Frequently Asked Questions

We are the project manager on an NEC3 Engineering and Construction Contract (ECC) Option D (target contract with bill of quantities). Clause 63.2 says, ‘If the effect of a compensation event is to reduce the total Defined Cost, the prices are not reduced except as stated in this contract’. Does this mean the contractor still gets paid the same as the original tendered cost and pockets the difference in profit? I understand this is an incentive to the contractor but, with no incentive for the employer, why would I agree to changing the works information (assuming there are no time benefits with the change – and which would belong to the contractor anyway and the employer would have to pay more to accelerate and benefit from the extra time)? And can you please explain what the exceptions, ‘as stated in this contract’ could be?

Finally, the contractor has suggested a change to the works information provided by the employer, which will reduce defined cost. I accept the change and wish to give an instruction changing the works  information. Should I reduce the prices when notifying the compensation event, confirm that the prices will not be reduced or notify a compensation event and instruct a quotation to be submitted?
The logic of clause 63.2 is that there may be compensation events that occur that reduce the defined cost where the risk and reward should lie with the contractor. The obvious example is clause 60.1(12), where the physical conditions may be better than expected. The exceptions stated in the contract are to be found in the other sub-clauses of clause 63 set out in the main option specific clauses (as well as some of the secondary options), so see clause 63.10 in Options A and B and 63.11 in Options C and D.

You will see that generally the secondary option clauses allow for the reduction if the event is an instruction to change the works information. The only exception to that is in Options C and D, when the instruction to change the works information resulted from a proposal by the contractor which the project manager accepted – see the first bullet of clause 63.11 and compare it with the same bullet in clause 63.10.

With a risk-sharing contract, such as Options C or D, the contractor should be able to share in the benefits of the cost savings that it has proposed through the share mechanism set out in clause 53. You should remember that in these options the value of the compensation event only changes the ‘target’ and not what the contractor actually gets paid for carrying out the work, and therefore the contractor will never ‘pocket the difference’, as you suggest. Instead it would be the employer that did the ‘pocketing’.

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