Frequently Asked Questions

We are the project manager on an NEC4 Engineering and Construction Contract (ECC) that is delayed due the client. The contractor has notified a compensation event and in its quotation has included inflation of some material cost because of the delay. It has based inflation on the difference between the tender cost of the material and the increased cost at the time of the delayed procurement date. As option X1 (price adjustment for inflation) was not included in the contract, we think the contractor carries the risk of cost increases between the tender and planned procurement date, and that the client’s risk is only the increase between the planned date and delayed date.

Who is right?

Technically you are both wrong. The contractor is entitled to assess the compensation event based upon the effect the compensation event is forecast to have on its defined cost, see clause 63.1. But the contractor can only recover the increase in cost of any material that was caused directly by the compensation event. This will of course depend upon how and when the contractor procures its material.

For example, did the contractor procure the material on a fixed-price basis or a price subject to cost increases, and did that procurement happen at the beginning of the contract or later? It is for the contractor to justify the increase in its costs, and it should supply you with more information on the issue for you to make a decision.

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