The NEC forms of contract are known for their flexibility in approach to procurement and contract strategies. The choices available are reflected by the range of different pricing options. Each of these main payment options has different features tailored to meet project-specific needs and allocate risk between the parties. The NEC4 Engineering and Construction Contract includes six main options A to F. The client chooses one main option, which together with the core clauses, dispute resolution and the secondary X and Y options, forms the basis of the conditions of contract. This article provides an overview of each of the main payment options.
Main option A - priced contract with activity schedule
Option A is a priced contract that uses an activity schedule as the pricing document and essentially operates as a lump sum contract. However, the agreement does not represent a Guaranteed Maximum Price (GMP). At the tender stage, the contractor prepares and submits its priced activity schedule with its offer. The total of the prices taken from the activity schedule is stated in contract data part two as the ‘tendered total of the prices.’ Option A contracts require a clearly defined scope, which has been sufficiently developed to allow the contractor to prepare its fixed price, as the contractor bears the risk of the cost in the prices offered for each activity.
Payments under option A are made upon the completion of each activity listed in the schedule. This means that the contractor also carries the risk of cash flow, which is dependent on the breakdown of activities and the price allocated to each activity.
Option A is most commonly associated with design and build procurement strategies and is suitable for projects with a clearly defined scope, prepared by the client, or sufficiently detailed performance based requirements that allow a fixed price offer to be made.
Main option B - priced Contract with bill of quantities
Main option B is a priced Contract using a bill of quantities. This approach resembles traditional remeasurement contracts. Usually, the client provides bill of quantities prepared in accordance with a recognised industry method of measurement e.g. CESMM. The contractor prices the bill of quantities and submits this with its offer. option B is most commonly used where the client has undertaken and completed all or most of the design, and accurate quantities can be ‘taken off’ from the drawings.
Under the standard form of the NEC4 Engineering and Construction Contract, the client bears the risk of errors and omissions in the quantities stated in the bill. Payments are determined by actual work performed using the rates or lump sum prices stated in the bill of quantities, so the contractor carries the risk of cost allowed for in the stated prices. The prices are not adjusted for small variations in the actual quantity of work done compared to the quantities stated in the bill of quantities. However, provisions are included in the contract allowing changes to the prices stated in the bill of quantities where the difference exceeds a stated threshold.
Main option C – Target Contract with activity schedule
Main option C employs a ‘target cost’ arrangement combined with an activity schedule used to derive the target. The priced activity schedule represents the contractor’s commercial offer, similar to option A, but the prices stated in the schedule are not used for payment.
Payments are based on the defined cost of work plus an agreed fee percentage, rather than fixed prices for activities. Defined costs represent actual expenditure evidenced by the contractor’s accounts and records and only the costs stated in the contract (Schedule of Cost Components) are recoverable. Some cost are expressely disallowed and others deemed to be included in the contractor’s fee percentage. option C is regarded as an ‘open-book’ contract, allowing the client and Project Manager visibility of the costs claimed by the contractor.
The initial target, set at the start of the contract, is adjusted for changes to scope made by the client and other risks held by the client through the compensation event mechanism. At contract completion, actual expenditure is compared against the initial target price, and resultant savings or overruns are proportionately distributed between the client and contractor according to the share ranges and percentages stated in contract data. This ‘pain-gain’ mechanism is designed to incentivise and reward the contractor and client for delivering a project with savings made against the target price. It could be said that option C is a contract where the risk of cost is shared between the client and the contractor.
Main option C can be combined with secondary option X22: Early contractor Involvement as part of a two-stage contract strategy.
Main option D – Target Contract with bill of quantities
Main option D is very similar to the option C target cost contract but uses a bill of quantities to determine the ‘target cost. It is less commonly used than option C and more suited to projects where the design has been sufficiently developed to allow quantities and a reasonable target to be determined but the scope of work is likely to vary. Payments are structured in the same way as option C, based on Defined Costs plus an agreed fee, with adjustments to the target for changes to quantities and scope.
Main option E - Cost Reimbursable Contract
Main option E is a cost reimbursable contract and typically used where early project initiation is essential despite incomplete or uncertain initial scope definitions. option E offers a quicker procurement route and flexibility for evolving project scopes such as enabling works, emergency work and experimental projects. Under option E, the client reimburses all actual Defined Costs incurred by the contractor, plus a predetermined fee covering overheads and profit. As with options C and D, the contract is run on an ‘open-book’ basis with costs only being reimbursed if they are covered by the costs described in the Schedule of Cost Components. However, option E does not include the ‘pain/gain’ sharing mechanism used in option C and D placing greater financial risk on the client.
Main option F - Management Contract
Main option F is a Management Contract designed to be used for projects where work is to be carried out in separate packages under subcontracts placed by the ‘main’ contractor. The client is expected to have a greater involvement and visibility of the scope, quality and cost of each work package before each subcontract is awarded.
The contractor’s primary responsibility under option F is the procurement, coordination and management of the work package subcontractors. Payments include reimbursement for subcontracted work, plus a management fee, and optionally a lump sum for any work performed directly by the contractor. Generally, the client bears the risk of cost and the contractor is responsible for quality and performance of the Subcontractors. As with all of the main options, the risk of time sits with the contractor. Management contracting is not as popular in the UK as it was in the 1980s and 1990s and is probably the least commonly used main option.
Summary
The NEC4 Engineering and Construction Contract provides six payment options tailored to meet project specific needs and the required allocation of risk. options range from fixed-price lump-sum agreements (option A) and measurement-based contracts (option B), through target cost arrangements (options C and D), to cost-reimbursable (option E) and management contracts (option F). Each option varies by definition, risk-sharing mechanisms, pricing methods, and responsibilities, allowing flexibility in procurement and contract strategies.
If you need any advice in developing a procurement or contract strategy for your project please get in touch by phone or email.
David Hunter
Daniel Contract Management Services Ltd
June 2025