Frequently Asked Questions

We are the project manager on an NEC4 Engineering and Construction Contract (ECC) Option C (target contract with activity schedule). We issued an instruction to the contractor giving rise to a change in scope and, while it was likely the contractor would incur additional costs, the contractor’s clause 20.4 forecast of total defined cost did not suggest any change. If this is the case, can we rely on clause 63.1, in that the compensation event had no effect on the forecast defined cost after the dividing date?

The change of scope is a compensation event under clause 60.1(1) and you should have notified it and instructed the contractor to provide a quotation under clause 61.1/61.2. That is especially so when you accept it is likely the contractor will incur additional costs. Given this is a change to the scope, there will be no actual defined cost at the dividing date referred to in in clause 63.1, so the compensation event is assessed prospectively by forecasting the change to the future defined cost. The process is then carried through in accordance with the rest of section 6.

Note that the forecasts required by clause 20.4 are irrelevant when dealing with compensation events. They are there so the parties can see how the sharing of financial risks are proceeding. As with any forecast to a budget, it will be a best guess of the end result at that time and has no binding obligation on any of the parties. They are just snapshots at a particular time and can, and will, change the next time the snapshot is taken. They have no direct effect on the method of assessing compensation events.

Once the change of actual and/or forecast defined cost for any compensation event is agreed, that will form just one part of the next forecast. That is because forecast changes to the defined cost of carrying out the works in clause 20.4 will take into account the changes to the defined cost of all of the works, not just those works that are subjects to compensation events.

In ECC Option C, the parties share the financial risks and rewards of carrying out the works. But the client still carries the risks caused by compensation events. If the budget is the same despite the compensation event having happened, it could well mean that the contractor has saved money elsewhere. That is good news for both parties in that the savings will be shared. As the project manager, you cannot use that saving to shelter the client from the additional costs incurred by an event that was at their risk, and therefore not one that the contractor shares.

Back to FAQs