The NEC 4 ECC contract clearly defines compensation events and how these are to be notified.
This article considers a particular aspect of notifying compensation events which relates to another NEC provision, namely, the giving of early warnings.
Early Warnings in NEC 4 Contracts
NEC 4 clause 15.1 states that, “The Contractor and the Project Manager give an early warning by notifying the other as soon as either becomes aware of any matter which could:
• increase the total of the Prices,
• delay Completion …” [Emphasis added]
NEC is entirely unambiguous when it states that an early warning is to be given “as soon as” the Contractor/Project Manager (as relevant) “becomes aware” of such a matter. If either become aware of “any matter” (not necessarily a compensation event) which “could” delay Completion (significantly, it has not delayed Completion yet), it is to be notified as soon as possible.
In respect of compensation events, the importance of early warnings is noted in clause 61.5 which states that, “If the Project Manager decides that the Contractor did not give an early warning of the event which an experienced contractor could have given, the Project Manager states this in the instruction to the Contractor to submit quotations.” [Emphasis added]
Noting the requirement in clause 10.1 to “act as stated” in any NEC 4 contract, clause 61.5 merely requires that the Project Manager states that the Contractor “did not give an early warning of the event which an experienced contractor could have given …” when instructing the submission of the quotation.
The importance of giving an early warning becomes even clearer when we consider clause 63.7 which deals with the submission of quotations. It states: “If the Project Manager has stated in the instruction to submit quotations that the Contractor did not give an early warning of the event which an experienced contractor could have given [i.e., as clause 61.5 above], the compensation event is assessed as if the Contractor had given the early warning.”
It is also worth remembering that Disallowed Cost (i.e., costs that you cannot recover under NEC 4 ECC contracts under Options C, D, E & F) includes Defined Cost that has only arisen because of a Contractor failing to “give an early warning which the contract required it to give” – see Options C, D & E clause 11.2(26), and Option F clause 11.2(27).
Eight Week Deadline for notifying a compensation event
Another consideration, found in clause 61.3 states (in part): “… If the Contractor does not notify a compensation event within eight weeks of becoming aware that the event has happened, the Prices, the Completion Date or a Key Date are not changed unless the event arises from the Project Manager or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision.” [Emphasis added]
Hence, under the standard NEC 4 wording used here (beware of contract amendments which attempt to reduce this time), the Contractor has only 8-weeks to notify a compensation event. The penalty for failure to notify is clear – NO MONEY, NO ADDITIONAL TIME. Hence, it is imperative that the Contractor notifies a compensation event within the 8-weeks.
Thankfully, this time bar does not apply to all compensation events. For example, if the Project Manager gives an instruction under clause 60.1(4) to stop work, which is a compensation event, there is no point the Contractor notifying it as such as the Project Manager is to notify it as a compensation event at the time of the instruction, as clause 61.1. However, if the Contractor encounters unforeseen ground conditions that may be a compensation event under clause 60.1(12), it falls upon the Contractor to notify it as a compensation event within 8-weeks.
So, if the Contractor has up to 8-weeks to notify a compensation event, what is the consequence of a failure to give an early warning (if relevant)?
The following example will consider this …
Unfortunately, this example occurred because the Contractor did not follow the most fundamental principle of NEC contacts to “act as stated” in the contract.
Failure to give an early warning – NO MONEY, NO ADDITIONAL
Under clause 60.1(12), what happens when a Contractor
encounters an unforeseen subterranean structure that, noting NEC 4 clause 60.2,
was not in the Site Information or publicly available information, was not
obtainable from a visual inspection of the site, and was not, in any event,
something that an experienced contractor could have reasonably anticipated? Let
us assume, for the sake of argument, that all boxes are ticked as per clause
60.1(12) and the related clause 60.2 and hence that this is a compensation
event. Now what? The Contractor has up to 8-weeks to notify it as such.
But what happens if the Contractor proceeds to excavate and
remove said structure (perhaps to avoid delay) prior to notification of the
compensation event and incurs actual costs in the region of £100K (say). As
this is a compensation event, is it not a fait accompli that the Contractor may
now recover these costs? Unfortunately, with NEC 4 Option C, D, E & F
There are two key issues to note here. Firstly, NEC 4
contracts require compensation events to be assessed by reference to Defined
Cost and this does not necessarily mean that you may recover all your actual
incurred costs (albeit, properly completed Contract Data and Schedules of Cost
Components, etc., should minimise this risk).
The second issue, however, is considerably more significant.
Whilst the Contractor had up to 8-weeks to notify this
compensation event, he proceeded to carry out work without complying with the
requirement of clause 15.1. The Contractor failed, upon discovery of the
unforeseen structure, to give early warning to the Project Manager in respect
of the unforeseen subterranean structure that “could increase the total of the
This should have been done as soon as the Contractor
discovered the structure. But, instead, the Contractor elected to wait 7-weeks
to notify the compensation event and proceeded to just carry on with the works
needed to remove the structure.
Sadly, this is not an unfamiliar scenario to the team at Arbicon. Many enquiries come in where a contractor or subcontractor has signed up to an NEC contract for the first time and are not necessarily familiar with its provisions. Thankfully, we can advise in respect of all NEC provisions, provide training as necessary, and assist with the resolution of any problems or disputes that may arise.
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