.2(18).

Taken together, the three articles in this series highlight the extent to which PSC4 Options C and E adopt a genuine cost-based payment methodology. Recoverability depends not upon conventional consultancy selling rates or simple reimbursement of expenditure, but upon layered contractual rules governing People, Subcontractors, Charges, Insurance, the Fee and Disallowed Cost. Whether this is the best approach and one that is followed in precisely the way the PSC4 describes remains open to debate.

David Hunter

May 2026