Back to Basics #13 - Pricing compensation events under the NEC3 and 4 standard forms – Part Two

Pricing compensation events under the NEC3 and 4 standard forms – Part Two – Back to Basics #13

 

Following on Back to Basics #9 where we considered how the NEC3 and 4 determines the pricing of compensation events, we turn now to how, once each cost due to the compensation event (CE) has been covered under one of the headings of the Short Schedule or (full) Schedule of Cost Components, the various percentages are applied. 

The NEC3 treats Defined Cost under Option A and B as the costs under the Shorter Schedule of Cost Components, whether work is subcontracted or not (see 11.2 (22) under Option A). Thankfully, the NEC4 recognises the Defined Costs of Subcontractors as separate under both the Short Schedule and the (full) Schedule, which is a far clearer approach.

In contrast to the NEC3 which includes separate fees for the Direct and Subcontract costs, the NEC4 takes a simpler approach by replacing both with a single fee percentage. The Fee is calculated by multiplying the total Defined Cost (Direct and Subcontracted) by the Fee Percentage stated in the Contract Data Part 2. This follows from Clause 63.1 which states that the change to the Prices (the contract sum) is the effect of the CE on the Defined Cost or work done, the work not yet done, and the resulting Fee.

How compensation events are priced depends on which option is being used. The simplest approach is to place each cost incurred due to the CE, under the relevant heading in the Short Schedule or (full) Schedule of Cost Components (People, Equipment, Plant and Materials, Subcontract etc) and then add the percentage. This should also include the effect on any time related preliminary costs (e.g. People and Equipment) where the compensation event has caused a delay to the programme for remaining work and therefore, delayed planned Completion. The NEC3 and 4 do not contain separate provisions for extensions of time and loss/expense (as say a JCT contract does); the CE is a “one-stop shop” mechanism for both cost and time remedies.

A further change between NEC 3 and 4 contracts is the fee percentages that apply prior to the Direct Fee percentage. The NEC3 required a percentage for people overheads (the Shorter Schedule), and a percentage for Working Area overheads (the (full) Schedule). The NEC4 however, contains neither and a single fee percentage is applied. This means that a rate under the NEC 3 for a particular profession or trade will be less than it would be under the NEC4, as under the NEC4, it will necessarily be proportionally increased to include an element of the overhead.

If you need assistance in understanding how to price compensation events, or what are contractual amendments to the compensation event procedures may mean, then Ramskill Martin can assist you by carrying out a contract review and by providing bespoke standard templates and flowcharts showing the entire procedure from notification, to quotation and assessment, and through to implementation.

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