8/18/2019 A Practical Guide to Compensation Events
1/2
NEC3 compensation eventsa practical guideWhat is a compensation
event?Compensation events are NEC3terminology for variations, loss
andexpense and extensions of time; a singleassessment that deals
with the entireeffect of an event on time and money
Whilst the name suggests this alwaysresults in something more
for theContractor (a compensation), this is not
always the case, as the saying goes,‘Prices can go down as well
as up’.
Which events?Of course, not all events arecompensation events.
Without exception,compensation events are those whichare not the
fault of the Contractor, butthat does not necessarily mean they
arethe fault of anyone else; they could befault neutral such as
weather conditionsor site conditions. In those cases,compensation
events are used toallocate risk between the Parties.
Events that are compensation events areset out in the
Contract.
There are 19 events listed in clause 60.1of the core clauses, a
further 3 in mainoptions B and D (the bills of quantitiesoptions)
and more scattered through thesecondary options.
In addition, the Employer has the optionto add further events in
the ContractData part 1 and some could be added inthe Z
clauses.
Is there a procedure to follow?It is NEC3, of course there is
aprocedure. Simply put, it is:
• Notication;
• Quotation;
• Assessment;
• Implementation.
Taking each in turn:
NoticationFor a compensation event that arisesfrom an
instruction of the ProjectManager or the Supervisor, for
instance
to change the Works Information or tosearch for a Defect, the
Project Managernoties the Contractor of thecompensation event and
instructs him toprovide a quotation.
For all other compensation events, theContractor noties the
Project Manager.
On receipt of a notication from theProject Manager and an
instruction toprovide a quotation, the Contractorprovides that
quotation within 3 weeks.
That period can be extended byagreement with the Project
Manager,such extension only being effective onreceipt of a
notication from the ProjectManager of an agreement to extend.
On receipt of a notication from theContractor, the Project
Managerresponds with a ‘no’ if:
• The event is the Contractor’s fault;
• It has not occurred or is not goingto occur;
• It has no effect on the Dened Costand the Completion Date;
• It is not one of the listed events.
In all other cases, the reply is ‘yes’ alongwith an instruction
to the Contractor toprovide a quotation.
When instructing the Contractor toprovide a quotation, the
Project Managermay, after discussion with the Contractor,instruct
him to provide other quotations
for alternative methods of dealing withthe event.
In any case, if the effect of the event isunclear, the Project
Manager statesassumptions on which the Contractor isto base his
quotation. If thoseassumptions turn out to be incorrect, it
isanother compensation event.
QuotationUnder NEC3, a quotation has a specialmeaning. It must
deal with all the effectsof a compensation event on both timeand
money.
The quote must be assessed using theprocedures in the contract
and, when
providing his quote to the ProjectManager, the Contractor must
includedetails of his assessment and, if thecompensation event
affects theCompletion Date or the Key Dates, arevised programme for
acceptance.
On receipt of a quotation, the ProjectManager must respond
within 2 weeks(or an agreed and notied extendedperiod). His reply
must be one of the
following four permitted responses:
• An acceptance of the quotation;
• A conrmation that a proposedcompensation event will not
beinstructed;
• A notication that the quotation hasnot been prepared properly
(withreasons) and an instruction toresubmit;
• Ditto, with a notication that theProject Manager will instead
assess
the compensation event.
Assessment A compensation event is assessed as theeffect of the
event on:
• The actual Dened Cost for workalready done plus the
Fee;and
• The forecast Dened Cost for worknot yet done plus the
Fee;and
• Planned Completion as shown onthe latest accepted
programme.
The cut off point between work done andwork not already done is
the date of theinstruction to provide the quotation.
So, what does this mean? In simpleterms, the NEC3 philosophy is
thatneither Party should be disadvantaged orshould unfairly gain
from the happeningof a compensation event.
For those of you who are familiar withmore traditional forms of
contracts withbills of quantities, a contractor wouldordinarily be
reimbursed for additionalwork based on an existing bill rate. In
thatcase, if the bill rate is too low or too high,the Contractor
could unfairly gain anadvantage or suffer a loss.
April 2013
knowledge• experience •resolution © Steven C Evans Ltd
8/18/2019 A Practical Guide to Compensation Events
2/2
Under NEC3, neither the rates and prices in the Activity
Schedule nor the Bill of Quantities areconsidered in assessing a
compensation event.
Rather, the assessment is based on the effect ofthe event on the
Contractor’s cost; i.e. it eitherincreases the cost or decreases
it.
One nal point, it is not actual cost which isconsidered, rather
it is Dened Cos t. These are
costs the Contractor incurs in Providing theWorks which fall
into the particular denition ofDened Cost applicable to the
relevant mainoption.
More on this in a later article.
ImplementationWhen a compensation event is ‘implemented’ itmeans
it is nalised and cannot be changed bythe parties, only by an
adjudicator.
A compensation event becomes ‘implemented’when:
• The Project Manager accepts theContractor’s quotation;
• The Project Manager noties theContractor of his
assessment;
• The Contractor’s quotation is treated ashaving been accepted
by the ProjectManager.
SanctionsIf the Contractor fails to notify the ProjectManager of
a compensation event within 8weeks of him becoming aware of the
event, heloses his right to claim any additional time ormoney
(unless it is an event which the ProjectManager should have notied
to the Contractor).
If the Project Manager fails to reply to anotication of an event
by the Contractor within1 week, the Contractor may notify the
ProjectManager of that failure. If the failure continues fora
further 2 weeks after the reminder, it is deemedthat the Project
Manager has accepted that theevent notied is a compensation event
and aninstruction issued to provide a quotation.
If the Project Manager fails to reply to a
quotation or to assess a quotation within theallowed time, the
Contractor may notify theProject Manager of that failure. If the
failurecontinues for a further 2 weeks, the Contractor’squotation
is treated as being accepted.
There is no express sanction for a situation inwhich both the
Project Manager and theContractor entirely fail to notify an event
whichthe Project Manager should have notied savethat only notied
events are compensationevents and that no event can be notied
beyondthe Defects Date.
Written by Steven Evans who is a construction contractand
commercial expert with particular specialism inNEC3, and is an NEC
accredited tutor.
When is a compensation event not acompensation event?
When it is time barred.
Clause 61 contains a procedure by which theProject Manager and
the Contrac tor mustnotify the other of a compensation event. Inthe
case of the Contractor, clause 61.3requires notication within 8
weeks ofbecoming aware of the event; if he fails to doso, he loses
his right to claim a change in thePrices or the Completion
Date.
This clause provides opportunity for many toclaim a Contractor's
entitlement is 'timebarred'.
However, the Contractor would not be timebarred if he failed to
notify an event which theProject Manager should have notied to
theContractor, but did not.
Clause 61.1 describes such events as those
arising from the Project Manager or theSupervisor issuing an
instruction or changinga decision.
In those events, clause 61.1 requires theProject Manager notify
the Contractor "at thetime", but if he does not, clause 61.3
requiresthe Contractor to notify the Project Managerbut, as above,
without falling foul of the timebar if he fails to do so.
That appears reasonably straightforward, butcloser inspection of
the applicable clausesreveals that NEC3, out of character,
useswords such as "believes", i.e. "the Contractorbelieves that the
event is a compensationevent" and "becoming aware", i.e. "if
theContractor does not notify an event within 8weeks of becoming
aware of the event....".
These words are difcult to dene in acorporate context.
A nal consideration; under clause 61.3 theobligation on the
contractor to notify an eventdoes not arise until the contractor
believesthat event is a compensation event.
However, that same clause prescribes thatthe 8 week time bar
runs from awareness ofthe event. It is possible that by the time
anevent becomes a compensation event (i.e.one that effects the
Prices and theCompletion Date), the 8 weeks may haveexpired.
For more information, please contact us.
Written by Steven Evans who is a construction contractand
commercial expert with particular specialism inNEC3, and is an NEC
accredited tutor.
These articles are for general information purposes only
and should not be relied upon in any specic situationwithout
appropriate legal advice. If you require thatadvice or wish to
discuss any of the issues raised in thisarticle, please contact
us.
Contact:
Steven C Evans LtdRegus HouseFalcon DriveCardiff CF10 4RUt: 029
2002 6565
f: 029 2002 [email protected]
About us:
We are an experienced,professional constructionconsultancy
providing costeffective, practical legal,contractual, commercial
andproblem resolution advice
and training to our clientsthroughout the industry,assisting
them to moreefciently and effectivelymanage their projects
andreduce and resolvedisputes.
Our consultants arequalied in law and have anextensive
constructionbackground as quantitysurveyors, commercial
managers and contractmanagers. Our knowledge combined with
ourpractical experience allowsa fresh approach tothe resolution of
yourbusiness-critical problem, inthe shortest time and at thelowest
cost.
Our Services:
!
Contract advice, vettingand drafting;
! Dispute avoidance;! Dispute management and
resolution;! Time and quantum claim
preparation and analysis;! Adjudication;! Arbitration;!
Mediation;! Litigation support;! Commercial assistance
and management;! Expert witness;
For more information, visitour website.
knowledge• experience •resolution © Steven C Evans Ltd
http://www.stevencevans.com/steven/http://www.stevencevans.com/contact/http://www.stevencevans.com/steven/http://www.stevencevans.com/http://www.stevencevans.com/http://www.stevencevans.com/http://www.stevencevans.com/mailto:[email protected]:[email protected]://www.stevencevans.com/contact/http://www.stevencevans.com/contact/http://www.stevencevans.com/steven/http://www.stevencevans.com/steven/http://www.stevencevans.com/contact/http://www.stevencevans.com/contact/http://www.stevencevans.com/steven/http://www.stevencevans.com/steven/
