The term ‘compensation event’ under the NEC® form of contract refers to a situation where either the scope of works or other event requires the contractor to undertake additional work that they were not originally contracted to provide.
Of course, not all events are compensation events. Without exception, compensation events are those which are not the fault of the Contractor, but that does not necessarily mean they are the fault of anyone else; they could be fault neutral such as weather conditions or site conditions. In those cases, compensation events are used to allocate risk between the Parties.
Events that are compensation events are set out in the Contract. There are 21 events listed in clause 60.1 of the core clauses, others in main options B and D (the bills of quantities options) and more scattered through the secondary options.
In addition, the Employer has the option to add further events in the Contract Data part 1 and some could be added in the Z clauses.
To ensure projects are delivered successfully, the management of Compensation Events is critical as failure to manage them effectively may lead to unnecessary increases in costs and/or overrun to the delivery of the project.
Change is managed as part of the compensation event process where any impact on cost or schedule is assessed and actioned accordingly.
There is a simple procedure to follow:
Notification – Quotation – Assessment – Implementation
Once notified, it is a good idea to record each compensation event in a spreadsheet so that its progress through the contractual process can easily be monitored. Important dates, namely the deadlines for each action, should be diarised and checked regularly.
Notwithstanding the fact that there is an 8 week time limit for notification of compensation events under the NEC4 Engineering and Construction Contract, any compensation event that occurs should be notified as soon as possible. The same goes for quotations; aim to submit them as soon as possible. Allowing deadlines to get too close can increase risk unnecessarily. There may not be time to correct a mistake in a compensation event notification or quotation if it has been submitted at the last minute.
If you do not have the benefit of a purpose-made system for managing an NEC Contract, then prepare a spreadsheet, or something similar, from the outset, indicating all the key actions when such things as Notifications and Quotations were submitted, when Responses should be received and when such things as Deemed Acceptance might apply. Hold at least monthly meetings to review the status of Compensation Events.
If you need assistance on the mechanics of the spreadsheet, or feel this is something you are not able to do in-house, either through lack of experience, confidence or time, VOLOCO can provide this service. We have been successfully providing this service to our clients, reducing risks and saving them significant sums of money in the process. Get in touch if you would like to discuss this further for a specific tender or just talk about the service generally.
Do not underestimate the resources required to effectively manage Compensation Event procedures. They require significantly more time than with other forms of contract. There is no Final Account procedure and if proper time is not spent during the course of the Contract, then there is a high chance that this will affect recovery.
