Event horizon

All claims by a contractor for extra time and money are dealt with in the NEC3 Engineering and Construction Contract (ECC) under core clause 6, Compensation Events.

Although NEC3 has been hailed as an example of clarity and fairness, new users will find the terminology difficult, and there are areas of the compensation event procedures where a contractor is at risk.

To understand compensation events there is a need to study ‘NEC3-speak’. Gone are the terms in daily usage – valuation, extension of time, relevant events. New terms and their definition must be tackled: defined cost, fee and the price.

There are 19 compensation events listed in clause 60 and more included in the option clauses. They cover variations, prolongation costs and revisions to completion date.

Notifying events

In the event that the project manager or supervisor gives the contractor a written instruction, they must also, at the same time, notify the contractor of a compensation event and instruct them to provide a quotation for the work. A contractor carries out the work and provides the quotation.

The procedure is similar if there is only ‘a proposed instruction’, and the project manager or supervisor requires a quotation in order to aid the decision-making process.

Then the contractor will provide the quotation but will not commence the work until the quotation is agreed.

If a compensation event occurs or the contractor expects it to occur – for example, a delay to the works – the contractor must notify the project manager of the compensation event.

If the contractor fails to inform within eight weeks of becoming aware of the compensation event, and the project manager does not notify the contractor, the contractor will forfeit any change in price, completion date or key date.

This is a risk for contractors, who must be aware that notification of compensation events is a condition precedent to payment.

If the contractor fails to inform within eight weeks of becoming aware of the compensation event, they will forfeit any change in price, completion date or key date

There will be difficulties establishing when the contractor became aware of an event, the point when the notification period began. As payment could be time-barred, disputes are likely to occur. A probable resolution would be to establish the date when an experienced contractor should have become aware of the event.

Assessing events

The procedure is far removed from the valuing method used in other contracts, based on contract rates and sums.

The assessment of defined cost is generally based on the Shorter Schedule of Cost Components (main options A and B) or Schedule of Cost Components (main options C, D, E), and also the data inserted in the Contract Data Part 2 – percentage additions, and so on.

The assessment is made up of the actual defined cost of work already done and/or the forecast defined cost of work still to be done, plus the contractor’s fee, which includes profit and risk, and any applicable costs not included in the defined cost.

It is a complicated and time-consuming task but, most importantly, it can leave a contractor at risk.

The forecast cost does not relate to actual cost. The assessment is not subject to review when the work is done, therefore any under-assessment will be borne by the contractor.

Each assessment will roll up contractor’s risk and any prolongation costs. There is no provision for claims made later.

As the assessment will include time and money, the contractor must also submit any changes to the programme that are necessary due to the compensation event. The danger is that events may be frequent and, as they are the only mechanism for increasing price and extending time, calculation must be prompt and accurate.

The requirement for instructions, notices, quotations, accepted programme updates and assessments for every change affecting time and money is a challenge to both project manager and contractor.

In addition to the risks above, a contractor should be aware of the enormous amount of management resource needed to avoid the process seizing up.