BuiltIntelligence

Assessing compensation events : taking account of changes since the programme was accepted.

by Glenn Hide, BuiltIntelligence Ltd

Two often asked question when working under NEC3 are

  • “what programme do you use to assess a compensation event ?” and
  • “what progress or change (if any) from the Accepted Programme should you first take into account  when assessing  a compensation event ?” 

    Problems with a literal interpretation of NEC

    Clause 62.2 of the NEC3 Engineering and Construction Contract (ECC) states that, ‘If the programme for remaining work is altered by the compensation event, the Contractor includes the alterations to the Accepted Programme in his quotation’. Clause 63.3 also states that, ‘A delay to the Completion Date is assessed as the length of time that, due to the compensation event, planned Completion is later than planned Completion as shown on the Accepted Programme’.

    What then happens if that accepted programme is several months old and contains logic that is now clearly known to be wrong? Would you really consider that it would be contractually or practically correct to blindly ignore matters that you know have changed by taking the words of clause 63.3 so literally?

    Unfortunately, in my experience some people appear to take that view. They suggest that you assess the compensation event against the last Accepted Programme without taking into account anything that may have happened since that programme was accepted. In their interpretation, that is what the contract says.

     

    Read the contract as a whole

    Whenever I am giving advice about the administration of an NEC3 contract, my simple response is normally, ‘just do what the contract says’ or ‘follow the contract’. For the most part, the contract is pretty clear on what should be done and the associated consequence for not doing it. However, there are certain areas where simply following the precise words of a single sentence or clause in the contract will not give us a concise answer because the contract needs to be read as a whole.

    The problem generally comes about when the parties have not been following the contract in the first place. For whatever reason, the programme submission and acceptance process has got out of kilter, either by the Contractor not producing compliant programmes, or by the Project Manager not following the acceptance process in the contract … or both !

    Following the contract clearly puts both Parties in a better place. However, if they have got themselves into this situation, then we have to be able to use the contract to try to get back on contractual track.

     

    Non-implemented compensation events

    I wrote another article which had a similar type of problem. The ECC says you show the effects of implemented compensation events, but it does not expressly mention non-implemented compensation events. By non-implemented compensation events, I mean those that are currently being quoted or assessed and, in the meantime, the relevant work is or has been carried out on Site.

    The conclusion I came to in that article was that you must show notified compensation events on the programme (which I believe meets the first bullet of clause 32.1) as it would be non-sensical not to, particularly when they are affecting the programmed works and possibly even the critical path and hence planned Completion.

    Not showing non-implemented compensation events on the programme would mean that the programme was not realistic and therefore a reason not to accept the programme under 31.3. I thus believe it is contractually incorrect to those who say you should not show non-implemented compensation events on the programme, despite the second bullet of 31.2 only specifically mentioning implemented ones. 

    Whenever you assess a compensation event, my general approach is that you take into account any progress and change that you were aware of up to the point that the compensation event was notified by the Project Manager (or if notified by the Contractor, the point at which the Project Manager agreed that it was a compensation event and instructed a quotation). This seems to be compliant with the first bullet of clause 32.1, although I do accept it would be more useful if either the contract or the guidance notes more expressively and clearly made this point.

    Following the same logic, when it says you use the Accepted Programme to assess a compensation event against, you should take that as the starting point but not then blindly ignore everything that you know for a fact has already changed since it was accepted.

    Some examples

    Let us look at a simple example. The Contractor shows on the original programme that it plans to do activity A, then B, then C, then D. Each activity is 4 weeks long, making a total programme time of 16 weeks. C is critical to the start of D.

    The Contractor subsequently decides to do C first, effectively creating 8 weeks float on D.  But a compensation event then arises that delays the start of D by 4 weeks, reducing the float to 4 weeks.

    The Contractor has either not had its latest submitted programme accepted or possibly even deliberately has not updated its programme. Either way it now claims that, by using the original accepted programme, it is entitled to a 4 week delay to planned Completion and hence contractual Completion Date, and all of the preliminary costs that go with it.

    In reality, the delay to activity D did not at that point in time affect planned Completion and therefore there would be no entitlement of time, but there may be cost which would be assessed on its own merit.

    It is worth noting that clause 64.1 also states that the Project Manager can make its own assessment of a compensation event if the latest programme submitted has not been accepted. This must be because the Project Manager does not agree with the way that the Contractor has assessed changes and progress since the last Accepted Programme, and can assess it directly. If it were the case that you only used the last Accepted Programme, then this bullet would not be needed as the rules would be clear.

    A similar series of questions could result if you did not take into account any other changes that occurred since the last Accepted Programme.  Consider the following examples.

    • A programme has been issued for acceptance and it is 1 week before it may be accepted, yet today we have to put in a quotation for a compensation event. Do we use the ‘old’ programme or the ‘new’ programme?
    • The Contractor has 3 weeks to produce a quotation, does it use the accepted programme at the start of that 3 week process or, if 1 day before it goes in, a new one is accepted, does it change the quotation?
    • You are assessing two compensation events at the same time – both of which on the critical path. If you assess the first one and that impacts planned Completion, do you then use that programme to assess the impacts of the second, or simply assess it against the original ignoring the effects of the first?
    • What if the accepted programme shows in-situ concrete and you have since changed to precast units, which completely changes the programme?

      Avoiding the problems

      All of the issues and questions listed above are avoided if you always follow the same principle: whenever you become aware of a compensation event, you take the Accepted Programme at that point, and take into account any progress and change that occurred up until that point.

      I think this subject is an example where future revisions of the contract can be tightened up so that the Parties have an even clearer understanding of how compensation events should be assessed.

      In the meantime, as an industry we have to make the best of the words that we have. We should come to a recognised consensus that what I have proposed in this article is the only logical and, more importantly, contractual way for both parties to assess compensation events in order to get the fairest result each time. 

       

      Glenn Hide is long term advocate and practitioner of NEC3, being the guru for programming under the NEC3 forms. As well as providing training and consultancy through his own company, he co-authored BuiltIntelligence's on-line NEC3 Academy and is a director i/c sales of BuiltIntelligence. He can be contacted on +44 (0) 7500 777 364, at glennhide@builtintelligence.com or via www.builtintelligence.com .

      3 comments

      Nov 06, 2015 • Posted by Jenni MacGregor

      Glenn,
      I have one reservation.
      If the contract is being administered properly the PfA process will be embedded and up to date.
      Using an accepted programme to impact change is a known entity, in that all parties understand that programme snapshot. By introducing a partial cycle update as well as the change into the CE programme, this introduces two areas of discussion – rather than focusing on the impact of the change on the programme. Using the accepted programme and recognising that it will be swings & roundabouts rather than absolute (however subjective) might be a better solution if the focus can be restricted to agreeing CE’s in as timely a fashion as possible.
      Regarding your scenario of multiple CEs impacting the same programme:
      It must be remembered that some CEs may be rejected. Therefore the change should be impacted on both the accepted programme stand-alone AND on the programme containing the previous CE. The point is that both quantums of time should be included (identified separately!) in the quotation to cover the combination of contractual outcomes that may occur.

      Oct 01, 2015 • Posted by Iain McAlister

      Hi Glenn,
      We appear to be entirely like-minded in respect of all you have written here. A couple of points I thought worth sharing with you in respect of this subject.
      Clause 32.1 (second bullet) refers to the effect of implemented CEs. It appears to me the effect of implementing a CE is limited to changing the Prices and delaying contractual dates. Consequently, I think it correct to interpret this bullet as simply meaning that any Clause 32 programme submission is required to show the contractual dates as determined at that time, taking into account all implemented CEs.

      In terms of challenging those who argue that the assessment of delay should be purely the result of “mechanistically” impacting a delay event into the Accepted Programme and then hitting the reschedule button, I also make reference to the final part of Clause 63.7. The assessment of the delay is to be based on the assumption that the Accepted Programme can be changed. Over the years I have seen several legal commentaries on what this clause means. They focus on what are the implications if the Accepted Programme, somehow, cannot be changed to accommodate the CE. Do you think they are missing the point, … or am I?

      I’d welcome you views on any or all of this.

      Kindest regards
      Iain

      Oct 01, 2015 • Posted by J Dennywood

      Glenn, thanks for sharing this.

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