The NEC dividing date separates cost assessed as actual from cost that must be forecast. The question is how to make a sound forecast using the information available, including facts established after that date.
Forecast costs, not facts
NEC compensation event assessments often become an argument about forecast cost versus actual cost. That can obscure a more useful question: what information should be used to prepare the assessment?
Under NEC4 ECC, the dividing date separates work already done from work not yet done. The assessment uses actual Defined Cost for the former and forecast Defined Cost for the latter, together with the resulting Fee. Preparing the quotation later does not move that date.
Forecasting cost does not require the assessor to ignore known facts. The contract requires a forecast of cost, not a forecast of facts that have already been established. Where information is missing, the assessment needs reasoned assumptions. Where relevant information is available, it needs to be examined.
This article considers that distinction in NEC4 ECC and revisits the NEC3 decision in Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43.
What the dividing date determines
Clause 63.1 establishes the dividing date by reference to the relevant communication or compensation event notification. The correct date must be identified from the event and the contract, rather than assumed to be the date the quotation is prepared.
The distinction concerns when the work was done, not simply when an invoice was received or paid. Work not done by the dividing date remains on the forecast side of the assessment even if it has been carried out by the time the quotation is reviewed.
Defined Cost also has a contractual meaning. An invoice or timesheet may provide evidence, but it does not establish that every amount recorded is recoverable. The assessment concerns the effect of the compensation event on Defined Cost, applying the relevant main option, cost provisions and Fee.
For example, where an instruction substitutes one item for another, the assessment normally needs to consider the cost of both the omitted and replacement work. The replacement invoice alone does not show the effect of the change.
Using what is known
A forecast can be based on a measured quantity, a supplier’s quotation, an established labour rate or a known access restriction. It may also require an estimate of productivity, a proposed working method and allowances for risks that remain. There is no reason for every input to have the same degree of uncertainty.
Suppose an instruction requires additional drainage. The drawings establish the length and specification, and a supplier provides a quotation for the pipe. The excavation method and likely output still need to be assessed. The forecast can use the established quantity and supply information while making reasoned allowances for the uncertain work.
Calling the assessment a forecast does not make the drawing dimensions or supplier’s quotation irrelevant. Equally, those facts do not determine every other cost. The assessor still needs to explain the resources, method and allowances used.
Information obtained after the dividing date, but before the assessment is completed, should be examined for what it establishes about the event. Rejecting it solely because it was obtained later avoids the question of what it actually proves.
A survey that confirms the quantity already required by an instruction is different from a later instruction requiring more work. The former may provide better evidence for the assessment; the latter may be a separate compensation event. The date the information became available and what it actually proves should both be recorded.
Evidence clarifying an existing fact is different from hindsight about how a risk eventually turned out. The assessment must distinguish between the two, applying the contract’s rules for forecasts and risk allowances.
What actual records can establish
Actual records may help explain the work involved, the resources used and the conditions encountered. They may support an assumption, expose an error or show that a claimed cost relates to something other than the compensation event.
They still need to be examined. A gang taking five days to carry out work does not, by itself, establish that five days should be allowed in the assessment. The records may include unrelated work, avoidable standing time or consequences of another event. The contractual assumptions about competent and prompt action, and reasonably incurred cost and time, remain relevant.
Nor should records be selected only when they favour one party. If actual information is relied on to support a quantity or rate, contrary evidence about that same quantity or rate needs to be addressed.
Using records as evidence for an assessment is different from adding up expenditure and submitting the total as the value of the compensation event. A quotation should make clear which facts are established, which matters remain uncertain and how each affects the forecast.
What Healthy Buildings decided
The 2017 decision concerned asbestos surveying services under an amended NEC3 Professional Services Contract based on the June 2005 form with June 2006 amendments. Its assessment provisions used Time Charge, rather than the NEC4 ECC Defined Cost terminology used above.
The Employer instructed a change but did not notify the compensation event when it should have done. Quotations followed months later, after the relevant work had been carried out. The Employer rejected them and assessed the effect as zero.
In determining preliminary issues, the Northern Ireland High Court held that actual time and cost records were relevant to its assessment. It rejected the argument that the requirement for a forecast prevented the court from considering that evidence in those circumstances.
The decision concerned that NEC3 contract and a delayed assessment before the court. Its significance here is the court’s treatment of actual records as relevant evidence, not a general replacement of forecasts with actual cost under NEC4.
Once an event is implemented
Preparing an assessment must be distinguished from revisiting an implemented event. Under NEC4 ECC clause 66.3, a forecast turning out to be wrong is not, of itself, a reason to revise the assessment.
If the work costs more or less than forecast, that difference does not automatically reopen the event. Otherwise, the parties would be making provisional allowances and reconciling them to expenditure later, rather than using the contractual assessment process.
Project Manager assumptions under clause 61.6 are a separate matter. Where the effects are too uncertain to forecast reasonably, the contract provides for the Project Manager to state assumptions. A correction to those assumptions is dealt with through the compensation event provisions. This is different from a Contractor’s own estimate proving inaccurate.
Contractual correction mechanisms and dispute procedures must be considered on their own terms. Neither party should assume that a later invoice is enough to revise an implemented assessment.
Preparing a reasoned assessment
The quotation should explain the basis of the assessment without requiring the Project Manager to reconstruct it. In particular:
- Identify the dividing date and explain why it applies.
- Separate the actual and forecast Defined Cost elements by reference to the work done at that date.
- Identify the facts and records used, including when later information became available and why it is relevant.
- Set out the assumptions and risk allowances for matters that remain uncertain, distinguishing any assumptions stated by the Project Manager.
- Show the effect of the event, excluding unrelated costs and applying the contractual cost provisions and Fee.
The parties should not delay an assessment until all costs are known. Where uncertainty prevents a reasonable forecast, it should be addressed through the contract’s procedures. Time effects require a separate assessment under the applicable programme provisions.
A forecast needs an evidential basis. Use relevant known facts and explain the assumptions made where information is missing. Neither the word “forecast” nor a collection of invoices removes the need to assess the event properly.
