Under the NEC4 Engineering and Construction Contract (ECC), compensation events are the mechanism for assessing the cost and time consequences of specified events. The Project Manager and Contractor establish whether an event qualifies, assess its effects and make the resulting changes to the Prices and contractual dates. These decisions are made as the work proceeds, rather than left until the final account.
Compensation events include more than instructions changing Scope. Certain failures to provide access or information, specified physical conditions and weather measurements, and changes to earlier decisions can also qualify, depending on the requirements for each event. An event may affect cost without delaying Completion, and notifying it does not establish that all the consequences claimed are recoverable.
The fictional Ironbark Recycled Water Scheme, introduced in NEC4 Explained, provides an example. A regional Australian water utility is procuring a pipeline, pumping station and balancing tank under ECC Option C. The scheme will supply recycled water from an existing treatment plant to an industrial estate, with the plant remaining operational during construction and connection.
Suppose the Project Manager instructs a change to Scope requiring an additional isolation valve chamber along the pipeline route. The chamber is a new requirement, not a clarification of work already required. The Contractor needs to examine how to provide it and assess the effects on procurement, the construction sequence and the connection to the operating plant.
An instruction changing Scope is not always a compensation event. Clause 60.1(1) excludes a change made to accept a Defect and certain changes to Scope provided by the Contractor for its design: those made at the Contractor’s request or to comply with the Client’s Scope. Ironbark’s additional chamber is a new Client requirement, so those exceptions do not apply to the example.
The clause references are to the June 2017 ECC incorporating the January 2023 amendments. The main option affects cost assessment and payment, while selected options and Contract Data can add compensation events. Project-specific amendments need to be checked before applying the standard procedures and periods.
Notifying NEC4 compensation events
For an event arising from an instruction, notification, certificate or changed decision of the Project Manager or Supervisor, clause 61.1 requires the Project Manager to notify the compensation event at the time of that communication. On Ironbark, the instruction for the additional chamber should therefore be accompanied by a separate compensation event notification. The Project Manager also instructs quotations unless clause 61.2 applies because the event arises from the Contractor’s fault or has no effect on Defined Cost, Completion or meeting a Key Date.
The Contractor has its own notification obligation under clause 61.3. It notifies an event which has happened or is expected to happen if it believes the event is a compensation event and the Project Manager has not notified it. This includes an event which the Project Manager should have notified but has overlooked. If Ironbark’s chamber instruction arrived without a compensation event notification, the Contractor would need to notify the event itself.
The usual time bar is eight weeks from the Contractor becoming aware that the event has happened. The period does not wait for the Contractor to finish calculating the effects or recognise the event’s contractual significance. Late notification prevents changes to the Prices, Completion Date or a Key Date, except where the event arises from the specified Project Manager or Supervisor communications. The exception depends on how the event arose; it does not cover every event involving the Client. Clause 61.7 also prevents either the Project Manager or Contractor notifying a compensation event after the Defects Certificate has been issued.
A notification needs enough information to identify the event and explain why the Contractor considers it a compensation event. The completed quotation, supplier prices and detailed programme assessment can follow through the quotation process. Waiting for that information should not hold up a notification which is already due.
Clause 13.7 requires a notification to be communicated separately from other contractual communications. A reference to the chamber in meeting minutes or a progress report should not be assumed to notify the event. The instruction changes the requirement in Scope; the separate notification identifies the compensation event for assessment.
Responding to a notification
When the Contractor notifies an event, the Project Manager normally has one week to reply under clause 61.4. A longer period can be agreed with the Contractor before the reply is due. The Project Manager considers whether the event arises from the Contractor’s fault, has neither happened nor is expected to happen, was notified outside the contractual timescales, has no effect on Defined Cost, Completion or meeting a Key Date, or is not a stated compensation event.
If one of those grounds applies, the Project Manager gives its reasons and notifies that the Prices and dates will not change. Otherwise, it confirms that the event is a compensation event and instructs quotations. Confirming that Ironbark’s additional chamber qualifies allows its consequences to be assessed, without accepting a particular price or establishing that the Completion Date must move.
If the Project Manager misses the reply period, the Contractor may notify that failure. A further two weeks without a reply then results in the event being treated as accepted as a compensation event and quotations as instructed. For these unanswered submissions, the Contractor’s further notification is essential: the missed deadline alone does not produce acceptance.
Preparing and revising quotations
The Contractor has three weeks from the instruction to submit its quotation. Under clause 62.2, the quotation contains proposed changes to the Prices and any delay to the Completion Date and Key Dates, together with details of the assessment. Where the event alters the programme for remaining work, it also includes alterations to the Accepted Programme, whether or not a delay to the Completion Date is claimed.
At Ironbark, the quotation would explain how the chamber affects procurement and the pipeline sequence, including its relationship with the live plant connection. Supplier quotations, resource build-ups and programme logic would support the assessment of the resources and operational support required. Records of work already done would support the relevant actual Defined Cost.
The Contractor and Project Manager may identify more than one practicable way to carry out the change. After discussing alternatives with the Contractor, the Project Manager may instruct alternative quotations, and the Contractor may submit quotations for other practicable methods. A different procurement or construction sequence for the chamber might reduce interference with the connection work. The quotation would need to show how that sequence works and what it requires.
The Project Manager replies within two weeks of submission, accepting the quotation, instructing a revised quotation or stating that it will make the assessment. It explains its reasons before instructing a revision, after which the Contractor has three weeks to submit the revised quotation. Extensions to submission or reply periods under clause 62.5 must be agreed before the relevant deadline, and the Project Manager communicates the agreed extension.
The Contractor does not generally wait for an accepted price before obeying an instruction given in accordance with the contract. If the Project Manager wants to examine the consequences before instructing a change, clause 65 provides a procedure for a proposed instruction. The Project Manager requests a quotation and states the date by which the instruction may be given. The Contractor prices the proposal without putting it into effect. If no reply is given by the stated date, the quotation is not accepted.
Assessing cost and time
The change to the Prices is assessed through the event’s effect on Defined Cost and the resulting Fee. Clause 63.1 separates actual Defined Cost for work done by the dividing date from forecast Defined Cost for work not done by that date. For events arising from the specified Project Manager or Supervisor communications, the dividing date is the date of that communication. For other events, it is the date the compensation event is notified.
Ironbark’s chamber instruction would therefore establish the dividing date. Although the quotation may be prepared later, it must distinguish work done by that date from work still to be done. Later preparation does not change the basis on which the actual and forecast parts are calculated.
The calculation includes the cost effects of work displaced or avoided as well as additional work, although any reduction in the Prices depends on the provisions allowing it. Defined Cost follows the contractual valuation rules rather than simply reproducing the Contractor’s accounts. Options A and B use the Short Schedule of Cost Components. C, D and E use the Schedule of Cost Components and their applicable Disallowed Cost definitions. Contractual rates and percentages can govern individual components, so recorded expenditure alone will not establish the assessment.
Option F has its own Defined Cost provisions and does not use either cost schedule. Clause 63.17 deals separately with changes affecting work the Contractor is to carry out, by agreement or, failing agreement, a Project Manager decision. The main options also determine how the Prices are changed. Under clause 63.2, the Project Manager and Contractor can agree rates or lump sums for assessment, but existing tender rates do not automatically govern every compensation event.
The Fee is calculated using the fee percentage and Defined Cost. A cost treated as included in the Fee cannot be added again as separate Defined Cost. The assessment also includes cost and time risk allowances for matters with a significant chance of occurring which are not themselves compensation events. It assumes that the Contractor reacts competently and promptly, with the resulting Defined Cost and time reasonably incurred.
Where the effects are too uncertain to forecast reasonably, clause 61.6 requires the Project Manager to state assumptions in its instruction to submit quotations. At Ironbark, the Project Manager might state an assumption about the operational arrangements for the chamber where those arrangements cannot yet be established sufficiently to forecast the effects. The quotation would then be assessed on that basis. A qualification added by the Contractor does not become a clause 61.6 assumption merely because it is labelled an assumption.
The Accepted Programme current at the dividing date provides the basis for assessing time. Under clause 63.5, delay to the Completion Date is measured by the event’s effect on planned Completion compared with planned Completion shown on that programme. Planned Completion is the Contractor’s programmed finish, while the Completion Date is the contractual deadline. Delay to a Key Date is assessed through the effect on the planned date for meeting its stated Condition.
The assessment takes account of event delay already included in the Accepted Programme and events between the programme’s date and the dividing date. Comparing two programme printouts prepared at different times would not, on its own, establish the event’s effect.
For Ironbark, a longer chamber procurement period would not necessarily delay Completion by the same amount. The effect depends on the activities affected, their dependencies and available float, together with any practicable resequencing and the operator’s involvement. A programme revision showing a later finish does not itself change the Completion Date. Any change to the contractual date follows the compensation event assessment and implementation process.
Early warnings and compensation events
The early warning process helps the team manage matters affecting the project, while a compensation event notification identifies an event for contractual assessment. An early warning does not replace that notification. Clause 15.1 does not require an early warning for a matter already notified as a compensation event, but the team can continue using the process to manage its effects. At Ironbark, procurement and connection arrangements would still need attention while the quotation was being assessed.
If the Project Manager decides that the Contractor failed to give an early warning which an experienced contractor could have given, it must state that decision in the instruction to submit quotations under clause 61.5. Clause 63.7 then requires assessment as if the warning had been given. The consequence concerns the effects which could have been avoided; it is not an automatic loss of the whole entitlement. Under Ironbark’s Option C, cost incurred only because the Contractor failed to give an early warning required by the contract is also within the Disallowed Cost definition.
Assessments by the Project Manager
Under clause 64.1, the Project Manager must make its own assessment where the Contractor has not submitted its quotation and assessment details in time, or has assessed incorrectly and a revised quotation has not been instructed. It must also assess where, when quotations are submitted, the Contractor has not made programme submissions required by the contract or its latest programme has not been accepted for a stated contractual reason. These programme grounds extend beyond a missing attachment to the quotation.
The Project Manager must use the contractual assessment rules and provide details of its calculation. Clause 64.2 requires it to assess the programme for remaining work where there is no Accepted Programme, required programme submissions have not been made, or the latest programme has not been accepted for a stated reason. It cannot simply choose a preferred price or disregard programme evidence.
The Project Manager has the period allowed for the Contractor’s quotation to notify its own assessment, starting when the need for that assessment becomes apparent. If it misses that period, clause 64.4 allows the Contractor to notify the failure. A further two weeks without an assessment results in the Contractor’s quotation being treated as accepted. If there is more than one quotation, the notification identifies which is proposed for use. This procedure cannot accept a quotation which has never been submitted.
Clause 62.6 applies where the Project Manager fails to reply to a submitted quotation. The Contractor may notify that failure and, if it continues for two weeks after that notification, the quotation is treated as accepted. This accepts the quotation’s assessment. By contrast, the earlier procedure under clause 61.4 establishes that the event qualifies and quotations are instructed. The event record should distinguish those decisions and retain the communications establishing each deadline.
Implementing a compensation event
Under clause 66.1, a compensation event is implemented when the Project Manager notifies acceptance of the Contractor’s quotation, notifies its own assessment, or the Contractor’s quotation is treated as accepted. Clause 66.2 then changes the Prices, Completion Date and Key Dates in accordance with the assessment. An assessment can establish additional cost without establishing any delay to a contractual date.
For Ironbark, implementation would establish the assessed changes for the chamber; it would not mean that the chamber had been built or paid for. Under Option C, the assessment changes the Activity Schedule and the total of the Prices used as the target. Periodic payment continues through eligible Defined Cost plus the Fee, without adding the implemented quotation again as a separate payment. The target adjustment, periodic payment and eventual Contractor’s share remain separate calculations.
Under clause 66.3, an implemented assessment is not revised merely because a forecast is later shown to have been wrong. If an assumption stated by the Project Manager under clause 61.6 proves wrong, however, the Project Manager notifies its correction. That correction is a separate compensation event under clause 60.1(17). A further instruction may similarly create another event. A dispute about an assessment follows the applicable dispute procedure rather than informal retrospective repricing.
Ironbark’s event record should link the chamber instruction to its notification, quotation and implemented changes. Programme revisions need to reflect progress and changes to the remaining work throughout this process; they do not wait for implementation. The record must also distinguish any implemented change to a contractual date from a change to the Contractor’s intended sequence. Procurement and the plant connection can continue to be managed while the cost and time assessment is brought to a conclusion.
