5 Keys to Effective Use of NEC Compensation Events

5 minute summary of 5 Keys to Effective Use of NEC Compensation Events first published, February 2017.

My name is David Bowen, I’m a Director of Lexius Limited.

This is my 5 min summary of keys to compensation events when using the NEC3 engineering and construction contract. This is going to be helpful for anyone responsible for managing early warnings and compensation events, particularly quantity surveyors, contractors, subcontractors, project managers and supervisors.

Compensation events are risk events which materialise and entitle the Contractor to be compensated for additional time and or money.

There are 19 events listed in NEC3 core clause 60.1.

The first key is to keep a single project register of all risk events which will include early warnings.

This register should identify clearly which risk events have materialised and require compensation for time and or money. A good register of events will list any notices and include dates and will identify in advance if you are going to run out of time.

Whatever you do, don’t end up with 2 project registers of events (1 for the contractor and 1 for the employer). This is a recipe for disaster! It will drive the parties apart and potentially lead to a dispute. I have come across this on a number of projects in dispute.

The second key is to keep on top of the events and to implement them contemporaneously. This means that compensation for events need to be closed out quickly and before work begins. This is challenging.

Compensation for time and money is only a forecast and you can include an amount for risk and state assumptions which can be changed at a later date (if found to be incorrect). The NEC3 works best on the basis that you avoid going back over old ground and compensation for time and money is closed out quickly.

The third key is assessing the impact of events and deciding whether it:

• Has happened or not?
• Was a fault of the contractor?
• Has no effect on time or cost?
• Is a stated event under clause 60.1?

These are the 4 tests that should be applied as to whether there is any entitlement to compensation for time and or money.

The fourth key is to remember that there is a BIG difference between assessing compensation if you are using main options A and B. The forecast compensation is the time awarded and the amount paid to the Contractor. This approach gives you a running final account.

However, for main Options C and D the forecast compensation is the time awarded and the target amount and it is NOT the actual cost paid to the Contractor. With the target contract option the forecast price for compensation adjusts the target only and it has not effect on the cost paid.

The fifth & final key is to implement compensation events. The whole point of NEC is to agree compensation early and then move on. It avoids escalation into disputes and protracted periods to settle final accounts.

Events are only closed out when they have been implemented under NEC3 core clause 65.

Therefore, it very important that this is done so that the effects of any events that impact upon time and Completion can be shown on the programme that is submitted by the Contractor for acceptance.

Events are only implemented when the:

• Contractor’s quote is accepted or it is treated as accepted
• Project Manager makes his own assessment

BUT beware as time bar provisions relating to early warnings and acceptance of quotations may mean that a party incurs a loss if it does not act as stated in the contract!

Thank you for listening.

Those were my 5 keys to compensation events when using NEC3.

Please connect with me on LinkedIn, follow me on Twitter or book online a FREE 1:1 session if you’ve got anything you’d like to ask me about?

Thank you again and I look forwards to hearing from you soon.