Option E: Cost reimbursable contract | NEC Clauses Explained

Reviewed by LazyQS Editorial·Last reviewed: 2026-02-19

Plain English Explanation

Option E is a pure cost reimbursable contract — the Client pays the Contractor's actual Defined Cost plus a Fee. There is no target, no Activity Schedule, and no BoQ. The Contractor is paid for what they actually spend, subject to the contract's definition of what constitutes Defined Cost.

Option E places the greatest financial risk on the Client and the least on the Contractor. It is appropriate where scope is highly uncertain, where the Client wants maximum flexibility, or where the project must start before design is complete. Examples include emergency works, highly complex refurbishments, or early-stage development works.

Because the Client bears all cost risk, there is no incentive mechanism for efficiency. Contractors must still demonstrate their costs openly and comply with the Defined Cost rules. Fee competition becomes the primary commercial differentiator at tender.

Key Takeaway

Every cost you incur under Option E must be demonstrable under the Defined Cost rules — keep detailed, contemporaneous cost records from day one or risk having legitimate costs disallowed on audit.

What This Means for Subcontractors

Subcontractors under an Option E main contract may be on any form of subcontract. However, the main contractor's obligation to pass open-book cost records to the Client means your costs may be subject to audit. Maintain detailed cost records from day one. The absence of a target means there is less pressure on cost control from above, but the Client may scrutinise costs more closely as a result.

Common Risks & Disputes

1Defined Cost disputes — what costs are recoverable under the schedule of cost components is frequently contested
2Fee adequacy — the percentage fee must cover all overheads and profit; scope creep in the works erodes this
3Client audit rights creating uncertainty and tension on cost records
4No incentive for the Contractor to be efficient — which can create commercial and relationship tensions with the Client
5Subcontractors not understanding that all their costs must be demonstrable under the Defined Cost rules