Defined Costs, DCP Rates or Notional Rates

What is a defined cost?

Until 11/2018, a ‘defined cost’ was a cost defined in the contract that was deemed to be commercially sensitive.  A defined cost is the base rate, the cost of an item before profit and goes by several names :

  • defined cost
  • notional rate
  • base rate
  • DCP Cost

With regard to an operative, it is not simply what they are paid but all the components making up the cost of that person to the business.Kier Highways provided a breakdown example of an AIW (Asset Incident Watchmen), the emergency attendance staff to explain the £58.32* cost per hour of an AIW.  This can be found here.

*this is false – the defined cost to Highways England is about £24.

Post 11/0218, when Patrick Carney of Highway England undermined the Authority’s FoIA ‘commercial sensitivity’ exemption by telling a Tribunal the rates were not commercially sensitive, Highways England’s stance on defined costs have changed.  These secret rates which had to be withheld for the good of contracts were now … non-existent, there is no schedule of rates. Instead ‘defined costs’ is a definition …

Kier Highways statements to the Court about the cost:

30/01/2017 Court Transcript – Area 13 (T06B428)

Kier: So the base rate is the notional rate, I do apologise. The charge rate I thought we were talking about.

Q. The base rate is a notional rate?

Kier:Is a notional rate, yeah.

Q. Whose notion is it?

Kier: So it’s the notional rate against in this particular instance the asset incident watchmen, but every individual on a contract has a notional rate.

Q. Sorry, I do not understand. You have got an asset incident watchman.

Kier: Yeah.

Q. He has a notional rate.

Kier: Yeah.

Q. How is that fixed?

Kier: So the notional rate is calculated from the actual costs associated with the role and then divided by the number of working hours, and that’s done annually and audited by Highways England for every single staff member and operative, so it’s not just in the—

Q. Associated with the role and…?

COUNSEL FOR THE CLAIMANT: You said calculated from the actual costs associated
with the role—

Kier: With the role.

Q. —and divided—

Kier: And divided by the number of working hours, sorry.

THE DISTRICT JUDGE: Just so I understand it then, it is £70.32 an hour, is it?

Kier: In this particular instance the notional rate is £70.32, yes, because that is our working area overhead added to that.

Note: the figure of £70.32 was the charge made for an AIW as of 10/2015 for about a year.  Kier Highways claimed that this comprised £58.32 / hour of components and £12 working are overhead, also known as the Third Party Claims Overhead uplift @ 20.58% (in the specific Area).  The breakdown of the £70.32 was supplied by Kier – here.

The facts have been misrepresented to us and to the Court.

30/01/2017 Court Transcript – Area 13 (T06B428)

Q. I am a bit confused. Do the people on the ground fill in both paper and
electronic logs?

Kier: They don’t fill in the electronic; they phone somebody to fill in electronic logs.

Q. All right.

Kier: Which is a contractual thing, yes.

Q. All right. Therefore, it did make its way to the electronic logs.

Kier: Yes, as part of our reporting to Highways England, yes.

Note: This information IS reported to Highways England. The Public Authority has denied receiving the information.

02/02/2017 – Court Transcript – Area 13 (T06B428) continuation from 30/01/2017

Q. Let us move on to the (inaudible). at paragraph 18 of your statement you say that the way in which you price and repair damage to the roadwork is strictly set out in accordance with the contractual terms for the particular area. We do not have any contractual terms that provide your rates before us as evidence, do we?

Kier: No. I think it’s, (inaudible) reference the fact that it’s defined cost.

Q. Where do you make reference to that?

Kier:I‘m just looking for it now. (Pause) I think it references the insurance (inaudible) actually. I think it’s detailed in that.

Q. In the insurance (inaudible)?

A. Yeah.

Q. Well, you have got the insurance (inaudible).

A. Yeah, I‘m just going to flick through it for you now.

Q. It is your fifth exhibit.

A. Yeah.

Q. I do not think there are any rates in there, but if you can point me to—

A. I don’t think it’ll specify individual rates. It talks about the basis of the costs and the fact that we’re audited annually by Highways England on it. It talks about the methods used, so we don’t provide a full schedule of every rate, no, because that would be quite a large document.

Q. All right, so there is no—

A. Yeah, we just talk, we’re talking generally about it and the fact that we use a defined costs method. Which is our how contract is made up, on a defined costs basis and it’s how we deal with schemes and how we deal with general maintenance activities, as opposed to using the schedule of rates function.

Q. All right. None of that evidence is before the court, either.

A. Not the full schedule in that leaflet, no.

Q. I mean, there are no (inaudible) so it is one thing to say the full schedule is not here, but there are not even the particular rates that correspond to the invoice that you have provided.

A. No, we haven’t put a whole schedule in our, in our claims leaflet. This purpose is to explain the processes that we go through as a contractor for an insurer to understand.

Q. All right.

A. Obviously, if they want to go through that, we’re always happy to do that.

Q. However, what I mean is: for example, in terms of the invoice you provided, let us look at AIWs, you have not provided the rate at which the contractually agreed rate which you say is the basis at which you charge AIWs. You have not provided that.

A. Yeah, and the notional rate. The notional rate and its breakdown.

Q. However, you have not provided contractual evidence of what that notional rate is.

A. Not within this, no, but on this particular claim, or with the parties that are in this room, we have been through it on alternative occasions.

Q. I am going to put to you that—

THE DISTRICT JUDGE: Sorry, what does that mean?

A. Well, I know that—

Q. “With the parties,” who are the parties in this room that you are referring to?

A. The loss adjuster, CMA. So we have sat there and gone through our notional rates on the breakdown.

Note: defined costs, base rates, notional rates, call them what you will they are the same thing; a component of the contractually agreed billing process set out in Appendix A to Annex 23 of the contract.  The only other feature is the uplift applied to the rates.

As the national rate to Highways England and Third-Parties is to be common, the same, it is (as we have described to Highway England) impossible for the contract to have been complied with and in turn their witness, tin the name of the public Authority, is misrepresenting facts to secure costs that they did not incur.

The ‘notional rate’ is NOT £58.32, this sum is NOT the base rate used to bill Highway England and Third parties because Highways England has never been billed such a figure, they are charged using a ‘defined cost’ of about £23.

For £23 to be presented to a Third Party at over £65, the uplift is almost 300% – for specific figures, a case study, click here.

02/02/2017 – Court Transcript – Area 13 (T06B428) continuation from 30/01/2017

Q. Who have you discussed it with?

A. Philip Swift. (Pause) (inaudible)

Q. Is that before you carried on at work?

A. No, this was, this was probably going back to… It was either around about November 2015 or it would have been around about January 2016. It was between those two periods; I can’t be exactly precise.

Q. November…

A. 2015.

Q. 16?

A. 2015, 2015.

Q. Yes.

A. And January 2016. I think it’s been discussed twice.

MR. MARSDEN: In those discussions—

A. And what we went through on that occasion was what a notional rate is, and the components that are allowable as per the contract which are set out and we went through on that occasion, and the specific breakdowns for the role that you were talking about but it isn‘t—

THE DISTRICT JUDGE: Sorry, I cannot write down—

A. Sorry.

Q. What we went through is what a notional rate is and—

A. What the contractual components that make that up are and then the actual numbers corresponding to that in relation to this role you‘ve just asked about.

02/02/2017 – Court Transcript – Area 13 (T06B428) continuation from 30/01/2017

MR. MARSDEN: At no point in those discussions did you ever provide the contractual documentation that showed the rate which you say you were required to charge, did you?

Kier: We showed the contractual, the contractual components that are allowed as part of a notional rate, and we also provided a copy of our annual audit because notional rates can change.


Kier. Sorry. Notional rates can change every, every, sort of, year, really, there‘s an annual reconciliation that takes place because notional rates are based upon costs attributes and we provided the extract from the contract that said what the notional allowable are, and we went through what that breakdown was at that particular time and we also provided a copy of our audit which I think our last audit at that time was January last year. We have had another one in December.

Q. I am going to put to you that you did not provide the audit to the defendant’s representatives, and I am going to put to you that in those discussions it was put to you on several occasions, and no answer was provided, to the fact that the notional rate that you charged the third party insurer in this case was £58 plus – this is for AIW – a 20.58 per cent overhead. However, the notional rate which you had charged Highways England was £23 and a smaller percentage increase. I am going to put to you that this information was made very clear to you by the representatives of the defendant and you have not provided a response to that.

Kier. Not at all. I‘m not sure where the 23 comes from, genuinely I don‘t and I believe that over the course of the last I8 months there’s been lots of clarifications sent by the loss, by Philip and his team to Highways England asking for clarification and although they‘re not available to me in front of me, I can get electronic copies quite quickly of various freedom of information requests that confirm the rates that we charged. The basis of them are the same and that’s confirmed by Highways England. There’s been a lot of them over the last year though, as you can appreciate.

Note: how could Kier’s head of claims, who reviewed their processes and put in place a new schedule of rates as of 10/2015 be ignorant of what the contractor charged their client, Highway England?

13/05/2018 – ultimately in response to an FoIA made by CMA, Highways England released some AIW rates, the figures can be found here. an extract being:

Asset Incident Watchmen (AIW) Rates : Asset Support Contract Area 9
14/07/2014 29/09/2015 08/12/2015 31/12/2015 02/02/2016
to to to to to
Employee Position 24/09/2015 23/11/2015 27/12/2015 26/01/2016 11/04/2016
1 Asset Incident Watchman  £    22.74  £    20.19  £    22.94  £    23.46  £    23.71

02/02/2017 – Court Transcript – Area 13 (T06B428) continuation from 30/01/2017

Q. If we just look as the asset inspection watchmen, if we look at the base rate, so that is £70.32 which is the notional rate which I understand to be the salary plus the uplift.

A. Costs. Well, it’s notional rate, notional… A notional rate is made up of costs for that person. So a cost to a business of a person isn’t just a salary, it’s things like pensions, pensions, PPE, training, all these different things. There’s lots of different elements to it which are defined by our contract and is the basis that we would charge Highways England on.

Q. I see. All right.

A. No, if that was their salary we’d all be wanting to do that job, would we?

19/04/2017 – Court Transcript

HODGKIN: Not at all, thank you. Therefore, can you help me just to understand how the base rate figures have been calculated?

Kier: So, effectively, all the costs associated, attributed to a person are put in to against a person, and then once a year our finance team divide that obviously by the number of working hours, and they come up with an hourly rate. And then on top of the hourly rate there‘s a contract overhead applied, which in this case is 20.58 per cent. That is an overhead that was calculated at the contract end stage and given to us by Highways England to use, and it’s based on all the associated overheads of running an operation like this.

Q. Where do I see the 20.5 8 per cent on these figures?

Kier: They’re already in the figures. This one isn’t breaking down.

Q. What is the figure to which the 20.58 per cent is applied to?

Kier: Off the top of my head I‘m not sure because I haven’t got it in front of me, but I have provided that to your client before. I think it’s, well, it’s 70 less 20.58 per cent.

THE DEPUTY DISTRICT JUDGE: Therefore, just tell me again what the 20.5 8 is. You are going rather fast.

Kier: Sorry.

Q. 20.58 per cent is what?

Kier: Is the contract claims overhead, so it’s an overhead that’s been calculated by Highways England during the tender stage that we are told to apply to claims, and it’s based on all of our overhead costs and a figure, and then a calculation is done with the procurement team that basically says, you know, to recover your overall overhead costs you need to apply X per cent to each claim. Every contract in the country has a different contract overhead that is based on actual cost.

Q; All right. What is the 20.58 per cent applied to?

Kier: Our, our notional rate which is our defined cost rate, so I think it’s 50 something pounds, off the top of my head

19/04/2017 – Court Transcript

Q. Repair of damage including supervision management, traffic management during repair and initial response to incident clear up and make safe. Can you tell us the defined costs for these three items?

A. It’s the figures and the breakdown minus the 20.58 per cent. The financial annual work that goes on to go through the notional rates for each person every year, I don‘t have a copy of that on me because the file’s massive. But we do get audited by Highways England every year to make sure that we’re abiding by this, and I know that your client’s had a copy of that audit several times.

THE DEPUTY DISTRICT JUDGE: Are these the figures in the invoice?

A. Yeah. Yeah. So fundamentally, the figures in the invoice is the defined cost plus the claims overhead that, that annex 23 talks about.

Q. The 23.4?

A. Yeah.

MR. HODGKIN: How is one to understand what the defined costs is made up of?

A. I have produced it before for your client.

Are defined costs the same to Insurers and Third-Parties?

No! But they should be, this is the contractually agreed process which Kier have failed to comply with and Highways England have failed to enforce.  The base rates are to be the same – the evidence is here.