When and why NEC project managers have to assess compensation events

Key Points

• There are four reasons why NEC project managers are required to assess compensation events, all of which flow from contractors’ failure to comply with contract.
• The project manager’s obligation to assess a compensation event is mandatory when one of the four reasons applies.
• Good collaborative management can avoid the need for project manager assessments.

Core clause 6 of the NEC4 Engineering and Construction Contract (ECC) provides a process for assessing the change to the prices and completion date due to a compensation event. The process includes mechanisms designed to ensure that when either the project manager or contractor do not comply with the contract, the assessment is concluded.

One such mechanism is the project manager’s obligation to undertake the assessment. This article explores the circumstances under which a project manager is required to perform their own assessment.

Obligation to assess

The four reasons why an NEC project manager should make their own assessment of a compensation event are stated in ECC clause 64.1. Each reason describes a failure by the contractor to comply with its obligations and relates to programme and the compensation event process (see Table 1).

NEC contracts use the word ‘may’ to indicate that an action is discretionary. However, this word is not used in clause 64.1 so the project manager’s obligation is mandatory when one or more of the stated reasons apply. The approach taken by the contract to assessing compensation events is generally a prospective one. It requires the effects of change to be dealt with as soon as they arise so as to reduce uncertainty for the parties at the end of the contract.

The project manager’s obligation to intervene in the process when it is no longer possible or appropriate for the contractor to carry out the assessment reinforces the approach.

Reason 1: contractor misses submission deadline

The contractor’s obligation to submit a compensation event quotation and details of the assessment is stated in clause 62.2. The time allowed for submission is three weeks following instruction by the project manager (clause 62.3). Clause 62.6 also allows the contractor to notify the project manager of the project manager’s failure to respond to a quotation, giving rise to an automatic extension to the period in which the project manager must respond.

However, there is no similar provision for the project manager when the contractor fails to submit its quotation within the three-week period, presenting a potentially dangerous cliff edge for the contractor. The project manager could remind the contractor of the need to submit in the last few days leading up to the end of three-week period. Such action by the project manager could avoid the burden of the assessment falling to the project manager. It could also trigger a discussion and possible agreement between the project manager and the contractor to extend the period (clause 62.5).

A quotation submitted within the time required by the contract but without details of the assessment would require the project manager to carry out the assessment. The level of detail required is not described but some general guidance on this could be gleaned from clause 13.4. This describes a reason for withholding acceptance of a communication is, ‘that more information is needed in order to assess the contractor’s submission fully.’ If the project manager decided more detail was required, one option could be not to accept the quotation and instruct the contractor to submit a revised quotation (clause 62.3). However, the project manager should avoid introducing unnecessary delays to the process by repeatedly instructing revised quotations.

If the project manager considered the contractor’s assessment did not include sufficient detail and was considering not to instruct a revised question, it would prudent for the project manager to bear in mind the common law duty of fairness (e.g. Costain v. Bechtel [2005] EWHC 1018) before making their decision.

Reason 2: contractor makes incorrect assessment

The second reason requires the project manager to make a reasoned judgement as to whether or not the contractor’s assessment has been done ‘correctly’. The rules governing how the assessment should be made are stated in clause 63 and extensive. Particular attention needs to be given to sub-clauses 63.1 and 63.5, which describe the means by which any change to the prices and the completion date are assessed.

It seems, from the strict wording of the contract, that the project manager is only required to give reasons when instructing a revised quotation (clause 62.4). However, in the event that an instruction is not given and the project manager intends to do the assessment, it may be beneficial to advise the contractor of the reasons.

Reason 3: contractor omits programme alteration

The contractual obligation to include, ‘alterations to the accepted programme,’ with a quotation applies when, ‘the programme for remaining work is altered by the compensation event’ (clause 62.2). If the compensation event results in a change to the date for planned completion, this will clearly have altered remaining work. Assessing a change to the completion date (clause 63.5) involves using the accepted programme current at the dividing date (as defined in clause 63.1). While not specified as a requirement under the contract, it is good practice to identify the dividing date on the programme submitted with the quotation. The remaining work on the critical path of the programme could be altered and result in an earlier date for planned completion; a situation which does not change the completion date but would affect terminal float. Noncritical-path operations may also be altered by a compensation and result in a change to the float. Therefore, the circumstances under which remaining work is not altered by a compensation event may be limited.

Reason 4: contractor’s latest programme not accepted

The contractor is required to submit its quotation within three weeks of the project manager’s instruction (clause 62.3). This period may be longer if the project manager and contractor agree to extend the time allowed (clause 62.5). The requirements for submission and acceptance of a programme, as required by clause 31 and 32, are separate to the compensation event assessment process.

However, the assessment of a change to the completion date due to a compensation event relies on the existence of up-to-date accepted programme. This fourth reason reinforces the importance of the contractor submitting regular programmes which comply with the contract and are therefore capable of being accepted by the project manager.

The reasons why the project manager may not accept a programme submitted for acceptance are stated in clause 31.3. Figure 1 shows how the fourth reason would apply with an example time line of communications.

Conclusions and recommendations

Timely management of compensation events on an NEC4 ECC gives certainty to both the client and the contractor. The project manager’s mandatory duty to intervene in the process provides a remedy when the contractor does not adhere to the compensation process or requirements for the accepted programme.

Regular and proactive communication between the project manager and the contractor to review the status of compensation events and the accepted programme using a cloud-based communication system will help to avoid the need for a project manager’s assessment.