Pricing Compensation Events Under the NEC4 Standard Form - Part 1 - Back to Basics 9
Both of the NEC3 and NEC4 standard forms approach compensation events (CE’s) by reference to the Defined Cost incurred due to the CE. The CE can arise for any number of reasons including additional works instructed under a PMI or unforeseen ground conditions being encountered. The full list of grounds for CE’s is set out under clause 60.1 and sub-clauses (1) to (19).
The main options which can be chosen for the NEC vary both with respect to the pricing document used and with respect to whether payment for the entire works is a lump-sum or is to fluctuate according to a target.
Both main options A and B seek to compensate the Contractor by reimbursing him his Defined Cost incurred according to the Shorter Schedule of Cost Components.
The Short Schedule (Shorter Schedule under NEC3) is briefer than the (full) Schedule of Cost Components. The headings under each are the same: from People, Equipment, and Plant and Materials through to the cost of Insurance.
Unlike the NEC3, the NEC4 now additionally contains a section within the Contract Data Part 2, where the Contractor can stipulate categories of People involved in the contract, and their rates. These rates form the basis for assessing the additional Defined Cost of People due to the compensation event. Other Defined Costs are included by reference to their respective heading.
The (full) Schedule of Cost Components is used with Options C and D (where final payment depends upon cost relative to a target), and Option E (cost-reimbursable contract). It goes into more detail about what can and cannot be included as Defined Cost due to the CE.
One of the most important things when assessing a CE is to include preliminary costs. There is no “global wrap-up” option for an adjustment to the Completion Date or any additional preliminary costs. It is essential not to omit any impact on the programme for remaining work with the compensation event, unless you are sure that there is none.
If the event has passed when the quotation is submitted, there should be sufficient information to know whether there is any material delay due to the CE.
However, if the delay is forecast and therefore unclear, it is far better to include your assessment on time and Defined Cost with your quotation. If, as is often the case, this gets rejected by the Project Manager as he disagrees that there is a delay or with the duration of it, an alternative approach is to request that the Project Manager issues an instruction about assumptions to be made in the quotation in respect to the delay (under Clause 61.6). If this assumption is later found to be wrong, the Project Manager must notify this correction (which the Contractor may point out), then fresh entitlement can be gained due to a new CE under clause 60.1(17).
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