Laura Campbell examines the key features and mechanisms for compensation events in the NEC4 Engineering and Construction Contract (the ‘NEC4 ECC’).
This series of articles has already emphasised that the NEC4 suite works on the basis of collaboration and pro-active contract management. The compensation event provisions reinforce this approach.
What is a Compensation Event?
Under a construction contract, the Client’s aim is for the project to be delivered on time and on budget. However, circumstances may impact on the Contractor’s ability to meet these core requirements. The NEC suite anticipates this by way of Compensation Events (‘CEs’) which may entitle the Contractor to claim additional time and/or money in certain circumstances.
A successful claim for a CE depends upon the Contractor following contractual processes and providing sufficient evidence to substantiate its claim. The award of a CE may be for additional time, additional money, both or neither.
Twenty-one CEs are listed in Clause 60.1 of the NEC4 ECC; they are wide ranging and cover many scenarios which could result in a change to the contract price or desired completion date. Examples include:
- changes to the Scope instructed by the Project Manager (with some exceptions);
- access to the Site not being given to the Contractor by a specified date or failure of the Client to provide something to the Contractor which is required for the works to progress;
- not fully following the contractual provisions with regards to defects;
- finding objects of value, historical or other interest at the Site;
- unexpected weather conditions; or
- early takeover of the Site or part of it by the Client.
There is also the option for the Client to add bespoke CEs if they have specific circumstances that they wish to cater for which are not already covered in Clause 60.1.
CEs do not occur automatically; they rely upon the parties following the contractual notification requirements. They can be notified during the course of a project and no further CEs can be notified once the Defects Certificate has been issued. CEs should not be a surprise to the parties when claims are notified as they should be captured in the early warning register.
At a high level, how does the CE regime work?
Either party can notify the other of a CE depending on the factors. In scenarios where the Contractor notifies a CE, it must do so when it happens or before it happens if possible. If the Project Manager has not received a CE notification within eight weeks of the event occurring, the Contractor is time barred from making a claim (there are exceptions) and they will not be entitled to additional time or money even if they make the most compelling case for this in their claim. The time bar is a tool to proactively manage the contract and to avoid CEs building up as the project progresses. It reinforces the principle of collaboration as it encourages the parties to continually review the project and to make claims for additional time and/or money as and when circumstances arise.
On receipt of a CE notification, the Project Manager has a week (unless there is agreement to a longer period) to assess whether the claim is caught by the CE provisions. If it is, then the Contractor submits a quotation setting out the time and cost impact for the project. The Project Manager must respond within the contractual timescale otherwise the CE is automatically construed as such, and the Contractor is entitled to submit a quotation even if the event does not strictly qualify as a CE when assessed against the provisions of the contract.
The parties then follow the quotation provisions to assess whether the Contractor is entitled to additional time or money. Finally, the parties follow the implementation provisions to adjust the prices and the programme if additional time and/or money is granted.
The quotation provisions at a glance
Key takeaways:
- CEs deal with both time AND money – there is often a misconception that they only deal with cost because that is what we generally associate the terms ‘compensation’ and ‘quotation’ with.
- A claim for a CE must fall within one of the categories set out in Clause 60.1 or as identified in the Contract Data to be considered.
- CE’s should be identified on the early warning register before claims are made.
- Quotations for CEs should detail how much additional money the contractor is claiming as well as how much additional time they require (in either case, this could be zero).
- The CE provisions include a number of ‘deeming’ provisions meaning that if certain timescales are not met, a CE may be accepted by default – the provisions for assessing CEs should be followed in full and timescales complied with to avoid this happening.
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This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email