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NEC Contract / Subcontracts
Whether you are looking for help or advice on the NEC standard forms of construction contracts, Sum ADR can assist you and guide you on the right course. NEC3, and more recently NEC4, are forms of contract which many people find confusing, or difficult to comply with properly. Sum ADR are expert construction contract advisors, and our experience can assist you to get things right.
Compensation Events - what subcontractors need to know
What is a Compensation Event?
A compensation event, under the NEC forms, is an event which, if it occurs, and does not arise from the subcontractor's fault, entitles the subcontractor to be compensated for any effect the event may have on the Prices, the Completion Date, or a Key Date. Clause 60.1 lists 19nr main compensation events, includes such common issues as the Contractor instructing a change to the Scope (Subcontract Works Information), or not being granted access to start on site as agreed.
How do you claim a Compensation Event?
To be able to 'claim' a compensation event ("CE"), or to claim your entitlement to additional time or money, you need to "notify" the event to the Contractor, in a timely manner - in the standard NEC4 subcontract, this period is seven weeks (see clause 61.3). If the Subcontractor does not notify the compensation event within this period, it loses its entitlement (to money and/or time). This condition precedent clause may seem harsh, but if the subcontractor is aware of this requirement, it is not unrealistic or unreasonable to expect that such claims are made in a prompt fashion. Giving CE notices is crucial - it should be prioritised. It is worth noting in this respect also what the NEC4 subcontract states at clause 13.7 - a notice (or certificate) must be communicated separately from other communications. This is generally considered to mean that the giving of a notice, like a CE notice, should be clear and unambiguous, and should not be encompassed within a set of meeting minutes, for example.
How do you assess a Compensation Event?
Once you have notified a compensation event ("CE"), it should firstly be accepted or rejected by the Contractor in principle. If accepted, then they should instruct you to submit a "quotation" - note that a CE quotation is about more than just money, it must include any time impact also!
However, just focusing upon the value (the "change to the Prices" as clause 63.1 refers) for the moment, it is important to understand that the proper approach is to consider the effect of the event upon your Defined Cost. This term, Defined Cost, is further defined by the (Short) Schedule of Cost Components, which is in general terms a list of categories into which the NEC splits up what might otherwise be termed ;first principle costs', so rather than referring to 'labour, plant & materials' for example, the NEC Schedules of Cost Components list the following categories: (1) People, (2) Equipment, (3) Plant and Materials, (4) Subsubcontractors, (5) Charges, (6) Manufacture and Fabrication, (7) Design, and (8) Insurance.
The assessment is generally a prospective one, like an estimate, and is done using (hourly) rates and prices which can be stated in the Subcontract Data (part 2) or by utilising "open market or competitively tendered prices".
What can you do if the Contractor will not accept / agree with your quotation?
This is one of the questions we get asked the most; it is a common scenario which can develop on a project whereby the processes of the NEC sub-contract are not correctly followed, and rather than compensation events ("CE's") being dealt with in a prompt fashion, on a case by case basis, the subcontract account ends up taking a more conventional appearance, with differences between Contractor and Subcontractor assessments, items being partially paid "on account" and so forth.
Firstly, the Subcontractor should ensure that it has received a reply to its CE notice within the required timescales - see clause 61.4 - the point being is that you need agreement in principle to the claimed event being a "compensation event".
Secondly clause 64, which refers to "The Contractor's assessments" is a clause which is often overlooked. This clause requires the Contractor to assess a CE in a number of scenarios; so, if the Contractor responds to your quotation saying in effect that you have 'not assessed the compensation event correctly' (clause 64.1) and does instruct you to submit a revised one, the onus passes to the Contractor at that point. The Contractor has the same time period as the Subcontractor in which to produce and notify the Subcontractor of its assessment (usually a week or two) - see clause 64.3.
Clause 64.4 has teeth; if the Contractor does not assess a compensation event in the required timescale, then the Subcontractor may notify them of this failure - this is what we would refer to as the giving of a "2nd notice" (similar provisions are found for the giving of "2nd notices" in relation to a failure to respond to a notified CE (clause 61.4) and a failure to respond to a quotation (clause 62.6)). This '2nd notice' also informs the Contractor which quotation the Subcontractor proposes should be adopted. If the Contractor fails to respond to this '2nd notice' then it is treated as acceptance by the Contractor of the Subcontractor's quotation.
As previously mentioned, the NEC forms of contract really do prompt the parties to 'do their bit' - to communicate, and to not allow issues to stagnate; however, the parties do need to have a good working knowledge of how the contract operates. If they do not have such knowledge, and/or do not administer the contract correctly, then unfortunately it can lead to issues not being resolved, CE's not being implemented/agreed, and consequently paid.
Dispute Resolution - Option W2
Unfortunately, sometimes the processes of the compensation event section of the contract will not result in an outcome which is acceptable - the parties may well disagree over the valuation and assessment of a compensation event or events.
The NEC forms of contract are quite 'no nonsense' in the sense that all disputes can be dealt with via the procedures set out in the dispute resolution section/option - commonly W2 for projects in the UK.
Sensible negotiations should of course be the first port of call for any party, but if that fails, then under NEC4, there is the option to refer a dispute to the 'Senior Representatives' named in the sub-contract, so that senior managers or directors of both parties can seek to resolve matters amicably.
Failing this, Option W2 spells out an adjudication process which is compliant with the Construction Act.
Should you find yourself in this position, and are considering referring a dispute to adjudication, then please feel free to contact us, as our adjudication experts will be happy to give you advice on the merits of your case, and to act as your adjudication representatives to get you the best possible result.
