Legal: Counting the cost of change

When the NEC4 Engineering and Construction Contract came out in mid-2017, one of the first clauses examined was that concerning the assessment of compensation events. Was NEC to retain its prospective approach to valuing the time and money effects of a compensation event? This article looks at issues around valuing a compensation event that is a change in scope (previously called the works information) under NEC and how the rules work when the existence of such a change is only later established.

NEC3 provides at clause 63(1) that assessing the effect of a compensation event (CE) involves assessing changes to the prices of all three of:

• the actual defined cost of the work already done
• the forecast defined cost of work not yet done
• the resulting fee.

The court was asked whether the assessment of the effect of the Compensation event was calculated by reference to the forecast time charge or the actual cost incurred

It envisages that a CE that changes the scope of the works will normally be preceded by a quotation, where the contractor is being asked to “forecast” the effect of the CE on the work still to be done. It can also claim for the effect of the CE on work already done but, given it is a look ahead to a CE still to be instructed, the main focus is the effect on the work to follow. That forecast will inform the employer whether to instruct the CE, thereby accepting the quotation and, it is argued, giving everyone certainty before they begin as to how how much the contractor will be paid.

NEC4 does not change the approach except that it identifies when one moves from actual defined cost to forecast defined cost, with reference to a “dividing date”. The dividing date is defined as the date of the instruction of the project manager (where the CE is a change to the scope of the works). For all other CEs it is the date of notification of the CE. This assumes that both parties are operating strictly in accordance with the contract, where notification is given immediately and/or there is no dispute as to whether what has occurred is a change in scope or other CE. Of course that is not always the case.

How does that approach translate into what happens in practice? This question came under the microscope last year in the Northern Ireland case of NI Housing Executive vs Healthy Buildings [2017] NIQB 43. Under an NEC Professional Services contract the Housing Executive appointed a consultant to undertake asbestos surveying. The scope of the works and extent of the surveys under the contract was found at adjudication to have changed. This had been disputed by the employer. Looking at a value for a change in scope retrospectively is common where the existence of a change or CE is only established later at adjudication or some other form of dispute resolution. But can clause 63 work in these circumstances? There is no quotation and no forecast.

By this time the extra work had been done. Time sheets of the consultant were available. The court was asked whether the assessment of the effect of the CE was calculated by reference to the forecast time charge or the actual cost incurred by the consultant. The professional services contract provided for a “dividing date”.

The court had found in a previous judgment that the date when the employer should have instructed the contractor to submit quotations was 10 January 2013. On that basis, the consultant argued, the quotation for work done after that date should be a forecast. The actual time charges, it argued, were irrelevant.

The court rejected this approach, proffering the following reasons: it is up to the court to assess fair and reasonable compensation. The dispute resolution clause gives the court that power. Evidence from time sheets of what the consultant actually did is clearly the best evidence. It accepted the contract provides that an employer’s assessment cannot be later revised if it got it wrong, but that is not what happened here. Here the employer rejected the forecast (called for several months later) and made a zero assessment. Where that occurs the court found it was not bound by the employer’s assessment. As the tribunal named in the contract it was entitled to look broadly at the problem.

This has yet to be tested in the English courts. It may be they will adopt a stricter approach to compliance with the terms of clause 65.

What about CEs after the facts? Many disputes centre on whether an employer’s instruction is a CE or change and in particular whether certain work carried out by the contractor is a change of scope. How can you retrofit the NEC approach into this scenario? Is forecast cost really the answer for those cases? The employer is not obliged where it disputes there is a CE, when notified by the contractor of one, to instruct a quotation either under NEC3 and NEC4. Should it be?

This question arises not only in NEC but in many detailed contracts, in particular those under PFI, where the whole valuation process of a change is predicated on an advance approved quotation. If the contractor establishes through adjudication that the matter should have been instructed as a change, how is it to be valued? Does the contract give one a mechanism for valuation in these circumstances? Should there be some form of fallback valuation provision for changes found to be so retrospectively or can the current clauses be adapted to suit?