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Issue No. 41 January 2008
NEC3: Operating Compensation Event Procedures

'Reprinted from the Construction Law Review 2007, with kind permission from Darrell Smart, Director of Publications, Institution of Civil Engineering Surveyors.'

Users of NEC3 will be aware that it contains a comprehensive set of provisions for dealing with compensation events. Amongst the actions required by the project manager and contractor are

the project manager notifies the contractor of a compensation event and instructs it to submit quotations (clause 61.1)

the contractor notifies the project manager of a compensation event (clause 61.3) and the project manager instructs the submission of quotations (clause 61.4)

the contractor submits quotations for compensation events and the project manager accepts the quotation or gives notice that they will be making their own assessment (clause 62.3)

the project manager makes their own assessment of compensation events in certain specified circumstances (clause 64) and notifies the contractor of their assessment (clause 64.3).

A frequently encountered situation under NEC2 and more recently with NEC3 was that the contact mechanisms for dealing with compensation events had broken down. This was usually as a result of the parties having failed to operate the contract correctly or, in extreme situations, having disregarded the contract requirements entirely. The result of this would normally be that hundreds of claims for compensation events would remain unresolved at the end of the contract.

Meetings would be convened, but no resolution would be forthcoming. The contractor would make multiple references to adjudication, or more likely a single large reference to adjudication. This is the very situation which, it was hoped, NEC procedures would help to avoid.

Improvements in NEC3

NEC3 procedures are designed to avoid the problem of unresolved compensation events and to improve the operation of the compensation event mechanisms. In addition they introduce measures which are clearly intended to encourage the parties to operate the contractual provisions. They do this by imposing what some may regard as fitting punishment for non-compliance.

To discourage the practice of late notification of compensation events by the contractor, the following words have been added to clause 61.3. eIf the Contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is 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.f

The additional words have given rise to a great deal of legal debate as to whether or not they constitute a condition precedent to the contractorfs entitlement. There is also a problem with the starting point for the eight-week period being the state of the contractorfs awareness of the event. This is a somewhat vague concept by from which to measure a period of such contractual importance. However, setting aside these difficulties, the intention of the words are clear and a contractor that chooses to disregard the time limit for notification will, at best, create hurdles that will have to be overcome and will, at worst, lose its entitlement to time and money.

There is also some encouragement to the project manager to respond promptly to an event notified by the contractor. Clause 61.4 contains the following additional provisions. eIf the Project Manager does not notify his decision to the Contractor within either one week of the Contractorfs notification... the Contractor may notify the Project Manager to this effect. A failure by the Project Manager to reply within two weeks of this notification is treated as acceptance by the Project Manager that the event is a compensation event and an instruction to submit quotations.f A failure by the project manager in this regard would result in events being deemed compensation events and a deluge of quotations which had not been specifically requested would inevitably follow.

If the project manager has still not got the message and is inclined to be sluggish with their response to quotations, whether these were requested or not, there is another potential landmine at clause 62.6, which provides as follows. eIf the Project Manager does not reply to a quotation within the time allowed, the Contractor may notify the Project Manager to this effect c If the Project Manager does not reply to the notification within two weeks c the Contractorfs notification as treated as acceptance of the quotation by the Project Manager.f

The message is clear. If the project manager disregards quotations, the outcome could be one

follow the procedures in the contract and have a rolling resolution of compensation events, or face many months of chaos after the project
of deemed acceptance and an extremely unhappy employer.

Ensuring compliance

Whether these measures will have the desired effect of ensuring compliance with the contractual procedures remains to be seen. Is there anything that can be done to ensure compliance?

The obvious advice is that the procedures should be followed. However this is simplistic because there is a practical problem of operating the compensation event procedures at the heart of NEC conditions. This problem comes into sharp focus in circumstances where the scope of work is undefined or works information is incomplete and contains errors.

A huge number of instructions are necessary and a correspondingly large number of compensation events are notified. In this situation an awareness of the contractual requirements may not help. The project manager and the contractor may simply not have the resources to deal with the volume of early warnings, compensation event notices, quotation requests and assessments required.

It takes only a little imagination to envisage a situation where a blizzard of compensation events generates a requirement for a huge amount planning and estimating resources on site. If the resources are not available the system will break down regardless of penalties for failing to comply with contractual time scales.

There are no fail-safe remedies and there is no doubt that NEC3 requires a high standard of contract administration by both the contractor and the project manager. However, if both parties are able and willing to pay close attention to the contract requirements it can be made to work and the type of contractual chaos described above can be avoided. In this regard it is thought that busy construction professionals, who are responsible for running the project, would benefit from a well-devised set of operating procedures for use as part of the project quality plan.

If the operating procedures are followed it will mean that the routine matters of administration are attended to at the time the contract requires. This does not, of course, mean that there will be no problems to be resolved at the end of the contract. However, it will mean that answers to the problems can probably be found without recourse to a multitude of lawyers.

The choice is simple; follow the procedures in the contract and have a rolling resolution of compensation events, or face many months of chaos after the project has been completed. œ

For further information please contact the author on +44 131 200 6234 or email or

Related Documents
ces construction law review 07 compensation events (PDF, 84kb)

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