Even the best planned and managed construction projects will experience delay from time to time. Depending on the cause of the delay, there may be time and cost implications for both the client and the contractor. It is therefore vital that the parties understand the contractual processes for dealing with delay.
In the NEC4 Engineering and Construction Contract (ECC), if a delay occurs as a result of a compensation event occurring, the contractor may be entitled to a change to the prices, key dates and the completion date. Compensation events are effectively defined circumstances over which the contractor normally has little control and which are substantially listed in clause 60 of the ECC.
NEC4 provides comprehensive provisions as to how to deal with compensation events. These provisions allow the parties to navigate their way through from notification of the compensation event to the compensation event being implemented. They include mechanisms which deal with quotations from the contractor, and how the project manager assesses a compensation event.
The provisions are there to provide clear guidance to the parties if the worst happens and delay or disruption arises. As with the NEC3 version, the NEC4 ECC is meant to be an active tool to manage risks and deal with them as they arise. It works best if used as intended rather than being left in a desk drawer.
In this article, which is based on a seminar we gave to the Chartered Institution of Civil Engineering Surveyors and RICS Matrics on 31 October 2019 in Glasgow, we list some of our top tips for those making and dealing with compensation events in relation to delay and disruption under the NEC4 ECC.
Notifying a compensation event
Firstly, as with NEC3, NEC4 sets a time bar for contractors wishing to notify a compensation event. The contractor is required to notify a compensation event within 8 weeks, ‘of becoming aware that the event has happened’. Failure to do so means the contractor loses its right to additional time or money. This is in-keeping with NEC’s ethos of dealing with issues as they arise. It is worth bearing in mind that this time-bar provision may not be as restrictive as it first seems as there is an exception where the compensation event arises from the project manager or supervisor giving, ‘an instruction or notification, issuing a certificate or changing an earlier decision.’ There are several compensation events that fall within this category.
The issue was raised in the case of Northern Ireland Housing Executive v. Healthy Buildings, where there was a dispute as to whether discussions at a pre-start meeting changed the contractor’s tendered scope. The contractor did not notify within 8 weeks of the meeting and, when the contractor eventually raised the compensation event, the client said the contractor’s claim was time-barred. On the facts, the court found that the discussion at the pre-start meeting had constituted a client instruction and so the time bar did not apply. However, it took an adjudication and a court ruling to decide that. If in doubt, the best advice is to notify.
Secondly, in line with the emphasis on dealing with compensation events as they arise, the impact of compensation events is assessed prospectively. The disruptive effects of an event are unlikely to be properly known until afterwards. Contractors should therefore remember to include an estimate for disruption costs with their quotation, where possible backed by evidence of thickening costs from earlier in the project.
Assessing a compensation event
Given that the assessment of delay due to a compensation event is based on the dates given in the accepted programme, it is important for both parties to ensure the accepted programme is up to date. If it is not, the January 2019 amendment to the standard form allows project managers to take into account events between the accepted programme and the dividing date, so that project managers are not stuck with assessing on the basis of an outdated accepted programme.
The only word of warning for project managers is that clause 31 now provides that a contractor’s programme will be deemed accepted if it fails to respond within a prescribed time. Under NEC4 ECC, project managers therefore need to stay on top of programme submissions.
Project managers also need to be wary of overload in relation to contractor’s quotations. Given the focus of dealing with compensation events at the time they arise, there is a risk of several quotations landing on the project manager’s desk at one time. Failure to respond to such quotations within set timescales risks deemed acceptance of the quotations. To avoid running out of time to consider the quotations properly, project managers need to make sure they have sufficient resources and where, they know a response timescale cannot be met, they should try to seek agreement for their own extension to this timescale as soon as possible.
As with NEC3, the key to handling delays and disruption under NEC4 is understanding and applying the contract at the time, working with the other party to discuss and deal with compensation events as they arise rather than saving them until the end of the project.