Frequently Asked Questions

We are the project manager on an NEC3 Engineering and Construction Contract Option A (priced contract with activity schedule). We have removed three activities from the works information via project manager instructions, notified these as separate compensation events and instructed the contractor to submit quotations. The three activities were never completed, so the price for work done to date never included the value of these activities as set out in the activity schedule. Our understanding is that the cost of these three activities was to be calculated as defined cost plus fee (how much it would have cost the contractor) as stated in clause 63.1. Then, assuming this is less than value of these activities as out in the activity schedule, is this the sum deducted from the contractor and not the value of these activities as set out in the activity schedule?
You are correct to say that the compensation events will be assessed using the forecast effect it has had on the defined cost to carry out the work, plus the fee, see clause 63.1. However, when you remove work altogether, you need to make sure you do not accidentally double deduct. If the work was never done, the items in the activity schedule will never be part of the price for work done to date because they were never completed, see clause 11.2(27). So, if you then deduct the assessment of the compensation event as well, you will be double deducting.

You therefore need to assess the compensation event based upon defined cost plus fee, but you then need to deduct that from the prices in the activity schedule for the omitted work to come up with the net effect. You then add that as an item in the activity schedule (usually under the heading of the compensation event number) and, at the same time, also remove the original activities and their prices from the activity schedule, because that work will not be done.

If the assessment of the compensation event is lower than the prices, that will produce a positive figure in the activity schedule. If it is higher, it will produce a negative figure. That means that the effect of the compensation event is neutral as far as the contractor is concerned. If the contractor was forecasting to make a profit from the work (over and above the fee), it still would, and if it was forecasting to lose money on the work, it still would too.

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