g sie Systech r COMPENSATION EVENTS UNDER NEC 3: PART 1 r Programme Location: ‘London Bridge Hotel 8-18 London Bridge St London SE1 9SG Date: 6 December 2006 Time: 6:15pm Speaker: Peter MorrisCompensation Events Under NEC 3: Part 1 Peter Morris 1. Introduction 1.1. Compensation events are the very heart and soul of the NEC 3 form of contract. Aside from bonuses under the target cost mechanism, they are the only route to additional time and money under NEC 3. Further subject to one exclusion notification of those events within a strict time limit is @ condition precedent to recovery of any time or money under the contract and possibly at common law for breach. 1.2.For the above reasons the list of compensation events is much more widely drafted than for example the list of “Relevant Events” under the ICT forms of contract. However this can be both a benefit and an administrative burden for as we shall see, there is a heavy, time consuming and costly administrative burden in operating the complex procedures for notification and assessment. 1.3.By way of example of the administrative problems to be faced, the consequence of every change to the Employer's drawings is potentially a compensation event. Every compensation event must be considered and notified and a corresponding quotation detailing the calculation of the cost of the event and its time effects produced and amendments to the Accepted Programme put forward for acceptance. Fine for the occasional amendment but where changes amount to hundreds or thousands both the Contractor's administrative team and the Project Manager can quickly become overburdened. 1.4. Further the Project Manager is often reticent to identify, accept and require quotations for compensation events on the basis that it Is safer to do nothing unless notified. Even when notified the Project Manager can reject the notification upon specified grounds or reject the quotation forcing the Contractor to operate the dispute mechanism to recover time and money. For what is branded as the first partnering contract it is strange that it is geared to raise disputes from day one. 1.5. In this note I will consider: 1.5.1. each of the heads of compensation events in turn; 1.5.2. the procedure for notification of compensation events by the Contractor and Project Manager; and 1.5.3. the requirement for quotations from the Contractor in respect of compensation events. Definition of Compensation Event 2.1,The compensation events are found principally in the standard Core Clause 60 but there are additional events in the additional Clauses in Main Options B and D dealing with issues in relation to the Bill of Quantities and in the Secondary Options X2 (Changes in the law), X12 (Partnering), X14 (Advanced payment to the Contractor), X15 (Limitation of the Contractor's liability for his design to reasonable skill and care) and Y(UK)2 (The Housing Grants, Construction and Regeneration Act 1996). The following are the listed compensation events. The list ofcompensation events in the contract is exclusive but in consequence very wide. “(1) The Project Manager gives an instruction changing the Works Information except + Achange made in order to accept a defect; or + A change to the Works Information provided by the Contractor for his design which is made either at his request or to comply with other works information provided by the Employer. (2) The Employer does not allow access to and use of a part of the Site by the later of its access date and the date shown on the Accepted Programme. (3) The Employer does not provide something which he is to provide by the date for providing it shown on the Accepted Programme. (4) The Project Manager gives an instruction to stop or not start any work or to change a Key Date. (5) The Employer or Others do not work within the times shown on the Accepted Programme, do not work within the conditions stated in the Works Information or * carry out work on the Site that is not stated in the Works Information. (6) The Project Manager or the Supervisor does not reply to a communication from the Contractor within the period required by this contract. (7) The Project Manager gives an instruction for dealing with an object of value or historical interest found within the Site. (8) The Project Manager or the Supervisor changes a decision which he has previously communicated to the Contractor. (9) The Project Manager withholds an acceptance (other than an acceptance of a quotation for acceleration or for not correcting a Defect) for a reason not stated in this contract. (10) The Supervisor instructs the Contractor to search for a Defect and no Defect Is found unless the search is needed only because the Contractor gave insufficient notice of doing work obstructing a required test or inspection. (11) A test or inspection done by the Supervisor causes unnecessary delay (12) The Contractor encounters physical conditions which are within the Site, are not weather conditions and an experienced Contractor would have judged at the Contract Date to have such a small chance of occurring that it would be unreasonable for him to have allowed for them.Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken account in assessing a compensation event (13) A weather measurement is recorded © within a calendar month, * before the Completion Date for the whole of the works and * at the place stated in the Contract Data the value of which, by comparison with the weather data, is shown to occur on average less frequently than once in ten years. Only the difference between the weather measurement and the weather which the weather data shows to occur on average less frequently than once in ten years is taken into account in assessing a compensation event. (14) An event which is an Employer's risk stated in this contract. (15) The Project Manager certifies takeover of part of the works before both Completion and the Completion Date. (46) The Employer does not provide materials, facilities and samples for tests and inspections as stated in the Works Information. (17) The Project Manager notifies a correction to an assumption which he has stated about a compensation event. (18) A breach of contract by the Employer which is not one of the other compensation events under this contract. (19) An event which * stops the Contractor completing the works or + stops the Contractor completing the works by the date stated on the Accepted Programme, and which * neither Party could prevent, * an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it and * is not one of the other compensation events stated in the contract.” 2.2, Options B and D Onlv: Clauses 60,4, 60.5, 60.6 and 60.7 2.2.1, Difference in Final Quantities: Clause 60.4 “A difference between the final total quantity of work done and the amount stated for an item in the Bill of Quantities is a compensation event if * it does not result from a change in the Works Information ,+ the difference causes the Defined Cost per unit of quantity to change and * the rate in the Bill of Quantities for the item multiplied by the final total quantity of work done is more than 0.5% of the total of the Prices at the Contract Date. If the Defined Cost per unit of quantity is reduced, the affected rate is reduced.” 2.2.2. Increased Quantity Cau 1g Delay: Clause 60.5 “A difference between the final quantity of work done and the quantity for an item stated in the Bill of Quantities which delays Completion or the meeting of the Condition stated for a Key Date is a compensation event.” 2.2.3. Correction of Mistakes in the Bill of Quantities: Clause 60.6 “The Project Manager corrects mistakes in the Bill of Quantities which: are departures from the rules for item descriptions and for division of the work into items in the method of measurement or are due to ambiguities or inconsistencies This is stated to be a compensation event which may lead to reduced Prices. Note that the words underlined are absent from NEC 2. 2.2.4. Assessing a Compensation Event Resulting From Correction of an Inconsistency between the Bill Of Quantities and Another Document: Clause 60.7 “In assessing @ compensation event resulting from correction of an inconsistency between the Bill of Quantities and another document, the Contractor is assumed to have taken the Bill of Quantities as correct." 2.3. Secondary Option x2: Changes in the Law “A change in the law of the country in which the Site is located is a compensation event if it occurs after the Contract Date. The Project Manager may notify the Contractor of a compensation event for a change in the law and instruct him to submit quotations. If the effect of @ compensation event which is a change in the law is to reduce the total Defined Cost, the Prices are reduced.” X2.1 2.4, Secondary Option X12: Partnering * “The Core Group may give an instruction to the Partners to change the Partnering Information. Each such change to the Partnering Information is a compensation event which may lead to reduced Prices.” X12.3(6) + “The Core Group prepares and maintains a timetable showing the proposed timing of the contributions of the Partners. The Core Group issues a copy of the timetable to the Partners each time It is revised. The Contractor changes his programme if it is necessary to do so inorder to comply with the revised timetable. Each such change is a compensation event which may lead to reduced Prices.” X12.3(7) 2.5. Secondary Option X14: Advanced payment to the Contractor “Delay in making the advanced payment is a compensation event.” X14.2 (last line) 2.6.Secondary X15: Limitation of the Contractor's liability for his design to reasonable skill and care “If the Contractor corrects a Defect for which he is not liable under this contract It 's a compensation event.” X15.2 2.7. Secondary Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) “If the Contractor exercises his right under the Act to suspend performance, it is @ compensation event.” Y2.4 Change to the Works Information: Clause 60.1(1) 3.1."The Project Manager gives an instruction changing the Works Information except + A change made in order to accept a defect or A change to the Works Information provided by the Contractor for his design which is made either at his request or to comply with other works information provided by the Employer.” 3.2. This event, unchanged from NEC 2, is self-explanatory. 3.3. Clause 20.1 states that "The Contractor Provides the Works in accordance with the Works Information.” 3.4.Works Information is defined in Clause 11.2(19) as “information which either specifies and describes the works or states any constraints on how the Contractor provides the Works and is either in the documents which the Contract Data states it is in or is an instruction given in accordance with this contract.” Any additional specification, description or constraint In those documents will amount to a change to the Works Information. 3.5. Clause 44 contains the procedure for accepting a defect and Clause 44.2 Provides that acceptance of the Contractor’s quotation for that is not a compensation event. 3.6.The Guidance Notes state specifically that clarifications of previously Issued drawings or specifications can only be made by changing the Works Information though not all will effect money or time. 3.7. The power to change the Works Information itself is found in Clause 14.3. 3.8.Material considerations include accidental omissions from the Works Information and other instances of provision of information after award.3.9. As a change to the Contractor's design at the Contractor’s request is not a compensation event it appears that if it results in a saving this will not be shared under Options A and B. 3.10. If the Project Manager does not issue an instruction to change the Works Information when he should this is a breach and hence a compensation event. Late or No Access to Sit lause 60.1(2) 4.1,"The Employer does not allow access to and use of any part of the Site by the later of its access date and the date shown on the Accepted Programme.” 4.2. This allows for changes to programme The Employer's obligation to give access and use of a part of the Site is found in Clause 33, 4.3. The change from NEC 2 reflects the use of the new NEC 3 terminology of access and access date rather than possession and possession date. jure to Provide Agreed Things on Time: Clause 5.1."The Employer does not provide something which he Is to provide by the date for providing it shown on the Accepted Programme.” 5.2. This could include information or physical things such as materials if this is shown on the Accepted Programme. 5.3. The Works Information provides the details of what Is to be provided by the Employer and when and the Contractor has the obligation of including this information on the programme under Clause 31.2. 5.4. Same wording as NEC 2. 6. Project Manager's Instructions to Stop, Start or Change Key Date: Clause 60.1(4) 6.1. "The Project Manager gives an instruction to stop or not start any work or to change a Key Date”. 6.2. NEC 3 now references the change to Key Dates which concept was absent from NEC 2, 6.3. The authority of the Project Manager to instruct the Contractor to stop or not start work is found in Clause 34.1. 6.4. The authority of the Project Manager to change Key Dates is found in Cl.14.3, Note the Project Manager is not empowered to change the Condition corresponding to that date only the date. 6.5. Such an instruction might accelerate a Key Date the cost consequence of which, unlike delay to a Key Date, is not covered by other events. 6.6. An instruction to stop or not to start any work Is likely to give risk to the following three classes of claim:‘+ stoppage/ demobilisation costs; + standing time/ prolongation costs, and; ‘*_restart/ remobilisation costs. 6.7. These classes of claim will be similar to those that will arise under compensation event Y2.4, where the Contractor exercises his right under the HGCRA to suspend performance. 6.8. There is an argument that only the instruction to stop or not start work is ‘a compensation event and that therefore only demobilisation costs are covered under this head. 7. Work of Employers or Others: Clause 60.1(5) 7.4." The Employer or Others * Do not work within the times shown on the Accepted Programme * Do not work within the conditions stated in the Works Information or * Carry out work on the Site that is not stated in the Works Information.” 7.2. The Works Information gives details of the order and timing of work to be done by the Employer and Others and the Contractor is obliged to include this information on the programme under Clause 31.2. 7.3. The third head, the carrying out of other work on the Site is new to NEC 3 and increases the scope of the event considerably. . 7.4, The “Site” is defined as the area within the boundaries of the site and the volumes above and below that which are affected by the works under the contract. 7.5. The Clause is akin to agreeing exclusive possession save as provided in the Works Information and thus goes much further than NEC 2. Project Manager's or Supervisor's Failure to Reply on Time: Clause 60.1(6) 8.1."The Project Manager or the Supervisor does not reply to a communication from the Contractor within the period required by this contract.” 8.2. This is the same wording as NEC 2. 8.3.In addition to stated periods for reply in the various Clauses there is a general obligation to reply within a “period for reply” given in the Contract Data in accordance with Clause 13.3. 8.4.If the Contractor does not reply to a communication from the Project Manager within the period required by the contract, there is no equivalent remedy. In that instance the consequence depend on the circumstances. Examples: + If the Contractor has not submitted a quotation for a compensation event and details of his assessment within the time allowed for then the Project Manager can assess the compensation event.* If the Contractor does not respond to the Project Manager's instruction to submit a quotation for acceleration there is no contractual sanction but it would constitute a breach of contract. 9. Objects of Value/Historical Interest: Clause 60.1(7) 9.1. "The Project Manager gives an instruction for dealing with an object of value or historical interest found within the Site.” 9.2. This is the same wording as NEC 2. 9.3. This Clause ties in with Cl.73.1 “The Contractor has no title to an object of value or of historical or other interest within the Site. The Contractor notifies the Project Manager when such an object Is found and the Project Manager instructs the Contractor how to deal with it. The Contractor does not move the object with: structions.” (Emphasis added) 9.4. “Object of value or historical interest” is not defined and a wide interpretation would favour the Contractor. 10. Change of Decision by Project Manager or Supervisor: Clause 60.1(8) 10.1. “The Project Manager or the Supervisor changes a decision which he has previously communicated to the Contractor”. 10.2. This is the same wording as NEC 2. 10.3. The scope of what constitutes a “decision” is unclear as the word is undefined and again this leaves scope for the Contractor to argue a wide interpretation. 11. Improperly Withholding an Acceptance: Clause 60.1(9) 111. “The Project Manager withholds an acceptance (other than an acceptance of a quotation for acceleration or for not correcting a Defect) for a reason not stated in this contract.” 11.2, The Guidance Notes reiterate that under Clause 13.8 “the Project Manager can withhold acceptance of a submission by the Contractor” for any reason but that "Withholding Acceptance for a reason not stated in the contract is a compensation event’, 11.3 ‘This is the same wording as NEC 2. 11.4, The problem here is that the stated grounds in the contract for withholding acceptance are usually wide enough for the Project Manager to hide behind. For example, under Clause 31.3 reasons to reject a programme include the following: + The Contractor’s plans which the programme shows are not “practicable”; + The programme does not represent the Contractor's plans “realistically”. 11.5. Equally so careless wording of reasons for non-acceptance can be exploited.12. 12.4. 12.2. 12.3. 12.4 13. 13.1. 13.2. 13.3. 14, 14.1. 14.2 14.3. Unjustified Instructions to Search for Defects: Clause 60.1(10) “The Supervisor instructs the Contractor to search for a defect and no Defect is found unless the search is needed only because the Contractor gave insufficient notice of doing work obstructing a required test or inspection” (Emphasis added). This is substantially the same wording as NEC 2 except the wording now makes clear that the search must be a search for a defect. The power to order a search is found in Clause 42.1. ‘The Clause is analogous to the Clauses in other contracts whereby the Contractor foots the bill for searches if his work is discovered to be defective or he covers up work without providing appropriate notice. Unnecessary Delay Due to Supervisor’s Tests: Clause 60.1(44) A test or inspection done by the Supervisor causes unnecessary delay. This is the same wording as NEC 2. This Clause links in with the Supervisor's obligation pursuant to Clause 40.5 to carry out “his tests and inspections without causing unnecessary delay to the work or to a payment which /s conditional upon a test or inspection being successful” (Emphasis added). Unexpected Site Conditions: Clause 60.1(12) “The Contractor encounters physical conditions which are within the Site, are not weather conditions and an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would be unreasonable for him to have allowed for them. Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken account in assessing a compensation event” The last paragraph is additional to the wording found in NEC 2 and makes it clear that it is only the unexpected element that is capable of being a compensation event. Under NEC 2 it was unclear whether one took into account the whole cost or only this unexpected excess. The position is now clear. Whilst the words “physical conditions” encompass more than the usual references to “unforeseen ground conditions” found in other contracts, the Clause makes it clear that the Contractor bears the risk for all physical conditions which have anything but a small chance of occurring,14.4, 14.5. 14.6. 14.7. 14.8. 14.9. 14.9.1. 14.9.2 15. 15.1. The “experienced contractor test” is a test of forseeability. There is no consideration of whether the Contractor actually made allowance for these physical conditions despite the small likelihood of occurrence although the fact that he made allowance would suggest that he considered the risk large enough to merit that. ‘As to the exclusion of "weather conditions” it has been noted by some commentators that the “effect” of "weather conditions” is not excluded arguably allowing a claim for flooding. ‘The Guidance Notes state that in some circumstances unforeseen ground conditions could be an event of prevention under Clause 60.1 (19) in which case the Project Manager is obliged to assume responsibility for managing the consequences. The information that the Contractor is assumed to have taken into account is listed in Clause 60.2 and under Clause 60.3 any ambiguity or inconsistency in the Site Information is construed in the Contractor's favour. Judging Physical Conditions . Note that Clause 60.2 provides that ,"“In judging the physical conditions the 0: fa: inins compensation event (including the information referred to in it) the Contractor is assumed to have taken into account: + the Site Information, * publicly available information referred to in the Site Information, * information obtainable from a visual inspection of the Site and ‘+ other information which an experienced contractor could reasonably be expected to have obtained.” The underlined words have been added to those found in NEC 2 to avoid any suggestion that the Clause would impact on the Contractor's other obligations such as design. Unusual Weather Measurement: Clause 60.1(13) “A weather measurement is recorded ‘+ within a calendar month, + before the Completion Date for the whole of the works and + at the place stated in the Contract Data the value of which by comparison with the weather data, is shown to occur on average less frequently than once in ten years. Only the difference between the weather measurement and the weather which the weather data shows to occur on average less frequently than once in ten years is taken into account in assessing a compensation event.” 1015.2. 15.3. 15.4. 15.5. 15.6. 16. 16.1. 16.2. 16.3. 16.3.1. 16.3.2. Again the wording found in NEC 2 has been clarified to make it lear that the compensation event is the extent of the weather conditions in excess of those occurring at an average frequency of at least once in every ten years. Unlike most standard forms the Contractor can claim both time and money for such exceptional weather conditions but limited as above. This Clause must be read in conjunction with the Contract Data Part 1 Section 6 (compensation events) where the place, type and supplier of the weather measurements and any deemed monthly measurements (where none exist) are recorded. The standard “weather data” in the Contract Data [unless added to or amended (a section is provided for this)] deals with the cumulative rainfall within a calendar month and the number of days of rain, sub zero temperatures and hours of laying snow within that calendar month rather than the actual daily levels of rain, snow and actual daily temperature. Consequently a temperature of minus 100 on a day would not necessarily trigger a compensation event whereas 5 days at minus 1 degree might. As the Guidance Notes point out these are the minimum usual requirements and for example a Contractor might wish to add reference to wind speed if tower cranes are being used. As the weather conditions must occur prior to the Completion Date, this compensation event cannot arise when the Contractor is in culpable delay. This ties in with the principle laid down in Brompton Hospital No 7 to the effect that a Contractor should not be entitled to relief for an event that would not have occurred but for his own delay. Employer's Risk Event: Clause 60.1(14) “An event which is an Employer's risk stated in this contract.” The wording in NEC 2 is “An Employer's risk event occurs”. Employer's risk events are listed in Clause 80.1 and include: “Claims, proceedings, compensation and costs payable” which: * unavoidably arise due to the use or occupation of the Site; * are due to the Employer's negligence, breach of statutory duty or interference with legal rights or that of its employee's or contractors other than the Contractor; * are due to the Employer's fault including design fault. “Loss or damage:” + to Plant and Materials supplied for and on behalf of the Employer prior to receipt and acceptance by the Contractor; at16.3.3. ‘+ to the works, plant and materials due to War etc, strikes etc extending beyond the Contractors employees and radioactive contamination. “Loss or damage or wear” to: 16.3.3.1. parts of the works taken over except loss, damage or wear prior to the Defects Certificate and due to: + Defects and Contractor's or + the Contractor's site activities after take over. k events prior to take over; 16.3.3.2, the works and any Equipment, Plant and Materials retained 16.3.4. 16.4. 16.5. 17. 7A. 17.2. 17.3. 47.4. 17.5. on the Site by the Employer after a termination unless due to Contractor's activities on Site after termination, Additional Employer's risks can be stated in the Contract Data. There is some overlap here with Clause 83.1 under which each party indemnifies the other against claims, proceedings and costs due to an event which is at his risk although this event affords the possibility of an extension of time and provides a process by which costs are assessed for an Employer's risk event not present in Clause 83.1 ‘An Employer's risk event may in some circumstances be a prevention event under Clause 60.1(19). Take Over Prior to the Completion Date: Clause 60.1(15) “The Project Manager certifies takeover of part of the works before both Completion and the Completion Date.” This is the same wording as NEC 2. On a strict interpretation of the Clause the trigger for this compensation event is certification of takeover not takeover itself. Failure to certify would, however, be covered as an Employer's breach. However the Guidance Notes state that use of part of the works before the Completion Date other than for a use stated in Clause 35.2 (to suit the Contractor's method of working or for a reason stated in the Works Information) is a compensation event. The Works Information should therefore carefully state the circumstances in which the Employer can use the works prior to completion without triggering this. For take over to be a compensation event it must occur before both the Completion Date and Completion. If the compensation event mechanism is an exclusive remedy, then it appears that after the Completion Date and before Completion (when the Contractor is in culpable delay) the Employer can takeover a part of the Site without sustaining liability to the Contractor. 1217.6. 18. 18.1. 18.2. 18.3. 18.4. 19. 19.1. 19.2. 19.3. 19.4, This Clause will also apply to Sectional Completion: “In these conditions of contract, unless stated as the whole of the works, each reference and Clause relevant to the works, Completion and Completion Date applies, as the case may be, to either the whole of the works or any section of the works.” X5.1 (X5: Sectional Completion). Failure to Provide Materials and Fa Clause 60.1(16) jes and Samples: “The Employer does not provide materials, facilities and samples for tests and inspections as stated in the Works Information." This is the same wording as NEC 2. The obligation to which it relates is found in Clause 40.2. “The Contractor and the Employer provide materials, facilities and samples for tests and inspections as stated in the Works Information.” A breach by the Contractor is dealt with under Clause 25.2. “The Employer and the Contractor provided services and other things as stated in the Works Information Any cost incurred by the Employer as a result of the Contractor not providing the services and other things which he is to provide Is assessed by the Project Manager and paid by the Contractor.” Project Manager’s Correction of Assumptions: Clause 60.1(17) “The Project Manager notifies a correction about an assumption which he has stated about a compensation event.” NEC 2 referred to notification of a correction of an assumption about “the nature of” a compensation event. The wording now indudes correction of any stated assumption “about a compensation event”. Clause 61.6 allows the Project Manager to state assumptions about a compensation event upon which he makes his assessment where the effects are too uncertain to forecast. If the assumption proves to be wrong he “notifies a correction" There is some ambiguity as Clause 61.6 does not state in terms that the Project Manager can correct the assessment based on the incorrect assumptions, only the assumptions themselves. Clause 65 states the assessment is not revised if a forecast upon which it is based is shown by later recorded information to be wrong. That being said this was clearly intended to be the effect of the Clause. As such this Clause allows for adjustment of time and money by the back route where the original assumption proves wrong. 1319.5. 20. 20.1. 20.2. 20.3. 20.4. 21. 24.1. 21.2. 21.3. 21.4. 21.5. 21.6. It should be noted that there is no corresponding right to alter costs where the Contractor makes incorrect assumptions when quoting (Clause 65.2) making the process rather one sided. Employer's Other Breaches: Clause 60.1(18) “A breach of Contract by the Employer which is not one of the other compensation events under this contract.” This is the same wording as NEC 2. The wording appears to cover any breach whether or not other provisions of the contract outside the compensation events mechanism also provide a remedy. It therefore ignores other remedies such as for late payment and payment on termination found in Clauses 51.3 and 93.2, The Clause is clearly intended as a catch all Clause to preserve the Employer's right to delay damages by preventing time becoming “at large”. The main use to date has been in respect of the Project Manager's failures and late provision of design information. Other Events: Clause 60.1(19) Clause 60.1 19 is 2 new compensation event to NEC 3 and deals with events which prevent the Contractor from completing the works to programme. " (19) An event which ‘+ stops the Contractor completing the works or * stops the Contractor completing the works by the date stated on the Accepted Programme and which ‘+ neither Party could prevent, * an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it and + is not one of the other compensation events stated in this contract.” This is akin to force majeure however, unlike a traditional force majeure Clause which tends to assign loss where it falls under NEC3 the Employer bears the time and cost consequences. The compensation event is linked to Clause 91.7 which makes prevention (R21) a reason which allows the Employer to terminate the contract. ‘The references to "small chance of occurring” and “unreasonable to have allowed for” demonstrate that even though an event was foreseeable it can still be a prevention event. It is hard to imagine what events will fall into t provide a fertile ground for opti Clause and it will istic contractors to argue the case 142.7. 22. 22.1. 22.2. 22.3. 22.4, 22.5. 22.6. for compensation for such matters as sub-contractor insolvency. We will have to wait to see how such arguments are received. It is interesting to note that the Guidance Notes state that if it is possible to meet the date on the Accepted Programme by for example acceleration then this is not an event which stops the Contractor completing the Works by that date even though no acceleration instruction has been given. This is not clear from the wording of the Clause itself. Options B and D Onh Quantity and Quantity Clauses 60.4 and 60.5, The Difference Between the Original Bills of Quanti Differences in Final Quantity: Clause 60.4 “A difference between the final quantity of work done and the amount stated for an item in the Bills of Quantities is a compensation event” provided: * it “does not result from a change in the Works Information” (this criteria is additional to those in NEC 2) and; + it causes the Defined Cost per unit of quantity to change; and * “the rate in the Bill of Quantities for the item multiplied by the final total quantity of work done” is greater than "0.5% of the total of the Prices at the Contract Date’. i.e. the final value of the work for that item is at least 0.5% of the total value of works at the Contract Date (NEC 2 has 0.1% as the percentage). A change in quantities is not always a compensation event and as the Guidance Notes point out the amount due to the Contractor under the contract includes the Price For Work Done to Date which is based on actual quantities. Clause 60.4 expressly states that "if the Defined Cost” (Actual Cost under NEC 2) “per unit of quantity is reduced then the affected rate is reduced” seemingly allowing the Employer to take advantage of bulk purchasing of larger quantities than anticipated. However, It is only the Contractor who can notify this as a compensation event and he is unlikely to if it means a reduction in rate. The proviso that the difference must not result from a change in the Works Information is new to NEC 3 and is a clarification as a change to the Works Information is always a Compensation Event in its own right. The percentage consequent change to the prices necessary for the event to qualify as a compensation event has also been increased from 0.1% under NEC 2 to 0.5% under NEC 3. If the Contractor has subcontracted most of the work, employing this compensation event will largely be an academic exercise based on calculations of Defined Cost. 1522.7. 22.8. 22.9, 22.10. 23. 23.1. 23.2. 23.3 24. 24.4. 24,2. 25. Notification and assessment under this Clause will often be after completion (but remember it must be before the Defects Date pursuant to Clause 61.7). Clause 60.5 -Differences in Final Quantity Causing Delay - “A difference between the final total quantity of work done” (for an item) and the quantity stated for that item in the Bills of Quantities is always a compensation event if it delays: + "Completion; or the meeting of the Condition stated for a Key Date”. Note that the references to meeting a Condition stated for a Key Date is not found in NEC 2. The effect of the Clause is that the Employer guarantees the precision of the quantities in the Bill of Quantities in the context of the Contractor's obligation to complete on time and comply with any Key Dates. Options B And D Only: Correction of Quantities: Clause 60.6 stakes in the Bills of Under Clause 60.6 it is a compensation event if the Project Manager corrects mistakes in the Bill of Quantities which: * are departures from the rules for item descriptions and for division of the work into items in the method of measurement; or * are due to ambiguities or inconsistencies This compensation event is stated to be one which may lead to reduced Prices as under Clause 63.2 the Prices can only be reduced if expressly stated. Note that the words underlined are absent from NEC 2. The intent is no doubt that the Employer is to be held responsible for mistakes in the format of the bills but there is nothing in the wording that would prevent it applying to ambiguities or inconsistencies in the Contractor's rates. Correction of Inconsistencies: Clause 60.7 In assessing a compensation event resulting from correction of an inconsistency between the Bill of Quantities and another document the Contractor is assumed to have taken the Bill of Quantities as correct. This is new to NEC 3, Ambiguity or Inconsistency Within the Site Information Resolved in Contractor's Favour It should be noted that (as under NEC 2) if there Is any ambiguity or inconsistency within the Site Information or in the information referred to in the Site Information then the Contractor is assumed to 1626. 26.1. 26.2. 26.3. 27. 28. 29. 29.4. 29.2. 30. 30.1, 31. 32. 32.4, have presumed the physical conditions most favourable to it carrying out its works. Secondary Option X2 (Changes in the law): lause X2.1 Where it occurs after the Contract Date, this makes a change in the law of the country the Site is in a compensation event. ‘The Project Manager may also notify the Contractor of the change and ask for quotations. If the effect is to reduce the Defined Cost then the Prices are reduced. Secondary Option X12.3(6): Changes in Partnering Information A Core Group instruction to the Partners to change the Partnering Information and a change to the Contractor's programme to comply with the Core Group's revised timetable are compensation events. The latter, it is stated, may lead to reduced Prices. Secondary Option X14 (Advanced payment to the Contractor): Clause X14.2 (Delay in making an advanced payment to the Contractor) Option X14 provides for the Employer to make advance payments to the Contractor. In consequence if those payments are late it is a compensation event. Secondary Option X15 (Limitation of the Contractor's liability for his design to reasonable skill and care): Clause X15.2 (Correction of a defect not the Contractor's liability) Option X15 limits the Contractor's liability for design and in consequence where the Contractor corrects a defect for which he is not liable under the contract it is a compensation event. This is new to NEC 3. Secondary Option Y2.4: Suspension Under HGCRA Suspension under the HGCRA for non-payment is a compensation event. Changes from NEC The old Option U which provided a compensation event for a change in CDM regulations has been removed, Overview of Procedure for Claiming Notify Compensation events are to be notified by the Contractor to the Project Manager within 8 weeks of the Contractor becoming aware of the event, unless it has already been notified by the Project Manager. 1732.2. 32.3. 32.4. 32.5. The Project Manager is obliged to notify the Contractor of compensation events arising from instructions or changed decisions. Failure of the Contractor to notify leads to a loss of right to time or money (unless the Project Manager should have notified the event). Acceptance ‘The Project Manager then accepts or rejects the notified event as a Compensation Event. There is a procedure for deeming acceptance following a failure to reply to the initial and a subsequent notice within 3 weeks. Quotation The Contractor is then instructed or deemed to be instructed to submit a quotation of the time and cost effects of the Compensation Event to the Project Manager. The quotation is to be submitted within 3 weeks of this instruction. This quotation is accompanied by alterations to the Accepted Programme, where time or disruption is claimed. The changes to the Prices are based on actual Defined Cost to date and forecast Defined Cost going forward. The Contractor takes the risk of the forecast being wrong (Clause 65.2). Reply to Quotation The Project Manager has 2 weeks to reply to the quotation (unless longer agreed). The Project Manager can accept the quotation, instruct the Contractor to submit a revised one, state that he will carry out his own assessment or confirm that the relevant instruction or changed decision will not be given or made. If he fails to reply following a further 2 weeks notice acceptance of the quotation is deemed. Assessment by the Project Manager ‘The Project Manager can reject the Quotation and assess the event himself where * he considers that the Contractor has not assessed it correctly, + the Contractor has not submitted the required alterations to programme or + the Project Manager has not accepted the Contractors latest programme for a permitted reason The Project Manager can also make his own assessment where the Contractor fails to submit a quotation within the time allowed. If the Project Manager assesses the Compensation Event he has the same time in which to notify it to the Contractor from the need to assess becoming apparent as that allowed for the Contractor's quotation for the same event. In so assessing the Project Manager can use his own assessment of the programme for the remaining work if there is no Accepted Programme or the Contractor has not submitted a programme or programme alterations he should have. 1832.6. Deemed Acceptance of Quotation If the Project Manager does not assess a compensation event within the time allowed or within two weeks of notification of that fact by the Contractor acceptance of the Contractor's quotation is deemed. 32.7. Implementation On acceptance, deemed acceptance or receipt of the Project Manager's assessment the Prices and time for Completion and the Key Dates are changed accordingly. 33. Notification of Compensation Events: Clause 61 33.1. The Contract provides for Notification by the Project Manager in some circumstances and by the Contractor in others in either case no notification may be made after the Defects Date (Clause 61.7) 33.2. Requirement for the Project Manager to Notify Compensation Events Arising Out of the Project Manager or Supe Giving an Instruction or Changing a Decision: Clause 61.1 33.2.1. In elther of theses circumstances it is the Project Manager's obligation to notify the Contractor of the compensation event at the time he gives the instruction or changes a previous decision. The old wording under NEC 2 referred to notification at “the time of the event” which was less clear. 33.2.2. The Guidance Notes state that Relevant Project Manager's instructions should be issued in relation to events 60.1 (4,4,7,8,10,15 and 17) as they all involve actions by the Project Manager and Supervisor. 33.2.3. Instructions will include changing the Works Information, to stop or not to start work, to change a Key Date, dealing with an objects of value or historic interest, to search for 2 defect early takeover and the Project Manager's correction of assumptions about a compensation event. 33.2.4, ‘As we will see, the Project Manager must also instruct the Contractor to submit a quotation in relation to the cost and time effects of the Instruction or changed decision, with the caveat that he must not request a quotation if the cause of the compensation event is the Contractor's default or if a quotation has already been provided. 33.2.5. Upon receipt of the instruction or changed decision the Contractor is obliged to put it into effect. This appears to be contrary to Clause 27.3 which requires the Contractor to obey any instruction given by the Project Manager or Supervisor in accordance with the Contract. It suggests that the instruction is put into effect when the compensation event is notified but the wording is not clear enough to rely on this, 1933.2.6, 33.2.7, 33.3. 33.4, 33.4.1. 33.4.2, 33.4.3 33.4.4, 33.4.5. The limited circumstances in which the Project Manager is required to notify compared to the Contractor is rather one sided especially given the consequences of failure to notify. The notification requirements can create a heavy administrative burden for the Project Manager. He has to instruct, notify and ask for a quotation in separate communications. If he fails to notify he will leave the Employer open to late claims (as the time bar will not operate) and fall foul of the contract’s deeming provisions Power of Project Manager to Require the Contractor to Submit a Quotation for a Proposed Instruction or Change of Decision: Clause 61.2 Simply put, a Project Manager can request a quotation in advance of making an instruction or changing a previous decision so as to have an idea of the likely time and cost consequences. Notification by the Contractor: Clause 61.3 ‘The Contractor is obliged to notify the Project Manager of events which he considers to be compensation events that either have happened or which he expects to happen, provided that the Project Manager has not already notified him of the event. So in circumstances where the Project Manager should have notified as above but failed to the Contractor must notify the event himself. The Guidance Notes state that events will include a failure by the Employer, Project Manager, Supervisor or Others to fulfil their obligations [events 60.1. (2), (3), (4), (5), (6), (11), (16), and (18)], the Project Manager withholding an acceptance for a reason not stated in the Contract 60.1 (9), or a happening not caused by any party [events 60.1 (12), (13), (14) and (19)] and an event that the Project Manager should have notified under Clause 61.1 but failed to. It should be noted that the Contractor must notify compensation events that he expects to happen not just those that have. It should be remembered that this is independent of the requirement under the contract to give early warning of such matters in any event. There is a very important condition precedent to obtaining time or money in relation to a compensation event. Unless a compensation event is a compensation event that the Project Manager should have notified to the Contractor, it must be notified within 8 weeks of the Contractor becoming aware of the event. If it is not, the Contractor will not be entitled to a change in the Prices, the Completion Date or any Key Date and in consequence may be liable in damages. (Clause 61.3) “61.3 The Contractor notifies the Project Manager of an event which has happened or which he expects to happen as @ compensation event if the Contractor belleves that the 2033.4.6. 33.4.7. 34. 34.1, 34.2. 34.3. event is a compensation event and the Project Manager has not notified the event to the Contractor. If the Contractor does not notify a compensation event within eight weeks of becoming aware of the event, he /s not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not.” The Contractor is obliged to give an early warning as soon as he becomes aware of the matter (Cl.16.1). This gives the Employer the opportunity to take action to mitigate any potential consequences of the event. Failure by the Contractor to give an early warming can reduce the Contractor's entitlement to time and money. The condition precedent is new to NEC 3. Under NEC 2 there was a requirement that stated that the Contractor “notifies” a compensation event “if it is less than two weeks since he became aware of the event” but the majority of commentators considered this insufficiently clear to be a condition precedent. The law requires both the time for compliance and the effect of failing to comply to be clearly and unambiguously set out. Whilst commentators disagree there is certainly a much stronger argument that the new wording achieves this. Whether it is a condition precedent to Common Law claims as well is also a subject of discussion but there is a risk that it may. It would be a foolish Contractor that took the risk of failing to notify whilst the Clause remains untried in the Courts. Project Manager to Decide if Event Notified is a Compensation Event and the Contractor's Entitlement in Principle: Clause 61.4 Within one week of an event being notified by the Contractor (or longer if agreed) the Project Manager must decide: Whether the event falls within one of the heads of compensation events in the contract; Whether it has happened or is expected to happen; Whether it has any effect on defined Cost, Completion or meeting @ Key Date; and Whether the event arose other than through the fault of the Contractor. If the answer to any of the above questions is no then the Prices, Completion Date and the Key Dates remain unchanged and the Project Manager must notify the Contractor of this decision. In that event if the Contractor wishes to take it further he should adjudicate. If the answer to each and all of the above questions is yes, then the Project Manager must notify the Contractor accordingly and 2a34.4, 34.5. 34.6. 34.7. 35. 35.1. 35.2. 35.3. 35.4, 36. 36.1. instruct the Contractor to submit a quotation of the time and/or cost effect of the compensation event. If the Project Manager also decides that the Contractor did not give the early warning of the compensation event that an experienced Contractor could have given then he must also notify the Contractor of this when instructing him to submit his quotation. There are some minor clarificatory amendments in the wording of Clause 61.4 from NEC 2 to make it clear that the Project Manager must notify the Contractor of his decision whatever it is. In addition to the introduction of references to Key Dates the major change is, however, the deeming of acceptance in the absence of a reply from the Project Manager as detailed below. Clearly there are some instances where the effects of a compensation event are too uncertain to be reasonably forecast. In those circumstances the Project Manager may notify the Contractor of the assumptions he has made about the compensation event when he instructs the Contractor to submit a quotation, Assessment of the compensation event is then made on the basis of these assumptions, which if later found to be wrong can be corrected by a notification from the Project Manager. It appears that the Project Manager must notify the Contractor of his decision and instruct quotations whether or not the Contractor has notified the compensation event in time as he can only reject a notification for four stated reasons. Procedure if Project Manager Fails to Reply to Notification of a Compensation Event If the Project Manager falls to reply within one week (or any longer period agreed) of receiving notice of a compensation event from the Contractor then the Contractor may notify the Project Manager to this effect. If the Project Manager then fails to respond to this second Notification within two weeks he is deemed to have accepted that the event is a compensation event and to have instructed the Contractor to submit a quotation. This is new to NEC 3 as under NEC 2 the Project Manager's failure to reply to a compensation event notification was itself a compensation event but there was no procedure other than dispute resolution to resolve the matter as the process could end up going round in circles. The new wording provides a degree of certainty previously absent and is important given the nature of the contract as a day to day management tool and the need to deal with matters as they occur. Quotations for Compensation Events Providing the Quotat 236, ‘A quotation is to be submitted by the Contractor within three weeks of the Project Manager's instruction to do so (unless that period for submission extended by agreement between the Project Manager and the Contractor prior to the expiry of that three week period) (Clauses 62.3 and 62.5). The quotation is the Contractor's assessment of the compensation event. 36.2.1. 36.2.2. 36.2.3. 36.2.4. 36.2.5. Project Manager's Instruction to Provide an Alternative Quotation: Clause 62.4 “After discussing with the Contractor different ways of dealing with the compensation event which are practicable, the Project Manager may instruct the Contractor to submit alternative quotations. The Contractor submits the required quotations to the Project Manager and may submit quotations for other methods of dealing with the compensation event which he considers practicable.” (Clause 62.1") In summary after the Project Manager and Contractor have discussed different practicable ways of dealing with the compensation event * the Project Manager may accordingly instruct the Contractor to provide alternate quotations for different methods of dealing with the compensation event, and; + the Contractor may of his own volition submit quotations in respect of alternate practicable methods of dealing with the compensation event. Under NEC 2 the Project Manager could ask for alternate quotations “based upon different ways of dealing with the compensation event that are practical”. This has been amended to requesting a quotation “after discussing with the Contractor different ways of dealing with the compensation event that are practical.” Under Options A and B the expense of producing the alternative quotation is left with the Contractor (Clause 11,2(22) whereas in Options C, D, E and F it forms part of the Defined Cost and hence of the Price for Works Done to Date. Tenderers under Options A and B are advised by the Guidance Notes to price the risk in their tendered fee percentages. The Notes say that this approach has been taken in Options A and B in the interests of certainty. ‘The Clause gives the Project Manager some flexibility as to how a compensation event is addressed. The Guidance Notes give an example that the Project Manager could prioritise timely completion over cost in this fashion. The 23Contractor may also suggest other methods for dealing with the matter. 36.3. Contents of Quotation: Clause 62.2 36.3.1. 36.3.1.1. 36.3.1.2. 36.3.1.3. 36.3.1.4, 36.3.2. 36.3.3. Every quotation must contain the Contractor's assessment oft Proposed changes to the Prices (based on forecast or recorded Defined Cost Clause 63.1); the Contractor's assessment of any delay to the Completion Date; the Contractor's assessment of any delay to the Key Dates; alterations to the Accepted Programme if the programme for the remaining work is altered by the compensation event. (Clause 62.2) Under NEC 2 the Clause required a “revised programme" to be submitted if the remaining work was “affected” by the compensation event, showing that effect. For a number of minor events the Guidance Notes recommend that Project Managers adopt a procedure for considering all compensation events in the month together in one revised programme but the Contract does not provide for this. 36.4. The Project Manager’s Reply to a Quotation: Clauses 62.3 and 62.5 36.4.1 36.4.2, 36.4.3 The Project Manager must reply to a quotation within two weeks of it being submitted (unless that period for submission extended by agreement between the Project Manager and the Contractor prior to the expiry of that two week period) (Clauses 62.3 and 62.5). This is to avoid the Project Manager sitting on the quotation either through laziness or to obtain greater certainty. The ability to extend recognises that a weather event may not be capable of assessment until the end of the relevant month. 36.5. Contents of Reply to Quotation: Clause 62.3 The Reply to the Contractor's quotation should do one of the following: 36.5.1. 36.5.2. accept the Contractor's quotation; or instruct the Contractor to submit a revised quotation (provided the Project Manager has first explained his reasons for requiring a revised quotation to the Contractor); or 2436.5.3. 36.5.4. 36.6. 36.6.1. 36.6.2. 36.7. Project Manager's Re notify the Contractor that the Project Manager will be making his own assessment; or where the compensation event is a proposed instruction or changed decision, notify the Contractor that such proposed instruction will not be given or proposed change be made. ed Quotation: Clause 62.4 Provided the Project Manager explains his reasons for doing so first he can instruct the Contractor to submit a revised quotation. The Project Manager in requesting his revised quotation can alter the assumptions he has made about the event under Clause 61.6. The time for submission of a revised quotation is within three weeks of instruction to do so (unless that period is extended by agreement prior to the due date). (Clauses 62.3 and 62.5) Project Manager's Failure to Reply to A Quotation Within the Prescribed Time: Clause 62.6 36.7.1. 36.7.2. 36.7.3. This is a new Clause introduced in NEC 3 to protect the Contractor and prevent the Project Manager from waiting until the work is done before accepting a quotation. If the Project Manager does not reply to a quotation within two weeks of it being submitted (or such extended period agreed between the Project Manager and the Contractor prior to the expiry of that two week period) then the Contractor may notify the Project Manager to this effect and if he has submitted more than one quotation for an event he must indicate which quotation he proposes the Project Manager accept. If the Project Manager does not then reply to the notification within two weeks of this second notice then the Contractor's notification is deemed as acceptance of the quotation by the Project Manager unless it relates to a: * proposed instruction by the Project Manager; * proposed change to a decision of the Project Manager. 37. Conclusions ‘We will pick up the thread again in a subsequent seminar with the process of assessment of compensation events and consider their pricing and time considerations and their implementation but for today some thoughts to take away: 37.1. When pricing the job take into account the increased administrative burden and the cost of preparing quotations. 2537.2. 37.3. 37.4. 37.5. 37.6. 37.7. 37.8. 37.9. 37.10. Brief your teams fully on their obligations under the contract before they start the works. Make sure they can identify compensation events and know what notices to serve if the Project Manager fails to issue the instructions or responses he should. Ensure you give early warning. Ensure you notify all compensation events even those that the Project Manager should if he fails to. If in doubt notify. Ensure you price risk when submitting quotations. If you need longer to produce a quotation ask early and don't rely on getting the extension. Put in place a system for identifying and monitoring the Project Manager's dates for response to notifications and quotations. Remember if using an NEC subcontract to keep an eye on notifications from the Subcontractor. Make sure you have sufficient Site administration to handle the burden of possibly thousands of notifications and quotations with the related pricing and programme revision issues. Impress upon your team that they cannot wait and claim later. You have 8 weeks to notify or lose your claim to time and money. 26