“Early warning or compensation event?” is the wrong question. They are not mutually exclusive and serve different purposes.
An early warning is used to manage the effects of a problem. The compensation event process determines whether the event changes the Prices, Completion Date or Key Dates and assesses those changes.
The same matter may need both processes. It may also need managing before anyone has enough information to decide whether it is a compensation event.
Managing the problem
Under the NEC4 Engineering and Construction Contract (ECC), clause 15.1 identifies matters which must be notified as early warnings. Failure to comply can have contractual consequences. The team can also use the early warning process to manage other project matters where it would help, whether or not notification is contractually required. Its purpose is to avoid or reduce the effects of problems, and that work need not be confined to matters for which the contract requires a warning.
That work does not depend on establishing liability. A supplier’s difficulty may remain entirely the Contractor’s risk, but the project will still benefit from considering alternative supply or a different sequence. A problem for which the Client is responsible needs the same attention.
The early warning meeting is where the team considers possible responses, decides who will act and reviews the actions already taken. The warning itself does not establish a right to additional time or money.
Assessing time and cost
The compensation event process determines whether the contract allocates the consequences of an event to the Client and assesses the resulting changes to the Prices, Completion Date or Key Dates.
A problem may have several causes. The assessment must identify the effects attributable to the compensation event and distinguish them from those remaining the Contractor’s responsibility. It also assumes that the Contractor reacts competently and promptly, so avoiding unnecessary disruption remains relevant to the assessment.
The notification exception
Clause 15.1 says that early warning of a matter previously notified as a compensation event is not required.
This provision removes the obligation to duplicate a notification merely to avoid the consequences of failing to give an early warning. It does not prohibit a warning or require the team to stop using the early warning process. If there are still effects which can usefully be managed, continue managing them.
A later compensation event notification does not excuse a warning which should have been given earlier. Under clauses 61.5 and 63.7, where the Contractor missed a warning that an experienced contractor could have given, and the Project Manager states this when instructing quotations, the event is assessed as though the warning had been given. The assessment may therefore exclude effects which timely action could have avoided.
Unexpected ground conditions
A Contractor excavating a drainage trench encounters buried concrete. The site team does not yet know its extent, what it forms part of or how difficult it will be to remove. It cannot tell whether the conditions satisfy the contractual test for a compensation event.
It does know that the obstruction could increase cost and delay the work, so the Contractor gives an early warning.
The initial response
The Project Manager enters the matter in the Early Warning Register. At an early warning meeting, the site team, planner and relevant specialists arrange trial pits to establish the extent of the concrete. They consider suitable breaking equipment and identify work which can proceed elsewhere. The register records the actions and who will take them.
None of this needs to wait for a decision on liability. The team needs to understand what it has encountered and keep the work moving where it can.
Identifying the compensation event
Over the next few days, the trial pits reveal substantial buried foundations. The Contractor reviews the findings against the Site Information and the other information relevant under clause 60.2. It concludes that an experienced contractor would have judged the chance of encountering these conditions at the Contract Date so small that it would have been unreasonable to allow for them.
The Contractor now believes the conditions satisfy clause 60.1(12) and notifies a compensation event. It has information to support that belief which was not available when the excavator first hit concrete. The Project Manager agrees that it is a compensation event and instructs a quotation.
The team can investigate the conditions and manage their effects without waiting for agreement on liability. The eight-week notification period in clause 61.3 is not a reason to wait until the investigation is complete before notifying.
The eight weeks run from awareness that the event has happened, rather than the later conclusion that it qualifies as a compensation event. An early warning does not stop that period running. The Contractor should notify once it believes the event is a compensation event, without waiting for agreement on liability or a complete calculation of the effects.
Continuing the work
The team continues arranging specialist equipment and resequencing the drainage work, with actions reviewed through the early warning process. If a response requires a change to the Scope, the Project Manager issues the necessary instruction.
The initial investigation suggested that the obstruction could delay planned Completion by ten working days. With specialist breaking equipment and excavation proceeding from the other end of the trench, the forecast delay is reduced to four working days.
The Contractor’s quotation assesses the additional cost and delay after allowing for that response. Under clause 60.1(12), only the difference between the conditions encountered and those for which it would have been reasonable to allow is taken into account. The cost of ordinary excavation and the effects of unrelated problems remain outside this assessment.
Assume the contract uses Option A and the additional Defined Cost is assessed at $36,000. With a Fee percentage of 10%, the proposed increase to the Prices is $39,600.
The programme assessment, using the Accepted Programme current at the dividing date, shows that the compensation event delays planned Completion by four working days. In this example, the proposed change to the Completion Date is therefore also four working days.
When the Project Manager accepts the quotation, the compensation event is implemented. The Prices increase by $39,600 and the Completion Date moves by four working days. The early warning meeting did not make those contractual changes; it helped the team reduce the disruption on which they are based.
The early warning matter remains open if further action could still reduce its effects. Settling the time and cost assessment is no reason to stop managing the work.
