This note is prepared using the NEC4: Engineering and Construction Contract (ECC) as an example. However, the processes and procedures included in this note apply equally to other NEC4 contracts.
Clause 60.1 sets out a number of events which are identified as compensation events. Note that there may be other events, depending on the choice of Options (for example X2 – changes in the law) or by additional entries in Contract Data.
A compensation event is a term used in NEC contracts to mean an event which can affect the cost to the Client of the work being carried out, the time when the works will be completed, or both. A compensation event is the only way in which these can be changed. There are no other ways in which a Contractor can claim additional payment for carrying out the works or be allowed additional time in which to complete them.
There are three categories of compensation events.
- An instruction or other change of the Project Manager or Supervisor provided for in the contract. The most significant of these is an instruction of the Project Manager which changes the Scope. Unless the change was necessary due to a defect in the work carried out, or a change to the Scope provided by the Contractor for its design needed to correct the design or requested by the Contractor, the instruction will be a compensation event. Whilst some changes may have only minor effects, they are all dealt with using the compensation event procedures in this clause.
- A failure by the Client, the Project Manager or Supervisor to take an action which the contract requires them to do. This includes, for example, a failure of the Client to allow access at the time required by the contract, or the Project Manager failing to reply to a communication within the period required by the contract.
- A supervening event where the risk has been allocated to the Client under the contract. A significant example of that is the Contractor encountering unexpected physical conditions within the site. This is a compensation event if it passes the test that an experienced contractor would have judged to have such a small chance of occurring that it would have been unreasonable to allow for them. Clauses 60.2 and 60.3 set out the assumptions to be taken into account in judging these conditions. Another is the act of prevention, dealt with in clause 19. This is aimed at events which are so unlikely that it would not be sensible to allocate the risk to the Contractor. An example might be a major outbreak of a virus, resulting in the imposition of travel or working restrictions.
One of the compensation events is that the Project Manager or Supervisor changes a decision which was previously communicated to the Contractor. The contract includes many instances where the Project Manager or Supervisor makes a decision. Many of these affect payment – for example changing a decision that a Key Date was not met – which is compensated for by interest payments under the contract. This clause provides compensation for the additional cost and time incurred which arises from of abortive work in complying with the initial decision.
Another event is the Project Manager withholding acceptance for a reason not stated in the contract. The Project Manager is given wide discretion on whether or not to accept a submission from the Contractor. The contract sets out the reasons why the Project Manager may decline to accept, but the Project Manager could decide not to accept for some other reason. That would be a compensation event, and the Project Manager is required to state why the submission is not accepted. An example might be the refusal to accept a proposed subcontractor since the Client objected to their appointment due to their performance on another contract. The Contractor is entitled to recover the additional cost of finding an alternative subcontractor in that case.
Two compensation events which are dealt with in a similar way are a Client’s liability event and breach of contract by the Client. In both cases, a substantial part of the remedy is covered elsewhere. For the Client’s liability, costs which the Contractor pays to Others is met through contract clause 82. For a breach of contract, there may be wider legal remedies. However, in either case if the issue causes the Contractor to incur additional cost in carrying out the works or causes delay to Completion, those costs and additional time are recovered through the compensation event procedure. An example of a Client liability might be damage, or potential damage, to an adjacent building which was the unavoidable result of the works, when the building owner obtained an injunction stopping work for a period until alternative non-damaging construction methods were established. Whilst the Contractor is compensated under clause 82 for any costs it has to pay to the adjacent building owner or in legal costs, its own additional cost of the works and delay to Completion are dealt with under the compensation event procedure.